Brian King:

Good afternoon and welcome to Intuitive second quarter earnings conference call. With me today we have Gary Guthart, our CEO; Dave Rosa, our President; and Jamie Samath, our CFO. 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 our Securities and Exchange Commission filings, including our most recent Form 10-K for the fiscal year ended December 31, 2023 and subsequent filings. Our SEC filings can be found through our website or at the SEC's website. 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 intuitive.com, on the Events section under our Investor Relations page. 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 second quarter results, as described in our press release announced earlier today, followed by a question-and-answer session. Gary will introduce the call and provide an organization update. Dave will present the quarter's business and operational highlights. Jamie will provide a review of our financial results. Then I will discuss procedure and clinical highlights and provide our updated financial outlook for 2024. And finally, we will host a question-and-answer session. With that, I will turn it over to Gary.

Dave Rosa:

Thank you, Gary. Starting with procedures, we experienced solid growth in the quarter of nearly 17% compared with a strong Q2 2023, which reflected the return of patients post pandemic. Cholecystectomy, colon resection, lung resection and foregut procedures led global procedure growth. General surgery led U.S. procedure growth in the second quarter and outside the U.S., procedure growth was led by non-urology procedures. Regional performance included strength in Europe, led by Germany, the U.K. and Italy. And in Asia, we have mixed market conditions largely consistent with Q1. Brian will describe these dynamics later in the call. Turning to capital, we placed 341 da Vinci systems in the quarter, of which 320 were multiport systems, including 70 da Vinci 5 systems. Our teams installed 21 SP systems and 74 Ion systems in the quarter, with solid capital placements in the U.S., Japan and India and pressure in Europe and China. System utilization defined as procedures per installed clinical system per quarter grew 2% globally year-over-year for our multiport platforms, lower than our historical trend, reflecting procedure strength a year ago due to patient backlogs. Utilization for SP and Ion continued to grow in the double digit range in the quarter. Turning to our finances, revenue growth of 14% in the quarter reflect solid procedure performance and strong capital placements. Product margins were above our expectations, reflecting a combination of cost reductions, fixed overhead leverage and some one-time nonrecurring benefits. Operating expenses reflected plan leverage in our enabling functions. Jamie will take you through our finances in greater detail later in the call. In Q2, we moved into the next phase of our rollout of da Vinci 5. Within the quarter, we placed 70 da Vinci 5 systems. As the launch continues to progress in line with our plans, customer feedback points to improvements in precision, imaging, ergonomics and integration, the combination of which customers indicate has led to overall efficiency improvements. Both Force Feedback and Case Insights bring new capabilities and analytics to surgery. We are encouraged by early insights these capabilities are presenting and are working hard to improve production and supply for Force Feedback instruments and smooth our computational pipelines and workflows for Case Insights. We expect these capabilities to be powerful and the maturity and evidence of impact to build over coming quarters. We launched new products thoughtfully centered around outstanding customer experiences. As our customers pursue operational and clinical excellence, we continue monitoring several key metrics across our measured rollout of da Vinci 5, as we ramp our supply and respond to customer input. We expect our measured rollout to continue through the first half of 2025. Adoption of our digital products and services grew nicely in the quarter, with routine use of My Intuitive App expanding to nearly 14,000 surgeons and surgeons using Intuitive Hub more than doubling versus a year ago. The long-term opportunity for computational tools is both significant and difficult. To recognize these benefits at scale requires a foundational infrastructure that includes robust, curated data, secure data warehousing and global privacy compliance. Our digital ecosystem, including Case Insights, leverages this infrastructure and enables us to collaborate with customers on a global scale to identify meaningful insights. These insights enable customers to optimize their robotic programs and ultimately reduce time to proficiency and improve clinical outcomes. As we said before, validations take time and are a worthy pursuit. Turning to Ion, our teams have made material progress resolving supply constraints on catheters and vision probes. Excellence in manufacturing at scale in this space is complex and we continue to reinforce our capabilities. Our commercialization in Europe continues according to plan and our teams are progressing towards commercialization in China. Turning to SP, last week we received FDA clearance for thoracic procedures. We will be measured in our thoracic indication launch, as we work to build a robust training and proctoring network, as well as bring stapling to our SP platform. In closing, we are committed to our 2024 priorities, supporting our measured launch of da Vinci 5 and our other new platforms by region, supporting surgeons adoption of focus procedures, continuing to improve product quality and margins and finally improving productivity in those functions that benefit from global scale. I'll now turn the time over to Jamie, who will take you through our finances in greater detail.

Brian King:

Thank you, Jamie. Overall, second quarter procedure growth was 17% compared to 22% for the second quarter of 2023 and 16% last quarter. In the U.S., second quarter 2024 procedure growth was 14% compared to 19% for the second quarter of 2023 and 14% last quarter. Second quarter growth was led by procedures within general surgery, with strength in cholecystectomy and foregut procedures and also thoracic procedures. Bariatric procedure growth declined in the mid-single digit range. Outside of the U.S., second quarter procedure volume grew 22%, compared with 28% for the second quarter of 2023 and 20% last quarter. Growth was led by non-urology procedures with strength in colon resection, hysterectomy and lung resection procedures. In Europe, second quarter growth continued to be led by procedures beyond urology, primarily from general surgery and gynecology procedure categories. Germany, the U.K. and Italy procedure performance led the region with each experiencing strong growth in colon and rectal resection, hysterectomy and other general surgery procedures. In Asia, growth in the second quarter was led by Japan and India, while growth in China was stressed and Korea procedure growth continued to be impacted by physician strikes. In Japan, overall procedure growth was solid with continued strength in colon and rectal resection, gynecology and lung resection procedures. In India, while still in the early stage of adoption, we saw strength in gynecology and general surgery procedures, particularly with growth in hysterectomy, cholecystectomy, and hernia repair. China procedure growth was lower than prior period averages when compared to the same quarter a year ago, which experienced a recovery in procedures impacted by COVID. System utilization remained strong, while capital placements continue to be impacted by delayed tenders and emerging domestic robotic systems. Now turning to the clinical side of our business. Each quarter on these calls, we highlight certain recently published studies that we deem to be notable. However, to gain a more complete understanding of the body of evidence, we encourage all stakeholders to thoroughly review the extensive detail of scientific studies that have been published over the years. Earlier this year, Dr. Zhang and team from the Guangzhou University of Chinese Medicine published a systematic review and meta-analysis in the International Journal of Surgery that looked at open, laparoscopic and robotic assisted surgery approaches to rectal cancer management. This meta-analysis covered 56 studies and included over 25,000 patients, of which approximately 11,000 patients received robotic assisted surgery, over 13,000 patients laparoscopic surgery and over 390 patients received open surgery. When compared to the control group of both laparoscopic and open procedures, patients undergoing a robotic assisted approach had an approximately 2 day shorter length of stay. Specifically, when compared to lap, the robotic assisted group was associated with a 1.7 day shorter length of stay. Relative to open surgery, the length of stay was 5.5 days shorter. The robotic assisted approach was also demonstrated a protective effect for converting to an open procedure, with 61% lower odds of conversion associated with robotics relative to the laparoscopic approach. Finally, when compared to the laparoscopic and open control group, the robotic assisted approach showed less estimated blood loss, approximately 40% lower odds of urinary retention and when compared to open, a higher number of harvested lymph nodes. The authors concluded, "The robotic approach emerges as the most favorable option for managing rectal cancer when compared to open, laparoscopic and transanal techniques, as it delivers the finest blend of oncological, functional and patient recovery outcomes. The digital interface of surgical robots enables a shift in the paradigm of surgical training, facilitating shorter learning curves that are more comprehensive and notably reducing the morbidity and mortality associated with them". I will now turn to our financial outlook for 2024. Starting with procedures, on our last call, we forecasted full year 2024 procedure growth within a range of 14% and 17%. We are now narrowing our forecast and expect full-year 2024 procedure growth of 15.5% to 17%. The low end of the range assumes further softening in bariatric procedures, along with increasing headwinds in Asia from prolonged physician strikes in Korea and in China from delayed tenders and emerging domestic robotic systems, impacting capital placements and therefore procedure growth. At the high end of the range, we assume bariatric stabilizes at current quarter rates and headwinds in Korea and China do not get worse. Turning to gross profit, we are increasing our pro forma gross profit margin to be within 68.5% and 69% of net revenue. Our actual gross profit margin will vary quarter-to-quarter, depending largely on product, regional and trade-in mix and the impact of new product introductions. Turning to operating expenses, we are lowering our guidance for pro forma operating expense growth to be between 10% and 13%. We are refining our non-cash stock compensation expense to range between $680 million to $700 million in 2024. We are narrowing our guidance for other income, which is comprised mostly of interest income to total between $300 million and $320 million in 2024. With regard to capital expenditures, we continue to estimate a range of $1 billion to $1.2 billion, primarily for planned facility construction activities. With regard to income tax, there is no change to our guidance of 2024 pro forma income tax rate to be between 22% and 24% of pretax income. That concludes our prepared comments. We will now open the call to your questions.

Larry Biegelsen:

Good afternoon. Thanks for taking the question and congratulations on a really nice quarter here. Of course, I have to start with da Vinci 5, really strong start here, 70 placements. I heard the comments about being constrained through the second half of 2025, but da Vinci 5 was almost half of your U.S. placement. So it looks like a strong launch. So how should we think about the ramp in da Vinci 5 placements in the second half? And how should we think about trade-ins going forward, which were probably a little lower than I expected this quarter in the U.S.? And I had one follow-up.

Larry Biegelsen:

That's very helpful. And then I wanted to ask about China. You mentioned it a couple of times on the call today. We recently saw a new stimulus announced there and my question is and you've talked about the anti-corruption initiative, is that still having an impact and how are you guys thinking about the new stimulus that was announced there? Will that help drive placements? Thanks for taking the question.

Larry Biegelsen:

Thanks for taking the questions, guys.

Travis Steed:

Hi, congrats on the good quarter. I wanted to maybe if there's any way you can help us understand the kind of the demand side of the dV 5 equation? I know we're in a constrained rollout, but 47% of the placements in the U.S. were dV 5 this quarter. And I don't know if there's any way to kind of rank order some of the factors you need to mark off and check off the list to kind of get the full launch, had the software hardware upgrade, but assume there's some other variables to consider as well.

Gary Guthart:

Travis, I would just add, your question, part of your question is on the demand side. I would say that in the early phase of a launch, you have a tendency to see early adopters look for the latest technology and also the larger institutions, the large IDNs. And so you have to kind of give it some time to see the full set of customers in terms of what that interest will be and the segments of customers, again, that will look for evidence to build over time, for customer belief to build over time. And so you probably need some time to see the full set of customers in terms of what the full picture of demand for da Vinci 5 is and again that take some time. Da Vinci 5 is a platform that, as we did with Xi will invest in overtime and so you'll build a set of capabilities also over time.

Jamie Samath:

Yes, I would just say that, we kind of describe from a sequential basis what drove the improvement quarter-on-quarter. It was lower inventory reserves. Our teams did an outstanding job with respect to component cost performance with our suppliers and in the logistics area. And that kind of came in earlier than we expected. Those are a set of teams that for a couple of years had been working on supply because of COVID and the pandemic. And what happened in terms of supply constraints and those teams in more recent periods have refocused on cost reductions. And we saw that come in early and so we were really pleased to see that. And so great performance in the quarter. You saw us improve the guidance for the year. I would say if we -- as we look at the second half, you will see increased depreciation, as I described. You will see a high proportion of the revenue be new products, da Vinci 5 and Ion and SP. In Q2, all of the 70 da Vinci 5 placements, only 11 of them were purchase arrangement. So kind of a muted effect in terms of gross margin in the quarter. The other placements are operating leases, where you see the economics play out over time.

Operator:

Okay, we'll go to the next line Robbie Marcus, JPMorgan. Please go ahead.

Dave Rosa:

Yes, Rob, maybe I'll start. This is Dave. Just starting with some of the feedback that we've discussed before, you look at what customers are immediately appreciating and some of the things you would expect around ergonomics, increases in precision and vision, the head in UI, onscreen graphics and other things. And so taken together, each one of those features are leading to some efficiency gains in particular in sort of console time. And that has been kind of noticed across the customer base. And I think that's where we're starting -- we're hearing a little bit about what can that mean in terms of adding a procedure a day, increasing utilization of the system. And so that's what both our surgeon customers and our executive customers are noticing as a result of their investment in da Vinci 5. You know, some of the other features, Case Insights, Force Feedback, we're excited to work with customers and we know that's going to take time to develop and really quantify some of those impacts. In terms of pushback, today what we are seeing is a little bit what Jamie talked about. We are starting, customers will have to evaluate the value of da Vinci 5. We have these early adopters that are excited about what it can be. And as we move in through our measured launch, we will continue to have to underscore, and reinforce the value that it brings, and communicate that to executives and their teams.

Dave Rosa:

Yes. So, Gary, in all of my discussions and with the team, surgeons prefer the use of da Vinci 5 for the reasons we talked about.

Robbie Marcus:

Well Gary, you anticipated my follow-up question. So let me ask another one here. One of the items of feedback I have heard from physicians is that case insights, and the force sensing can help existing physicians be better. But more importantly, it could help physicians that do a lot of lab procedures or open procedures make it easier for them to adjust to robotics. Is that something you are hearing? I know it is early in the launch here, but how do you think about those features and the ability to get more conversion from lab to robotic?

Robbie Marcus:

Thank you very much.

David Roman:

Thank you and good afternoon, everybody. I wanted to start on an Ion question, appreciating some of the supply chain dynamics that may have contributed positively to growth in the quarter. But maybe you could go into a little bit more detail about what you're seeing in the field from an adoption perspective, to what extent you're seeing higher diagnostic yields on Ion result in earlier intervention for patients and whether those interventions are taking place utilizing da Vinci or not?

David Roman:

That's a very helpful context. Thank you. And maybe I could ask a financial question on the follow-up here. I think as I look at the operating expense targets for the year, most of the reduction actually looks like, it stems back to what might have been a slower start to the year. I think you grew OpEx about 7% in Q1 and saw an acceleration here in Q2. But maybe you could just help unpack a little bit about - a little bit of the dynamic underpinning the operating expense growth for the balance of the year. And how we should think about sort of normalized OpEx growth. Is that sort of the seven number where you started the year, kind of the low double-digit number where you're trending now? And then I don't know if you're willing to offer any perspective on the incremental depreciation, but you were kind of in like the $90 million range in Q1, $100 million range, excuse me, in Q1 of this year. Are we talking about a $10 million per quarter increase, $20 million? And any framing you give might be helpful on that side as well?

David Roman:

Great. Thank you very much.

Rick Wise:

Good afternoon, everybody. Hi, Gary. Hi, Dave. Just - I was hoping that you could talk a little bit more about the procedure growth outlook broadly. You gave us - you bumped up the range, and we're very clear about the low-end factors at the low and the high end. But I was just curious, I'm not sure I understand from your perspective. Is our bariatric or GLP-1 pressure is leveling off here? Or have they leveled off? How reasonable is it to think you could get to the upper end? And sort of the same question for the China Asia pressures you talked about as well. Could you just elaborate a little bit on that? Thank you.

Brian King:

So Rick, I'm just going to reemphasize, or restate what the range was. So just ramp size 15.5% to 17%, is procedure guidance for the year. At the low end, we're assuming that bariatric procedures continues to soften. We did talk a bit about even last quarter and this quarter in Asia around physician strikes that were impacting procedures in Korea along with delayed tenders, impacting procedure or capital placements in China. Which therefore, impacts overall procedures, or procedure growth. And at the high end of the range, we're really assuming that, that bariatric or bariatric essentially stabilizes at current quarter rates. And again, that Korea and China do not get any worse.

Dave Rosa:

Yes. What I would say about the longer-term kind of outlook here is our offerings, when I said before, are highly valued in China. The systems are utilized at a high clip. And we're there's value that surgeons and patients place on high-quality, minimally invasive care. And so that's the, I think, the draw of this. In terms of some of the headwinds and to me, there are kind of two areas. One is the capital environment that we talked about, and with constrained capital environment and placements, it has an impact on procedure growth. And then, there's other areas around this kind of rebasing by the government around economics. And so, it has various impacts. It can have impacts in provinces around charge codes and that is another headwind for us in terms of procedure growth and utilization long-term.

Rick Wise:

Yes. Gary, if I could just one follow-up. The question I have gotten, I think, most frequently post the launch of DV5 is what new procedure - what new incremental TAM will da Vinci 5 unlock? I had the privilege of interviewing Dave, who might be near at hand today, that question at SRS. And I said the way da Vinci 5 unlock the general surgery TAM, what will da Vinci 5 unlock and Dave very eloquently said it's going to unlock the routine use of robotic surgery every day. Do you agree with Dave? And is that are your customers understanding that vision, or getting that that's what you're aiming at just any reaction to those thoughts, I'd appreciate it? Thank you, Dave.

Gary Guthart:

Yes. I'll start - good you asked yes, I agree with him. No shock. Maybe just to reiterate our position. There's two different ways that it can help grow long-term. One way is to go deeper into the procedure base, we're in already to help care teams and physicians who have thus far not wanted to adopt, or have chosen not to adopt, or have had a barrier to adoption, to help them adopt. And that can be so - through some of the functionality of DV5 and what it does, a little bit of easier access to other capital for example, of Xis become more used in more places, it can release access constraints together as a portfolio, those are powerful things, and that speaks to what Dave spoke about. We don't think we're done getting additional indications on DV5 and those are things that could happen in the future. And as we get closer and see what those opportunities are, we'll describe them.

Operator:

Okay. We'll go to next line. Drew Ranieri, Morgan Stanley. Please go ahead.

Jamie Samath:

Yes. I would just say in the U.S., demand for Xi kind of has two segments to it. You have customers that need incremental capacity, da Vinci 5 isn't available in the time that they need it. And so they're entering into arrangements with us, to take Xi now to serve that expansion of capacity they need. And then they have the upgrade right built into the arrangement to move to da Vinci 5 when it becomes available likely in broad launch. You have another segment of customers in the U.S. who are kind of wait and see with respect to, what the value will be of da Vinci 5. And again, they look for building evidence and kind of a broadening of customer belief, and part of that consideration is the profile of that customer, what their strategy is, what their procedure mix is. And of course, as part of the consideration, they're looking at the incremental price, which as Gary described, when you do the full stack isn't actually that significant. But - those customers that have tight capital budgets who like Xi, which is a capable system are more a wait and see. So I think in terms of - as you look forward, that will evolve with respect to how da Vinci capacity expands, and the extent to which then more customers can take that system. But there is a segment of customers that really like Xi.

Jamie Samath:

Yes. Just in terms of our OUS plans, I think it's consistent with what we have communicated, which is we're in discussions with Korea and Japan and don't expect to launch in Europe, before the end of next year. And so as we look beyond that, it's just too early to detail out those plans, and we'll let you know as they get a little bit more into focus here.

Adam Maeder:

Hi. Good afternoon. Thank you for taking the questions and congrats on the nice quarter. Two from me. The first one is on DV5, and I specifically wanted to ask about the hardware and software changes that you plan to make, in the back half of the year. What are you hoping to improve upon? What are the magnitude of the changes that you plan to implement? It sounds like they're relatively minor, but wanted to confirm that. And then I had a follow-up? Thank you.

Adam Maeder:

Highly good color, Dave. Thank you for that and for the follow-up. Wanted to ask about SP. Congrats on the thoracic indication. I'm curious how much you think that expands the opportunity for SP here in the states. I know you're also working on cold erectile, so curious if you have timelines there? And then together, does that kind of give you the indication base to push SP more aggressively in the U.S.? Thanks for taking the questions.

Adam Maeder:

Yes, happy to. I was just asking about colorectal timing. I think you have the IDE study that's ongoing. And I think that will be your fourth indication once the colorectal indication is in hand. So does that kind of give you critical mass from an indication standpoint to kind of push more aggressively with SP in the U.S?

Gary Guthart:

Operator, we'll take one more question from one more call and then we'll wrap.

Richard Newitter:

Thanks for taking the question. Maybe for Jamie, just Jamie in the past, you've talked about a long-term or an intermediate to long-term three, four-year time frame to get back above sustainably 70% gross margin. A, correct me if that's not true, but I'm pretty sure that's what you've said in the past. I'm just curious just with some of the initiatives maybe paying dividends earlier than expected and faster. I know you have some manufacturing transition going on for Ion disposables, that's a big initiative. Is it possible we're moving towards that goal a little faster sooner? I'd love to hear any thoughts there?

Dave Rosa:

Thanks. In fact, if I could just maybe -- okay...

Operator:

Thank you, everyone, for joining today's conference call. You may now disconnect at this time. Have a good day.

Brian King:

Good afternoon and welcome to Intuitive’s first quarter earnings conference call. With me today we have Gary Guthart, our CEO, and Jamie Samath, our CFO. 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 our Securities and Exchange Commission filings, including our most recent annual report on Form 10-K for the fiscal year ended December 31, 2023 and subsequent filings. Our SEC filings can be found through our website or at the SEC's website. 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 intuitive.com on the events section under our investor relations page. 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 quarters business and operational highlights. Jamie will provide a review of our financial results. Then I will discuss procedure and clinical highlights and provide our updated financial outlook for 2024. And finally, we will host a question-and-answer session. And with that, I will turn it over to Gary.

Jamie Samath:

Good afternoon. I will describe the highlights of our performance on a non-GAAP or proforma basis. And we'll also summarize our GAAP performance later in my prepared remarks. A reconciliation between our proforma and GAAP results is posted on our website. In Q1, da Vinci procedures grew 16%. The installed basis systems grew 14% to 8,887 systems. And average system utilization increased by 2%, lower than recent trends because of the strength in procedure growth and utilization in Q1 of last year that reflected a significant benefit from the treatment of patient backlogs. U.S. procedures grew 14%, driven by broad growth in general surgery. Bariatrics procedure growth in the U.S. continued to moderate and was flat year-over-year. OUS procedures grew 20%, reflecting strong growth in general surgery and thoracic procedures. Brian will provide additional detail on our clinical performance later in the call. Turning to capital, we placed 313 systems in the first quarter, compared to 312 systems in Q1 of last year. Excluding trading transactions, net new system placements grew 16% to 284 systems. In the U.S., we placed 148 systems in Q1, including eight da Vinci 5 placements, compared with 141 systems placed in Q1 of last year. Given constrained supply of da Vinci 5, system placements may be choppy this year as some customers that are interested in da Vinci 5 decide whether to acquire a fourth generation system with an upgrade rate or wait for adequate supply. Outside the U.S., we placed 165 systems in Q1, compared with 171 systems last year. Current quarter system placements included 84 into Europe, 20 into Japan, and 10 into China, compared with 101 into Europe, 16 into Japan, and 18 into China in Q1 of last year. Placements in the U.K. were below our expectations and lower than Q1 last year, because of the reallocation of NHS Capital Funding to help address industrial actions in the NHS. Placements in China continue to reflect the impact of domestic robotic competition and delayed tenders due to a broader central government focus on systematic governance across sectors, including healthcare. First quarter revenue was $1.89 billion, an increase of 11% from last year. On a constant currency basis, revenue growth was 12%. Additional revenue statistics and trends are as follows

Operator:

Thank you. [Operator Instructions] We will go to the first question at this time and that's from Robbie Marcus, JP Morgan. Please go ahead.

Gary Guthart:

Yes, I'm going to turn that first question over to Jamie. Thanks Marcus. Jamie why don't you go and then I'll add a few thoughts thereafter.

Gary Guthart:

So, I think, Jamie, you got it.

Gary Guthart:

Yes, in terms of early feedback, we’re hearing, I think what we were hoping for in terms of our design intent. They're appreciating the improvements to precision and imaging, to workflow and the team's efforts on human factors design and user interface, strong commentary on ergonomics, and I think force feedback is something that is new and will create opportunities to really understand the clinical implications of force application during surgery. I think that will be exciting and powerful over time. I think it's really hard for us, sitting where we are today, to predict the depth and timing of a replacement cycle. We're excited. I think that folks are excited about what's the potential of the product. That said, Xi is great. Xi has a lot of clinical indications, and we're going to have some supply constraints here as we work through our launch. Jamie, I don't know if there's anything you'd like to add to that.

Gary Guthart:

Thanks, Robbie.

Larry Biegelsen:

[Technical Difficulty] for taking the question. I echo Robbie, congratulations on a nice quarter here. Just two on da Vinci 5 for me. Maybe starting with Gary, the supply constraints, when do you expect those to be resolved? How long into 2025 will the limited launch last and what will trigger the full launch?

Larry Biegelsen:

That's helpful. And Gary, you haven't been specific about new indications that da Vinci 5 could open, but can you help us understand what the features are of da Vinci 5 that could allow physicians to do new procedures and why? Thanks for taking the question.

Operator:

And we will go to the next line Travis Steed, Bank of America. Please go ahead.

Jamie Samath:

Yes, I mean…

Jamie Samath:

Oh, go ahead, Gary.

Jamie Samath:

Yes. I think the first dynamic is trading-ins. Given the limited supply in dV 5, those placements will be, during the measured launch, focused on incremental placements. So not a lot of trade activity coming from dV 5. And if you look at what's left in the install base for our third gen SI, you've got about 350 systems globally, of which 50 are in the U.S. So we do expect trading volumes to be down quite a bit in ‘24. With respect to overall system placements, I know we made the comments on the last call, but generally we don't guide system placements, so we'll let you run that through your models given the updated procedure guidance. But certainly we've acknowledged that placements could be choppy, while we're constrained on dv 5. In Q1, we didn't really see any customers pushing back on I don't want an Xi, we want to wait for dV 5. But since the launch, which obviously was only in March, we've had our Connect conference, we've had SAGES this week, a significant number of surgeons and executives have now seen dV 5 put their hands on it. So we're acknowledging that customers may choose to wait. We don't have enough evidence or indication yet to see which way that will go.

Gary Guthart:

In terms of raw capability, I think that it will help care teams acquire skills more quickly and it also helps them in the case. As you can kind of think of that as contact sensitive help. The device is kind of aware of where it is and what it's doing and can share that information with the care team, so that as they're doing things, whether it's changing tools or setting it up, it provides real-time help to help guide them through it. And I think that's a really good thing. It just makes it easier to use. Our Intuitive hub has integration, technologies that start with da Vinci 5 and will get better over time as we release software updates and hardware updates. And so that starts to close an analytical loop for our customers from what they're seeing in the case to video review to video analytics to feeding back information to their phones and their laptops and whatever their means are consuming that data is. So that gives them an analytical loop, which should also help. And we'll also continue to evolve our simulation training and some of our other packages, our online learning, that will help them as well. So I think all of this is going to take a little bit of time, but I think the design concept, I think our designers did a beautiful job. I think the design concept of integrating these ideas, making it easy for care teams, for surgeons to follow that journey should help us. Final point I'll make is that in our labs and during our early experience with da Vinci 5, it looks like forced reflection helps novice, new to robotics, new to robotics assistant surgery, require their skills faster. So it should invite more surgeons in and ease their journey. It remains to be proven. It's not done and done, but we think it's encouraging. And so stay tuned. I think keep asking that question and as the data starts to come out, we'll be pleased to share it with you.

Operator:

Okay, and we'll go to the next line. Rick Wise, Stifel. Please go ahead.

Gary Guthart:

Yes, let me share my perspective. Rick, thanks for the question, and then Brian, I'll kick it to you to talk about the range. I think what we can tell you is what we see and what we've seen is continued deceleration such that it's flat year-over-year. There are a lot of opinions out in the field and we can all talk to them. I think the reality is nobody really knows yet. We're going to have to look through it together and as a result it's going to be dynamic. We do know that bariatric surgery is well tolerated and it's a good option and we also know that people are interested in pharmaceuticals and that the pharmaceuticals work as long as you take them for a subset of the population and then stop working if you don't. What that means for future surgery, I think there's a range of opinions and I would not hang a lot of confidence on any of them just yet. And that's why we have a range. And Brian, perhaps you can just touch on how you see bariatric surgery affecting the range. Just reiterate that, if you would.

Rick Wise:

Okay, great. And let me turn to some of the new and incremental features you talked about, Gary. I'm sure all of us on the call have been talking to doctors. I've been hearing a variety of additional features. Some sound quite compelling. Can you give us any flavor? I mean, first, I'd be happy to hear from you what some of them could be? But how quickly, given what you know today, when could we see those features that, again, I would assume would enhance the value? Are we going to see them this year, second-half, or is it more likely that's something for next year as you get supply chain where you want it to be? Thank you.

Operator:

And we will go to the next line. Adam Maeder, Piper Sandler. Please go ahead.

Gary Guthart:

Sure, we're getting a variety of feedback on the instruments themselves. Just a reminder for everyone, they have very sensitive sensors that are built into the distal end, in the body end of the instruments that are sterilizable and cleanable, and they report back contact forces with tissue which at a sensitive way, which has been a goal for us and for surgery for a long time. So it's a hard technology, we've been really excited to bring it to market. We will hear everything from, hey, I'm getting great results with da Vinci X and Xi today, that has very limited version of haptics. It really doesn't have in-body sensing. It does have a little something, but it's not sensing in the technical sense. And that's true, they're getting great results. So it's a new sense. That said, people are quite interested to explore where it will take them. And what's interesting is that when you're using a force sensing instrument, it's sensing whether you turn on force reflection into the surgeon's hands or not. So the surgeon can feel it, they can turn it on, or they can turn it off, but still measure so that they have the feeling experience of an X or an Xi. And what they find when they turn it on and off is that the amount of force that they apply during surgery to tissue decreases when force reflection into the hands is on. And so the big question is what's the clinical value of that? What will be the implications for patient outcomes by procedure and by technique? And that's what they're going to go explore and we will help them do that exploration. So now we're talking about the future, what could happen. I suspect, I believe, this is a personal opinion. There will be types of procedures and types of patients where having lower force applied to tissue during the surgery is going to be clinically meaningful. And we have to go prove that. So I think it's quite interesting. The technology is sophisticated. We are with our manufacturing partners learning how to make these at scale with good yield and robust. It's a worthy endeavor, but it is not easy and we're going to focus on it, make sure that we get what we want. We want to make sure we have robust and high yield products, we want to extend their lives to help the economics of our customers and our economics. So that is our first focus. As to the six instruments, I'm going look to Jamie as to whether the sixth number is right, I think it is. Certainly over time, we have the opportunity to extend it to other instruments. But that first set of six are the ones that we thought were right. Six is the right number, Jamie?

Adam Maeder:

Thanks Adam.

Drew Ranieri:

Thank you taking the questions, maybe just on SP for a moment with the indication expansion in Europe. Can you talk about that a bit more, Gary? And I was hearing from a surgeon today that the CRSA Conference in November in Rome could be pretty important for just getting broader adoption from European surgeons, but does that inform how you could approach the U.S. market with a broader indication? And then I just had a follow-up.

Drew Ranieri:

Thank you. And maybe this is more for Jamie, but Jamie, could you talk about the commentary about lower pricing in China for the quarter? Just talk about that a little bit more and maybe put that into context on if this is temporary, if it's permanent or more to come and just the overall competitive situation in China would be great. Thank you.

Operator:

And we'll go to the next line. And that will be Matt Miksic, Barclays. Please go ahead.

Gary Guthart:

Yes, it's a good question, Thank you. This is approximate, not specific, so take it with some error bars. But, you know, I think what you're going to see in force feedback study is going to be a progression. You'll see narrow series, single institution studies come out first that are kind of directional. They talk about what they're seeing in their own, and then you'll see a little bit, and that should be the kind of thing that comes out in the next 12 months. And then over the next period after that, over the next couple of years, you'll see multiple center trials that are comparing in a little more structured way. So I think you can predict the path of the journey, but I think this is something that you're going to see from narrower input to start to broader input in the next year to prospective studies that start to report over the next year after that. So I think it's a build, but I think it's going to be a powerful build in the end. I think with regard to efficiencies, we're hearing anecdotal reports already that the surge in autonomy features that are in da Vinci, the ability for them to control their own field and to control the equipment, the Hansler equipment in the room has been really positive and they're reporting efficiencies already. I think real-world evidence is going to be powerful on the efficiency side. I think that's the kind of thing that people can benchmark their own cases. We also our data collection capabilities between Intuitive Hub and the My Intuitive app allow them to measure that very quickly. So I think you'll see the real-world evidence of that build and it will be in the coming months and quarters and that will be exciting for us.

Operator:

And we will go to the next line. Let's go to the line, Brandon Vazquez, William Blair. Please go ahead.

Gary Guthart:

Jamie, why don't you take that one?

Brandon Vazquez:

Okay, and one quick follow-up maybe on the surgical side. The 1% utilization growth, I appreciate it, off of a tough comp and we're kind of normalizing. But I think we kind of, we usually use utilization growth as an indication for system placements and then it implies a certain procedure growth as well. Just talk to us a little bit about what you kind of think a below historical average utilization growth in the quarter might mean for those key moving pieces in the next couple of quarters. Thanks.

Gary Guthart:

I'll jump in and then Jamie take it. I think that in the prepared remarks, we had said you had a nice capital placement year and we had a bolus of post-COVID comeback into Q1. I think the uncertainty part of this is really just going to be what the inpatient volumes look like in the next quarters of 2024. In other words, just the patient census as it comes through. But you're right, I think that it's an indicator of capacity. So depending what that patient census looks like, that'll determine the high end and the low end of utilization growth in terms of how many procedures people want to put on those systems. Sorry Jamie, go ahead, you might discuss the modeling there.

Operator:

And we will go to the next question from the line of Jayson Bedford to Raymond James. Please go ahead.

Jamie Samath:

Yes, we have some work to put eye on at a point where it's actually available to sell, so that will take us some time. We're not expecting to have commercialization really until the back half of 2024. And China is a market where, like many cases, when we launch a new product in a market, we do that progressively as we kind of build our infrastructure in terms of training capabilities and engage with customers. So I'd say back up at ‘24 is when you start to see the potential for Ion placements in China.

Jamie Samath:

Oh, sorry. Yes, our understanding is it is not in the quota given the price.

Gary Guthart:

And Jason, if you have one more follow-up, that will wrap it up for us.

Gary Guthart:

Okay, that was our last question. In closing, we continue to believe there's a substantial and durable opportunity to fundamentally improve surgery and acute interventions. Our teams continue to work closely with hospitals, physicians, and care teams in pursuit of what our customers have termed the quadruple aim. Better, more predictable patient outcomes, better experiences for patients, better experiences for their care teams, and ultimately a lower total cost of care. We believe value creation in surgery and acute care is foundationally human. It flows from respect for and understanding of patients and care teams, their needs and their environment. At Intuitive, we envision a future of care that is less invasive and profoundly better, where diseases are identified earlier and treated quickly, so patients can get back to what matters most. Thank you for your support on this extraordinary journey. We look forward to talking with you again in three months.

Brian King:

Good afternoon and welcome to Intuitive’s fourth quarter earnings conference call. With me today we have Gary Guthart, our CEO, and Jamie Samath, our CFO. 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 our Securities and Exchange Commission filings, including our most recent Form 10-K filed on February 10, 2023, and Form 10-Q filed on October 20, 2023. Our SEC filings can be found through our website or at the SEC's website. 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 intuitive.com on the events section under our investor relations page. 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 full year and fourth quarter results as described in our press release announced earlier today, followed by a question-and-answer session. Gary will present business and operational highlights. Jamie will provide a review of our financial results. Then I will discuss procedure and clinical highlights and provide our financial outlook for 2024. And finally, we will host a question-and-answer session. And with that, I will turn it over to Gary.

Jamie Samath:

Good afternoon. I will describe the highlights of our performance on a non-GAAP or pro forma basis. And we'll also summarize our GAAP performance later in my prepared remarks. A reconciliation between our pro forma and GAAP results is posted on our website. Q4 and 2023 revenue, procedures, and system placements are in line with our preliminary press release of January 9th. I will briefly review full year 2023 performance before describing our Q4 results in greater detail. 2023 procedures grew by 22% as compared to last year, or 17% on a four-year compound annual growth rate basis. As we've discussed on previous calls, 2023 procedure growth was above our longer-term trend primarily because of the need to address patient backlogs. During the year, we placed 1,370 systems with customers, an increase of 8% year-over-year. Excluding trading transactions, net new system placements for 2023 grew by 23% over the prior year, with the US up 26%, driven primarily by customer need for additional capacity. Trading volumes declined by 105 systems to a total of 240 trading transactions for the year. Recurring revenue, which is correlated to ongoing use of our products, represented 83% of total revenue and grew 21% over the prior year. Total revenue of $7.1 billion increased 14% and for the first time our advanced instrument portfolio of stapler and energy devices exceeded $1 billion in revenue, growing 21% in 2023. During the year, we repurchased $416 million of our stock or approximately 1.7 million shares at an average price of $241 per share. We have a remaining authorization to repurchase our shares of $1.1 billion. Given these results, pro forma earnings per share for 2023 grew 22% as compared to last year. Turning to Q4, our core metrics were strong. da Vinci procedures grew 21%. The installed base of systems grew 14% to 8,606 systems, and average system utilization continued to be above long-term trends, increasing by 9% for the full year of 2023. Higher system utilization reflects both a higher mix of shorter duration benign procedures and the need to address patient backlogs. In Q4, US procedures grew 17% driven by growth in general surgery. OUS procedures grew 29%, driven by strong performance in China, the UK, Germany and Japan with notable strength across multiple OUS markets in general surgery which grew 44% in Q4. As a reminder, procedures in China in the fourth quarter of last year were adversely impacted by increasing COVID cases, resulting in negative growth in Q4 of 2022. Turning to capital, we placed 415 systems in the fourth quarter, 12% higher than the 369 systems we placed in the fourth quarter of last year. In the US, we placed 209 systems in Q4, 28 more than last year, driven by capacity expansion for procedure growth and higher greenfield placements at existing IDN customers. We placed 70 systems in Japan with strengths driven by greenfield placements and customer use of remaining capital budgets. Consistent with last quarter, we have seen delayed tenders and lower system placements in China due to ongoing anti-corruption efforts by the government. We expect system placements in China to be at lower levels at least through the first half of 2024. Globally, there were 51 trading transactions in the quarter as compared to 110 last year. As of the end of Q4, there were approximately 375 SIs remaining in the installed base, 60 of which are in the US. Fourth quarter revenue was $1.93 billion, an increase of 17% from last year. On a constant currency basis, revenue growth was also 17%. Additional revenue statistics and trends are as follows. Leasing represented 48% of Q4 placements, compared with 42% last year. The increasing lease mix we have seen over time is primarily driven by customers in the US, particularly those who have acquired systems under usage-based arrangements. These arrangements provide customers greater financial flexibility to expand their robotics programs independent of capital budgets. These arrangements also incorporate technology obsolescence protection for next generation technology. Q4 system average selling prices were $1.42 million as compared to $1.43 million last year. System ASPs were negatively impacted by regional mix, partially offset by lower trade-ins. We recognized $21 million of lease buyout revenue in the fourth quarter compared with $17 million last quarter and last year. da Vinci instrument and accessory revenue per procedure was approximately $1,800 compared with approximately $1,820 last year. The year-over-year decline in I&A per procedure is primarily a result of procedure mix in the US, given strong growth in cholecystectomy and lower growth in bariatrics and customer ordering patterns, partially offset by the I&A price increase implemented mid-2023. Turning to Ion, there were approximately 16,500 ion procedures in the fourth quarter, an increase of 108% as compared to last year. In Q4, we placed 44 Ion systems compared to 67 in Q4 of 2022 and 55 last quarter. We experienced supply challenges for our Ion catheter and vision probe and limited Ion system placements during the quarter to ensure customers could effectively launch their programs. There is strong customer demand for Ion, which contributed to backlog growth in the quarter. We are working hard and making progress to resolve these supply challenges. The installed base of Ion systems is now 534 systems, of which 214 are under operating lease arrangements. Our SP platform continued to make progress in 2023. Fourth quarter SP procedure growth accelerated to 58%. We placed 19 systems in Q4 and 57 for the year, up from 23 placements in 2022. Fourth quarter placements included five in Korea and two in Japan. Average system utilization for our SP platform grew 15% in 2023, reflecting increased usage by US customers. We continue to make progress in expanding the opportunity for SP, including continued work on regulatory submissions in the US for colorectal and thoracic indications and a system submission in China. In January, we received clearance for SP in Europe across a broad procedure set and are planning for a measured rollout as we build local KOLs and establish local proctoring and training capabilities. Moving on to the rest of the P&L, pro forma gross margin for the fourth quarter of 2023 was 68% compared with 68.2% for the fourth quarter of 2022. The year-over-year decline in pro-forma gross margin reflects increased inventory reserves and a higher mix of new platform revenue that currently carry dilutive gross margins, partially offset by the I&A price increase implemented mid last year. With respect to our manufacturing capabilities and capital investment plans, during the quarter we initiated local excise system production in China, allowing us to participate in tenders that require a domestically produced system. We also completed the transfer of X system production to our East Coast hub near Atlanta, Georgia. And during 2024, we are planning to transfer Xi system production from California to our East Coast hub. Over the next 18 months, we expect to open new manufacturing facilities for da Vinci 5 and Ion system manufacturing in California and to complete line transfers for Ion and SP I&A to our Mexicali facility. We believe these activities will position Intuitive to serve our customers with best-in-class supply availability, product quality and product cost. Fourth quarter pro forma operating expenses increased 15% compared with last year, driven by increased headcount and higher variable compensation. In addition, fourth quarter 2023 operating expenses included a $40 million contribution to the Intuitive Foundation. We did not make a contribution in 2022. Pro forma other income was $67.1 million for Q4, higher than $57.9 million in the prior quarter, primarily due to higher interest income. Our pro forma effective tax rate for the fourth quarter was 15.9%, lower than prior quarters, primarily because of the release of certain tax reserves associated with the expiration of related statutes and a favorable earnings mix. Fourth quarter 2023 pro forma net income was $574 million or $1.60 per share compared with $439 million or $1.23 per share for the fourth quarter of last year. I will now summarize our GAAP results. GAAP net income was $606 million or $1.69 per share for the fourth quarter of 2023 compared with gap net income of $325 million or $0.91 per share for the fourth quarter of 2022. Fourth quarter GAAP tax expense reflected one-time benefits of $159 million associated with an increase in deferred tax assets associated with a statutory rate increase in Switzerland and receipt of certain tax benefits associated with our Swiss operations. The adjustments between pro forma and GAAP net income are outlined and quantified on our website. We ended the year with cash investments of $7.3 billion compared with $7.5 billion at the end of Q3. The sequential reduction in cash and investments reflected capital expenditures of $435 million, partially offset by cash generated from operating activities. Let me take a moment to address the new multiple system that Gary highlighted and certain assumptions that may impact 2024 modeling. First, since we have not received FDA clearance for da Vinci 5, we cannot provide specificity on launch timing and pricing. Second, once cleared, we are planning a phased launch period over several quarters. Noting that we are at the end of the Si trading cycle and that da Vinci 5 will be in a phased rollout, we expect total trading volumes to be lower in 2024 than the prior year. Given that, and our procedure guidance of 13% to 16% growth, we also expect total system placements for 2024 to be lower than 2023. As a result of the phased rollout of da Vinci 5, we expect a higher proportion of Gen 4 systems will be leased as customers seek flexibility to upgrade to da Vinci 5 when supply allows. For those customers that prefer to purchase a Gen 4 system, we will offer a future trading right that can be exercised when there is sufficient da Vinci 5 supply. Purchase contracts containing a trading right result in a deferral of a portion of the purchase price negatively impacting systems revenue. Finally, consistent with our experience bringing four generations of platforms to market, new systems typically start at lower gross margins and rise over a multiyear period as we build volume and optimize design, manufacturing and supply chains. Brian will describe our gross margin guidance in more detail later in the call. Before I turn it over to Brian to discuss clinical highlights and our outlook for 2024, let me address operating margins. 2023 pro forma operating margin was 34% of revenue compared to 35% in the prior year. We expect operating margins to be under pressure in 2024, given the anticipated launch of da Vinci 5, increased depreciation expense and an adverse mix impact to gross margin from the growth in new platforms. However, as we look to the medium term, we see opportunity for operating margin expansion based on the following dynamics. One, moving to broad launching da Vinci 5, allowing customers the opportunity to upgrade their existing fleet to the latest technology. Two, improving gross margin. We aspire to be above the 70% level over time. And three, leveraging those functions that can take advantage of scale as we grow. Improvements to gross margin will be driven by the following actions

Operator:

[Operator Instructions] And our first question will come from the line of Larry Biegelsen of Wells Fargo. Please go ahead. Sir, your line is open now.

Gary Guthart:

Yeah, Larry.

Jamie Samath:

Yeah. I would say the dynamics are quite different between when we launched Xi in 2014 versus where we are today. And I think the feature sets of da Vinci 5, which we haven't described I think an important context for you all, which we'll do once we have clearance. You look at relative penetration of da Vinci over that period, the extent to which leasing has changed significantly our OUS penetration. I think there are a number of factors, Larry, where I would not use the kind of Xi ramp and progression as a reference point for how da Vinci 5 might progress. But I think that I would make any further comments on that once we get through clearance and are able to talk to you about the feature set.

Jamie Samath:

With respect to the lease. So I think there are a number of dynamics that in the end will motivate a customer to look at a trade even if they have an existing system under lease. If I hold everything else equal and just look at the fact that the asset is leased, I do think there is some benefit to the customer insofar as they can avoid a capital budget barrier to executing an upgrade. But I think you have to look at all of the other dynamics that we're yet to describe.

Gary Guthart:

Yeah, we submitted for broad indications and in the IDE trial it was a broad indication trial. What that looks like in the end, we'll come down to how we answer some of the questions that come back and forth. So I'm not telling you what the end point is, but I can tell you what our starting point is. In terms of kind of breadth and depth, we think that it will allow for additional penetration into some of the categories we're in already. And maybe an analogy is you could do some general surgery with Si, the earlier system, we had clearances there, but Xi had some product improvements and some really nice forward progress that allowed us for greater penetration depth. So there's opportunity for depth. We think over time there's opportunity for additional indications. Those are unlikely to occur right out of the gate. And we think that there's some really nice indications to talk about or features to talk about in future calls.

Operator:

Okay, we'll go to the next line. We go to Travis Steed, Bank of America. Please go ahead.

Gary Guthart:

Yeah. Hi, Travis.

Gary Guthart:

I laid out in the script kind of what our design methodology was. I am dying to tell you more about da Vinci 5, but I'll wait for clearance and for the final back and forth with FDA so we can do that with a little more care. So that's kind of where we are on that set. We're excited about it. I think it is substantive and I think some of the improvements that we can bring are going to be interesting and exciting. We are submitted and we're in the back and forth with FDA. It is our hope that it is a ‘24 launch. They ultimately are the arbiters of when we get clearance. But what I'd say based on past experience with them is that we're in a constructive conversation that we understand. And if that goes the way we want, then certainly it's something we'd be excited about in ‘24. But I can't guarantee it because I don't have the clearance yet.

Gary Guthart:

Yeah, I'll start with just a little bit of color on ASP and then I'll turn it over to Jamie. We won't call any ASP right now. We want to both get through the final clearances. What I will say is there are some differences relative to X, Xi that make that discussion a little detailed. And it's important for it to be detailed and clear for the customer to understand what they're going to be buying. So we're going to pause that for now. With regard to manufacturing ramp, clearly we're going to be in a phased launch. I think we'll be supply constrained in the early side of that, kind of intentionally as we work through manufacturing process, but in terms of pacing and what that might feel like, Jamie, let me turn it over to you.

Travis Steed:

All right, great. Thanks a lot and congrats.

Operator:

And we'll go next to the line of Robbie Marcus, JPMorgan. Please go ahead.

Gary Guthart:

Yeah, one of the things we talked about in the script is the increase in computational capability of the system, the re-baselining of that system. And one of the reasons for that is future programmability. Some of the things that we'll be able to bring out of the gate are pretty exciting, but it also gives us the opportunity to build on that base and sequential software releases. So it's a good pull-through, Robbie. The point you make is a good one, and we do want to pull through software capability. It will not just be software that we bring to market, but it's a starting point. Just to remind everybody back in the Xi launch period, Xi didn't have everything that we could possibly do with it at first year of launch either. It's something that as we build capability and build skill we can add to over time, and we've done that for years, we will do the same in dV 5, it is a platform upon which we can build for many years to come.

Jamie Samath:

Yeah. Let me take CapEx first. In '23 and '24, the majority of those capital investments are for manufacturing facilities and to add manufacturing capacity in particular to our Mexicali factory. So a significant portion of the depreciation that comes with that will show up in cost of sales, and that's reflected in part in the '24 gross margin guidance. Some of it will show up in OpEx, and that will therefore be reflected in SG&A. If I look at the relative growth in R&D and SG&A in '24, I think it's relatively similar. Obviously, innovation in R&D is important to us. But you will have a little bit of an impact in '24 at least for incremental depreciation. We still see opportunity to leverage some of our enabling functions. There are some other functions that also can leverage as we scale and grow, and so we'll look to do that over the next couple of years. With respect to the kind of operating margin expansion opportunity that I described in my prepared remarks. And we said over the medium term, I'd kind of broadly say that's a three- to five-year horizon. We have a specific set of actions and plans that we need to execute. Those teams have those as goals. There's some variability, obviously, in terms of how they get executed and there's some interrelationship between set of actions that need to be completed. So there are dynamics there that can impact the speed at which that gets executed. And of course, we have to run our business in the meantime.

Operator:

And we'll go over to the line of Rick Wise, Stifel. Please go ahead.

Gary Guthart:

Thanks, Rick. On the SP front, we're pleased with the step forward they took in '23. It was good. We're seeing more focused efforts in our commercial team in the US, which has been good. We're excited about its entry into Japan, and we're starting to see a build of activity in Japan, too. So that's been good. We expect to see it in Europe in '24, and that's another nice step. And I think that's a broader set of clinical indications as it was in Korea and Japan. So it gives us a little more freedom to operate, which is great. In the US, we have trials that had finished accrual and have been submitted or will be submitted soon in thoracic and colorectal that will give our US customers more opportunity to use SP in a multiplatform -- multispecialty environment. So I think SP continues to be a nice build. So that looks good. And team has their marching orders and is working down that set of processes. We have a breast oncology trial that's ongoing that we're excited about also that will not make a big impact in '24, but starts to open additional opportunity for narrow access surgery thereafter. So that's kind of where we are in SP, so far, so good. I'll turn it over to Jamie and talk about Ion.

Rick Wise:

Got you. And just one follow-up on Gen 5 and what's next. You said, Jamie, and it makes sense that probably in the next couple of quarters or until you launch, customers probably will lean more toward the leases with an upgrade clause. If I understood you. But I was just reflecting on it, should we imagine that, that could accelerate this sort of leasing approach in the near term for Xi, and as people, I guess, preferentially, potentially possibly maybe line up to get Gen 5 and that puts them in a more favorable position. How does that all -- how are all those dynamics work? Is this good? Better for sales that this transition occurs? Or is it going to be more complicated?

Gary Guthart:

More likely to be a slight negative than a slight positive. And I think the things we've put in place for customer transparency, the ability to see it, work to mitigate the feeling of having to wait and they'll get a chance to put their hands on it and see it. But I don't see it as an accelerant.

Operator:

And we'll go to the line of Adam Maeder, Piper Sandler. Please go ahead.

Jamie Samath:

Indications so far have been that, that anticorruption effort is a year-long effort which would take us to the middle of '24. And so that's why we indicated that we would expect delayed tenders through the period in which that effort is ongoing. We don't have great visibility, frankly, beyond the first half of '24. And that's why in the prepared remarks, we said at least through the first half of '24. So yes, if that effort was to be resolved, and if things start to normalize in terms of the pace at which tenders occurred, then you could see some opportunity for that to recover. But we're not in a position where we can predict that at this point.

Jamie Samath:

Let me start with seasonality. And I'm not going to be specific on quarterly cadence, but I do think I tried to emphasize in our prepared remarks that we believe that the first half will be a tougher comp versus last year. And so using that, the comparison from last year and then also thinking about our historical sort of cadence throughout the year, I think you can look at that history and just make an assumption on what that growth rate -- what those growth rates could be by quarter. Let's talk about factors in the procedure guidance. So those -- there's really three primary factors, right? You have -- we've called out bariatric growth rates, and that's primarily a US factor. We talked a bit about from an OUS perspective, China, and then also backlog in the system. And so the backlog also being primarily a US factor. But could still be broader. But -- so I'm not going to go into specifics as far as US versus OUS. But I think I'd go back and just really center you on our comments around bariatric growth rates, right? Low end of the range assumes that there's some continued moderation in bariatric procedures and at the high end of the range that it assumes current growth rates. There's some impact in China at the low end of the range just from the discussion that we had right now an anticorruption and how long that actually persists and then the benefit of backlog and how that will persist throughout the year.

Adam Maeder:

Thanks very much.

Drew Ranieri:

Gary, just, maybe just broadly on da Vinci 5 and just the TAM that you kind of updated at the conference earlier this month. How are you -- could you maybe just update us maybe on how you're thinking about penetration today in general surgery, where you are with chole, hernia, colorectal bariatrics, just to help us level set because it sounds like this could be another progression in general surgery for the company? And then I had a follow-up.

Jamie Samath:

If you take a look at the US, and I'm going to put this in quartiles for a second in terms of where we are in the adoption curve, colorectal we're in the second quartile. Bariatrics, also the second quartile. Actually cholecystectomy and hernia all in the second quartile in terms of where they are along the adoption curve. And so that obviously gives us some continuing runway to grow, and that's a driver behind the US general surgery growth rates that we've seen. In the international markets, by the way, just in terms of general surgery, for the most part -- in most of the larger markets, we're in the first quarter of adoption. It's early. What we're seeing is growth start to stick and those don't start to be on early growth rates. Particularly in the cancer procedures, colorectal and beyond general surgery in hysterectomy and thoracic.

Drew Ranieri:

Sure. Yeah. Just on da Vinci 5. Can you maybe just talk about how it might be able to improve access to hospitals? I know that you have many IDNs that have added more systems, but do you see that more as an opportunity? Or do you see just maybe better access for even smaller hospitals with having multiport systems in the portfolio? Thanks.

Gary Guthart:

That was our last question. In closing, we continue to believe there is a substantial and durable opportunity to fundamentally improve surgery and acute interventions. Our teams continue to work closely with hospitals, physicians and caregivers in pursuit of what our customers have termed the quadruple aim. Better, more predictable patient outcomes, better experiences for patients, better experiences for their care teams and ultimately, a lower total cost to treat. We believe value creation in surgery and acute care is foundationally human. It flows from respect for and understanding of patients and care teams, their needs and in their environment. At Intuitive, we envision a future of care that is less invasive and profoundly better where diseases are identified earlier and treated quickly so patients can get back to what matters most. Thank you for your support on this extraordinary journey and we look forward to talking with you again in three months.

Brian King:

Good afternoon, and welcome to Intuitive's third quarter earnings conference call. With me today, we have Gary Guthart, our CEO; Jamie Samath, our CFO; and Dr. Myriam Curet, our Chief Medical Officer. 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 our Securities and Exchange Commission filings, including our most recent Form 10-K filed on February 10, 2023, and Form 10-Q filed on July 24, 2023. Our SEC filings can be found through our website or at the SEC's website. 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 intuitive.com on the Events section under our Investor Relations page. 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 third quarter results, as described in our press release announced earlier today, followed by a question-and-answer session. Gary will present the quarter's business and operational highlights, Jamie will provide a review of our financial results, Myriam will present clinical highlights, and I will discuss procedure details and provide our updated financial outlook for 2023. And finally, we will host a question-and-answer session. With that, I will turn it over to Gary.

Jamie Samath:

Good afternoon. I will describe the highlights of our performance on a non-GAAP or pro forma basis. I will also summarize our GAAP performance later in my prepared remarks. A reconciliation between our pro forma and GAAP results is posted on our website. Core metrics continue to be healthy in Q3, with global procedure growth of 19% and an increase in the installed base of da Vinci systems of 13% and an increase in average system utilization of 6%. Our key financial indicators were also healthy. Third quarter recurring revenue grew 21%. Pro forma operating margin was 36%, and pro forma earnings per share increased 23% over last year. Procedures in the U.S. grew 17%, reflecting a lower benefit from patient backlogs as compared to the first half of 2023. Last quarter, we highlighted that our growth rate in bariatric's procedures in the U.S. had slowed given patient interest in weight loss drugs. In Q3, we continued to see double-digit growth albeit at a modestly lower growth rate as compared to Q2. Bariatric's procedures represent between 4% and 5% of total global procedures. Based on third-party data, we believe we continue to gain market share in the bariatric surgical segment. OUS procedures grew 24% with relative strength in India, Germany, the U.K. and Japan. Procedure growth in China was consistent with our expectations, lower than last quarter due to a strong base period given the recovery from COVID-related lockdowns in the year ago quarter. Consistent with recent trends, growth in non-neurology procedures outside of the United States was accretive, growing at approximately 31%. Within the larger cancer categories, our fastest-growing OUS procedure is colon resection, a high-value procedure led by adoption in Japan, Germany and the U.K. With respect to capital performance, we placed 312 systems in the third quarter as compared to 305 systems last year. As a reminder, system placements in Q3 of last year benefit from a delay in the shipment of approximately 15 systems from June into July as a result of supply chain challenges we encountered in June of last year. Late in Q3, we started to see delays in tender processes in China, primarily as a result of anticorruption efforts by the central government, resulting in lower system placements in China in Q3. We expect tender delays to continue to impact system placements in China in Q4. Q3 revenue was $1.7 billion, an increase of 12% year-over-year. Q3 revenue growth was driven by procedure growth, partially offset by an 11% decline in systems revenue due to the significant increase in the mix of operating lease arrangements. On a constant currency basis, third quarter revenue growth was also 12%. Given recent movements in exchange rates, at current rates, the U.S. dollar is approximately 3% stronger on a revenue-weighted basis as compared to the average rates realized in Q3. Revenue denominated in non-USD currencies represent approximately 24% of total revenue. Additional revenue statistics and trends are as follows

Brian King:

Thank you, Myriam. Our overall third quarter procedure growth was 19% year-over-year compared to 20% for the third quarter of 2022 and 22% last quarter. In the U.S., third quarter 2023 procedure growth was 17% year-over-year compared to 18% for the third quarter of 2022 and 19% last quarter. Q3 growth was led by procedure strength within general surgery, with particular strength in cholecystectomy and colon resection. Outside of the U.S., third quarter procedure volume grew 24% compared with 24% for the third quarter of 2022 and 28% last quarter. OUS growth was led by procedures beyond urology, which now make up approximately 50% of total OUS procedures. General surgery growth was strong, primarily in colorectal procedures followed by growth in gynecology procedures. Growth in urology continued to be healthy, led by kidney procedures, along with continued double-digit growth in prostatectomy. In Europe, we experienced strong growth in Germany, the U.K. and Spain. In each of the regions noted, procedure growth was led by general surgery, primarily from colorectal procedures and specifically in Germany and the U.K., hysterectomy procedures also contributed to strong growth. In Asia, growth was led by Japan. More than half of the incremental procedure growth in the country was led by strong growth in general surgery procedures, consisting largely of colorectal and gastrectomy procedures. In China, procedure growth was consistent with our expectations for the quarter. Growth was driven primarily in neurology, notably by prostatectomy and kidney procedures. In India, while in the early stage of adoption, saw strong growth in general surgery procedures, namely cholecystectomy and hernia repair and growth in gynecology procedures. I will now turn to our financial outlook for 2023. Starting with procedures. On our last call, we forecasted full year 2023 procedure growth within a range of 20% to 22%. We are now raising the low end from 20% to 21% and expect full year 2023 procedure growth of 21% to 22%. The low end of the range reflects uncertainty around the duration of elevated procedure volumes with patients returning to health care, a continued slowing of bariatric growth rates in the U.S. and macroeconomic challenges that could impact hospitals and patient spending. At the high end of the range, we assume macroeconomic challenges do not have a significant impact on hospital procedure volumes, and bariatric growth rates in the U.S. continue at the rate we experienced in Q3. The range does not reflect significant material supply chain disruptions or hospital capacity constraints. Turning to gross profit. On our last call, we forecast our 2023 full year pro forma gross profit margin to be within 68% and 69%. We are now refining our estimate of pro forma gross profit margin to be within 68% and 68.5%. Our actual gross profit margin will vary quarter-to-quarter depending largely on product, regional and trade-in mix and the impact of new product introductions. With respect to operating expenses, on our last call, we forecast pro forma operating expense growth to be between 12% and 15%. We are adjusting our estimate and now expect our full year pro forma operating expense growth to be between 12% and 14%. We are also refining our estimate for noncash stock compensation expense to range between $600 million to $610 million in 2023, lowering the range from our previous estimates of $600 million to $620 million. We are increasing our estimate for other income, which is comprised mostly of interest income, to total between $190 million and $200 million in 2023, an increase from our previous estimate of $160 million and $180 million. The increase primarily reflects the rise in interest rates. With regard to capital expenditures, we are narrowing our estimate to range between $900 million to $1 billion, primarily for planned facility construction activities. With regard to income tax, we are also refining our estimate for the 2023 pro forma tax rate to be between 22% and 23% of pretax income, reducing the previous estimate of the upper end of the range from 24% to 23%. That concludes our prepared comments. We will now open the call to your questions.

Robert Marcus:

Great. Congrats on good quarter. Thanks for taking the question. Maybe to start, it's hard to escape it. GLP-1 is becoming a very big topic in med tech. And your -- it's impacting bariatric surgery here. It doesn't seem to be impacting anything else, particularly in the pipeline. But just wondering your thoughts overall, could GLP-1s ultimately be a positive as more people try weight loss surgery and come in the funnel? And any other impacts good or bad that you foresee on business?

Myriam Curet:

I think you are correct. I think in the short term, we will see patients who are considering or are in the pipeline for bariatric surgery going to try the drug. However, given compliance issues, costs, side effects, we expect that many of them will not stay on the drug for longer than a year or 2. And at that time, we'll consider bariatric surgery. So I think overall, we'll see an increased interest in bariatric surgery, but that will get delayed in the short term.

Robert Marcus:

No, I had a financial question for Jamie, if that's okay, after.

Robert Marcus:

Jamie, it looks like the fourth quarter gross margin is ticking down a bit, and you're talking about the increased depreciation cost and some of these new investments here. I was wondering if you could seize the amount, and I'm really looking for how to think about into next year with depreciation, so we could get our gross margin set based on whatever expansion or contraction we're all forecasting. Thanks a lot.

Robert Marcus:

Great. Thanks a lot.

Travis Steed:

Thanks for taking the question. I guess to follow up on that. I know on the prepared remarks, it sounds like Gary said, manufacturing improvements for new products and other complex projects. So just curious if you could elaborate on some of those new products and complex projects and what those are that's impacting the gross margin.

Jamie Samath:

Just one other element. We are in-sourcing a high-volume accessory on the multiport side as part of in-sourcing that there's some differential automation in the line there. And so ramping that, there's some work to get that to be at our targets.

Brian King:

Travis, this is Brian. I guess thinking of 2024, nothing really to share at this point. Clearly, I think when we get into January, we'll be able to give you a bit more insight. But I guess I'll just leave it at that for now.

Travis Steed:

Great. Thanks a lot.

Larry Biegelsen:

Good afternoon. Thanks for taking the question. Gary, your usage-based leasing program has gotten some scale. Can you talk about the utilization rates on those systems relative to the average? And any other themes you could share?

Jamie Samath:

Yes. There's two ways to look at it, Larry, what is the absolute utilization rate compared to a regular leasing compared to a purchase arrangement. They are very similar. Actually, the tightness on the mean between those three structures is very tight. Within those arrangements, you generally have a target procedure level that reflects success of the program for the customer and the economic objectives that we have. And if you accumulate again, the portfolio they run at slightly above the targeted procedure levels that we have embedded in the contracts. So they have run very well so far, and it's one of the reasons why we and the customer have expanded those so quickly in recent times.

Jamie Samath:

On a global basis, we expect the proportion of placements that are leased to continue to find. U.S. is pretty high, as you pointed out, Larry, 70% this quarter, 78% last quarter. There will be some larger IDNs that just routinely prefer to purchase just because of how that affects the metrics that are important to them. But even in the U.S., I think there's some room for that to continue to creep up a little bit, obviously, running out of room. We found a number of U.S. customers have really appreciate that as a way to manage through what are totally managed capital budgets.

Operator:

Next, we have Brandon Vazquez, William Blair. Please go ahead.

Gary Guthart:

Sure. Thank you for the question. On -- one way to think about it is that general surgery comprises both procedures that are done where cancer is the underlying cause and others that are benign indication. On the cancer as an underlying cause, we're seeing nice early growth in several OUS markets. So there, I think that's healthy, and we're enthused. I think reimbursements are generally in place in many of the places that we are operating. I think that's what good in clinical data coming out has been supportive. I think that as you think about benign indications, we're seeing some of the beginnings of benign indications in some markets, there may be reimbursement work or education of insurers that has to be done for those to progress further. So in that setting, we'll have additional work to do as it plays out.

Gary Guthart:

Yes. Thank you for the reference. So Case Insights is our machine learning AI program that looks at surgical science. We have our first installs and first case is going that we had talked about it with you last quarter. So far, early feedback, and it's super early. We're really in the early innings here is very good. Case Insights builds on some prior research that we had done with academic centers on something that we have described as a computational observer. So we have some pretty good scientific underpinnings for it. We expect over time that, that program will feed insights into different parts of the hospital's analytic system from giving specific guidance to learning surgeons and care teams about where they might improve their technique and skills to giving suggestions to programmatics, about efficiency and total cost management, to giving other insights for the company about how to improve procedures in the OR. So, we think it's a long-term set of investments around really the science of surgery. We remain extremely excited about it. While we do have some revenue for it, we don't expect it to be a serious revenue driver. We think it is an ecosystem complementary. And we look forward to describing it more to you as time goes on.

Operator:

We'll go next to Matt Miksic, Barclays. Please go ahead.

Gary Guthart:

Yes. Jamie, you might speak to kind of what the size or percentage of that business is for us. A little bit of the acceleration or deceleration trend.

Matthew Miksic:

Yes. No, that's very helpful. And then I guess, just your expectation - you framed out in terms of your guidance, but I mean, is this - I mentioned it just because one of the other competitors actually saw a decline, I guess, in laparoscopic bariatric or some combination a lot been open in the third quarter, single-digit decline. But it doesn't seem like you're in that zone, right? You're still at or slightly below your average growth rate in the U.S. Is that - am I hearing your answer correctly?

Matthew Miksic:

Got it. That's very helpful. And then the other - just ASP, I understand system ASP you give is not - does not - as your U.S. leasing goes up, as I understand it, those leased systems in the U.S. are not included in that ASP calculation. So if you could maybe just speak to - I don't know, the way in which the increased leases have affected ASP or whether this is straight up year-over-year decline that suggested in sort of the overall numbers that you provide, if that's a clear question?

Matthew Miksic:

Thanks so much for the color.

Jayson Bedford:

Hi, good afternoon. Gary, I think you've expressed your views on the role of bariatric surgery in a GLP world. I'm just wondering if these views have changed in any way over the last quarter or two? I know it's not a lot of time, but the adoption of this class of drugs is obviously ramping quickly. And then just as kind of a related follow-up, getting back to Robbie's question on the potential impact of GLPs beyond bariatrics. Do you expect an impact from some of your other procedure categories as GLPs get adopted?

Jayson Bedford:

Fair enough. Thank you.

Ryan Zimmerman:

Thanks for taking the questions. I think you spoke about some of the new indications in SP. If I'm not mistaken, I think there's a 30-day follow-up on the thoracic trial. But I'm curious if you could expand maybe when complex colorectal and thoracic cases potentially could become growth drivers for SP adoption and when you expect those - not just those trials to wrap up, but potentially clearances in the U.S. with that?

Myriam Curet:

Yes. So, we are hoping to submit everything in the foreseeable future. After that, as you know, there's at least a 90-day turnaround for the IDEs and then - excuse me, for the clearances. And then after that, we will have to put training together - and they'll see launches together. So I can't really give you a time line for when that would be, but we know what the work is that needs to be done, and we are starting and moving forward on that.

Gary Guthart:

Our biggest steps are get the data arranged to get it into the FDA and work with them to get clearances. And then as Myriam says, we'll go through a staged commercialization. So you can expect submissions in the first half of '24 and then response thereafter.

Jamie Samath:

We have very well detailed plans for each of the areas that we're focused on. The teams have the capability and skill. It's going to take some time. I think the best way I would answer the question is we see a path of overtime probably in the midterm to get back above 70% gross margin.

Operator:

We go to next line, Anthony Petrone, Mizuho Group. Please go ahead.

Gary Guthart:

With regard to the capital side in China, I'll jump into that. I think demand for our systems and for the procedures they support in China, raw demand is really high. So it's really being limited or titrated by policy. I don't see - I haven't heard anything that says people want to go back and revisit or lower the quota, I think that would be resisted by customers who are looking for purchases. So, I think it's more around delay and a kind of a timing thing and how long it is hard to predict, but months, not weeks. On the pricing side, I'll speak to a general principle rather than projecting '24. What we try to do is a couple of things. One is be an outstanding manufacturer, really get high quality at low cost, and make sure that we can invest in manufacturing prowess to do that. I think that's really powerful for us, gives us enormous flexibility to meet the customers' needs, kind of where they are. With regard to pricing, we look at a couple of things, certainly price to us, cost to us, but also price elasticity, what the customer can do and achieve and that varies by market. And I think, we've become increasingly sensitive to and sophisticated at understanding pricing. So raw material pricing and core inflation to us is an input to our pricing. That's why we took price up this last year, but it's not the only thing, and you shouldn't expect us to be purely algorithmic tracking inflation on its own.

Operator:

And we'll go to the line of Michael Polark of Wolfe Research. Please go ahead.

Gary Guthart:

Yes, it's a good question. I think the general tools that we use to get from six to 20 are kind of three buckets. Some of them are clearances in new markets. So making sure that a market we can address has access to the technologies that we already have. So when you think about something like Ion, for example, Ion is not yet available in all the markets in which we operate as it operates that it starts to open what we can do. That's kind of one bucket. New indications are another one that some of the work that Myriam described earlier. That starts to open a new opportunity for us as we broaden the applicability of our platforms to new types of surgery and intervention. The third bucket or another bucket is reimbursement. There are places where we think additional data, is required to get insurers to engage a little bit differently and open the market. And then lastly, there are new products and technologies that we're working on that we are not yet described, that we think - allow us to provide new solutions that are competitive in the marketplace. Each of those operates on a little bit different time line. So it's not - I can't give you a simple synopsis of how fast each one runs. Some of them take a lot of years, some reimbursement things or long lead. A product development can be long lead. Other types of access can happen more quickly. But that's a set of plans that we lay out. We're pretty disciplined about laying out, what we want to do over time over a multiyear time horizon. And that's how, we start to open that market. That was our last question. In closing, we continue to believe there's a substantial and durable opportunity to fundamentally improve surgery and acute interventions. Our teams continue to work closely with hospitals, physicians and care teams in pursuit of what our customers have termed the Quadruple Aim. There are more predictable patient outcomes, better experiences for patients, better experiences for their care teams and ultimately, a lower total cost of care. We believe value creation in surgery and acute care is foundationally human. It flows from respect for and understanding of patients and care teams, their needs and their environment. At Intuitive, we envision the future of care that is less invasive and profoundly better, where diseases are identified earlier and treated quickly, so patients can get back to what matters most.

Brian King:

Thank you. Good afternoon, and welcome to Intuitive's Second Quarter Earnings Conference Call. With me today, we have Gary Guthart, our CEO; and Jamie Samath, our CFO.

Gary Guthart:

Thank you for joining us today. The fundamentals of our business were healthy in the second quarter with strong procedure and utilization growth and strong capital placements. Our product operations teams continue to build capacity and deliver in a dynamic supply chain environment as customers increasingly rely upon us for routine use.

Additional revenue statistics and trends are as follows:

in the U.S., we placed 157 systems in the second quarter compared to 150 systems placed last year. Outside the U.S., we placed 174 systems in Q2 compared with 129 systems last year. Current quarter system placements included 76 into Europe, 33 into Japan and 16 into China compared with 78 into Europe, 18 into Japan and 15 into China in Q2 of last year.

Brian King:

Thank you, Jamie. Our overall second quarter procedure growth was 22% year-over-year compared to 14% for the second quarter of 2022 and 26% last quarter. In the U.S., second quarter 2023 procedure growth was 19% year-over-year compared to 11% for the second quarter of 2022 and 26% last quarter.

Operator:

[Operator Instructions] We go through the first question from the line of Larry Biegelsen, Wells Fargo.

Gary Guthart:

Yes. Well, I'll start on AI. Let's talk about what it is. For us, it's a suite of digital tools that rests on a baseline and then can be built upon using various machine learning techniques including computer vision. We've been at it for some time. We started the Internet-of-Things for surgical robots over a decade ago. We built the baseline of cyber secure privacy-compliant pipes that allow us to get access to the data. So there's some foundational work that was important. That's kind of step 1.

Larry Biegelsen:

That's very helpful. And then on procedures, I'm just wondering, you talked about some catch-up in Q2. How are you thinking about how much of the backlog of deferred procedures is still left? You talked about the diagnostic procedures on the last call. And any color on what you're assuming for bariatrics here for the rest of the year? And does that mean international will continue to be stronger than the U.S.?

Travis Steed:

I did want to ask about China and the China quota and how you think the opportunity is now that there's more local players, but you also have the local version of Xi and on the bariatrics, just a quick follow-up on that, too. Is that around 100,000 procedures. Just trying to think about sizing that their active surgery opportunity or impact?

Travis Steed:

It was on China and the China quota and how to think about that opportunity there versus last quarter, given there's more local players, but now you have the local version of Xi.

Travis Steed:

Great. And a question for Gary. Just I heard the comment on hospitals leasing more to preserve the upgrade option for the next-gen system. So maybe just talk high level, the pipeline comments on the FDA and kind of supply chain bottlenecks that you saw last year? And then and how you're thinking about incremental upgrade to the Gen 4 versus kind of new platforms?

Robert Marcus:

Congrats on a really nice quarter. I heard the comment on prototype expenses are increasing. So I figure I'll try my luck here, and I know you're not going to tell us when a next-gen or if the next-gen system is coming. But I want to ask around just implications if and when one does, you have a lot of leases now. Do they have the option to upgrade? And will that come through at higher revenues? And how do we think about the prototyping expense and really what that's for?

Jamie Samath:

With respect to capital allocation, I think our priorities are consistent for how they've been for some time now. Our first priority is to invest in the business, both in capital expenditures, which as you've seen by our guidance are relatively high to our history this year and in organically investing in operating expenses.

Operator:

Our next question is from the line of Rick Wise, Stifel.

Gary Guthart:

You had a long list. I think several of those are important and things that we have talked about and have shared with the world. I think the idea of higher confidence ability to identify tissue in real time for the surgeon, and we can do that in a few different ways. So the florescence imaging, that you described and other advanced imaging technologies that give surgeons the ability to see beyond the surface of the tissue and beyond what you can see with normal white-light imaging, we absolutely think that's helping clinical outcomes and we're excited about and investing in image fusion or data fusion, and that's the CT overlay, the segmentation of preoperative MR and CT scans and the ability to use that in real time during the case, we think, can change outcomes and change efficiency in the OR.

Frederick Wise:

Great. Just a follow-up, quick follow-up. You -- I think, if I remember correctly, took a 5% across-the-board price hike on instrumentation. I don't know if I'm remembering correctly, that was to kick in like June 1. Did that happen? Did it help the quarter? And should I assume that it's going to be a little bit of an offset or a little bit of an instrument tailwind in the second half and beyond?

Gary Guthart:

A reminder, our motivations on that, we've been quite conservative on pricing. Our input pricing in the last few years has gone up in terms of raw material and labor content. We have offset most of that through efficiency and scale advantages, but we felt like it was time to share some of that with our customers, and that was what was behind the price increase.

Richard Newitter:

Richard Newitter here. Jamie, maybe for you on the guidance, 20% to 22%, very healthy. I'm just curious on thinking about the low end of the range there. You specifically mentioned you contemplate bariatric surgery growth trends, eroding a little bit from the 2Q levels. What's the pace of erosion there that you're thinking about that would get you to the low end? Like how much erosion, how did you establish a baseline for yourself?

Richard Newitter:

Okay. That's helpful. And just maybe sticking on the same topic here on bariatrics. Just thinking about the areas that you could offset that as we think of procedure categories geographically or by category that could be nearing an inflection point like Bariatric got to several years ago, what procedure categories or geographies would you call out that you think could lead to overage there to offset any potential incremental slowdown in bariatrics, if any?

Ryan Zimmerman:

Maybe one for Jamie. On the expense management standpoint, I mean, procedures are going up a little bit faster than expense -- OpEx guidance by about 50 basis points or so in and so I'm just wondering, Jamie, kind of what your views are on expense management and letting some of that leverage flow through as we think about not just the back half of the year, but into '24 versus maybe reinvesting that in R&D?

Gary Guthart:

Yes, it's a good question. I think we see that one size doesn't fit all. There are some folks for whom they still remain happy about capital purchases. They see it as the cheapest way for them to access systems. They have high confidence and they're going to buy. There are some folks for whom capital is tight, scarce and or they're interested in future technology protection clauses, and they would rather lease. And there are some folks who are looking at expansions, are a little bit unsure about how fast volume might ramp and for them, usage-based arrangements give them some protections about ramp timing and speed.

Jamie Samath:

The motivation by the way, for the new disclosure was simply the rate at which those adoption of those models have grown, we felt, okay it was important to be transparent as to what portion of operating leases and placements that structure was. If you kind of assess all of our usage-based arrangements in aggregate life today relative to usage patterns and economic objectives in total, on average, they're slightly above our expectations. So they performed well so far. That's obviously a blend across different customers and systems. Some are overperforming, some are underperforming. But I think part of the way that we've operated the program is to look carefully. Is it actually reducing barriers for accelerated growth of our customers? And is it producing the economic results for us and our customers and as we and customers have gained confidence, that's part of the reason why it's expanded the way it has.

Andrew Ranieri:

Maybe just one other follow-up question on bariatrics, but maybe a different angle. I mean, we've talked to some general surgeons too, that mean they're kind of suggesting that these new drugs might even open up potential procedure categories where these patients might not have been suited to have surgery. Gary, kind of like what are your views on this? Do you see some near-term disruption from GLP-1s on the bariatric side but maybe this opening doors for other procedure categories?

Gary Guthart:

It's a good question. We're probing probably too soon for us to give you a definitive answer.

Operator:

Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining. You may now disconnect. Have a good day.

Gary Guthart:

Thank you for joining us today. Use of our products grew strongly in the first quarter versus a year ago, helped by positive surgical trends and strong execution by our team. New capital installs were likewise strong as customers built their da Vinci and Ion system capacity to meet demand. Revenue grew 14% on the back of this continued adoption.

Jamie Samath:

Good afternoon. I will describe the highlights of our performance on a non-GAAP or pro forma basis. I will also summarize our GAAP performance later in my prepared remarks. A reconciliation between our pro forma and GAAP results is posted on our website.

Brian King:

Thank you, Jamie. Our overall first quarter procedure growth was 26% year-over-year compared to 19% for the first quarter of 2022 and 18% last quarter. In the U.S., first quarter 2023 procedure growth was 26% year-over-year compared to 16% for the first quarter of 2022 and 18% last quarter. Q1 growth continued to be driven by strong growth in procedures within general surgery. Specifically, growth was led by cholecystectomy, bariatrics, hernia repair and other procedures.

Operator:

[Operator Instructions] We'll first go to Travis Steed with Bank of America.

Jamie Samath:

Travis, this is Jamie. I think there are 4 drivers on the 26%. We do think there's a little bit of a soft comp on the base period given some impacts from COVID in Q1 of '22. You have 3 other drivers. We think there is some backlog effect from patients generally returning to more normalized health care routines given the effect of the pandemic over several years. Included within that is diagnostic pipelines, we see the last year or so of diagnostic pipelines being above pre-Covid levels. Second effect, there is some strength in the U.S. in general surgery, particularly behind general surgery. And in our OUS markets, the non-urology side of our procedure categories are growing nicely. .

Jamie Samath:

Yes. January, in particular, was very strong. That also probably reflects in part a little bit of the comp. February continues to be strong, and I characterize March as a normalized growth rate. I'm not going to give you the percentages, though, I think that can be misleading. Early part of April, it's difficult to look at just a couple of weeks. But I'd say generally, it's consistent with what we've seen in March. We've seen some third-party data through end of February, just with respect to total U.S. inpatient admissions, and that shows kind of the same trends in terms of a strong January, February.

Jamie Samath:

Yes. So the 5% is in the vast majority of our markets, a couple of smaller markets, where local dynamics are such that we have to take a look at that more carefully. That doesn't go into effect for the full year, that's in the next couple of months that we'll implement that. I think if you look at the gross margin impact of the $100 million, depending on where you're modeling revenue, I think you have to do it with and without revenue and gross margin dollars to do the impact to gross margin percentage. I think it's less than the number that you described. And yes, it is reflected in the gross margin guidance that we provided. So what you have there is the puts and takes of the Q1 performance, our updated outlook for the rest of the year and then you add in the effect of the price increase.

Robert Marcus:

Great. I just want to say congrats on a great quarter. Maybe if I could ask on placements, the net placements were well above consensus here in the first quarter, really strong showing, flat with last year pretty much, despite lower trade-ins. But that comes with your comments that it's still a fairly tight capital environment. So in a normal environment, how much better do you think you'd be doing on placements? And are you seeing an improvement at all in the capital equipment environment? It's certainly not holding you back here. But I'm just really curious where you think you could go if the environment was a bit healthier.

Jamie Samath:

Yes. I would say roughly, depending on where you are in the range, Q2 and Q3 operating expenses should be roughly similar to Q1, and you start to see a less of effect just from the payroll tax reset in Q2 and Q3 as those max out, and you should see Q4 seasonally higher.

Larry Biegelsen:

Gary, you've talked about competition potentially lengthening the capital placement cycle. But my question is, if there's an effort by a competitor to discount I&A by 30% or so, how would this impact your procedures? And secondly, Gary, why is this the right time to increase price in I&A? And I had one follow-up.

Gary Guthart:

So the first question of kind of breakouts in your estimates, I'll let Jamie answer that, and I'll talk a little bit about Europe.

Gary Guthart:

On Europe, this first year, as we go in, we'll be relatively modest in terms of revenue and installs. I think we'll start the process. We're excited about some of the sites and clinical trial work that we need to do. We do have to do some evidence generation in Europe. We do want to look at some of the reimbursement capabilities that are going to be important for broader market access. So year 1 is really about establishing evidence, having the right conversations and building the database so that reimbursement and broader use can be deployed.

Jayson Bedford:

Just a couple of questions. Just on China, I assume there was a backlog built in December and January and part of February. I don't know if you commented on March trends there, but can you comment on procedure growth in China in the quarter? And to the extent that you do believe there is a backlog, do you expect a bolus of growth in that geography over the next quarter or 2?

Jamie Samath:

I would just add, Jayson, there may be still some unmet backlog in China. If there is, it's probably relatively small, and it's captured within the procedure range that we provided.

Jamie Samath:

Yes, there was not an impact to revenue that I'd highlight in Q1. It was really just the gross margin impact of about 100 basis points that we highlighted. With respect to inventory, if I just look at the big picture, we've been trying to replenish inventory targets for each of our critical parts for some time. We've been supply constrained for a good portion of the pandemic. Inventory health improved in Q1 relative to Q4, but we still have a number of parts where we have to get to our target levels. And that will probably take us over the course of the rest of the year.

Operator:

And next, we'll go to Richard Newitter with Truist Securities.

Gary Guthart:

Yes. I'll let Jamie take the trend data, and I can talk about BPH.

Gary Guthart:

It looks like Brian is looking it up. I'm going to do the second question first, and then Brian is going to come back and save the day. On BPH, so there are a lot of different treatments for BPH. It's a quite common condition. At smaller prostate sizes, when it's caught earlier, there are pharmacologic approaches. There are some minimally invasive in-office approaches. Those tend to delay further onset. They don't tend to cure. So folks, over time, fail out. And as they fail out of those other procedures, surgery becomes increasingly important.

Richard Newitter:

Great. And just on the benign procedure commentary, it was such an enormous step-up, particularly in the U.S. I appreciate the easier comps. But were the benign procedures, that potentially saw a little bit of disproportionate lift this quarter, confined just to general surgery benign procedures? Or was it also inclusive of benign GYN? I'm just trying to get a sense for kind of where this procedure strength really derived.

Gary Guthart:

At the risk of being redundant, I think there's 2 concepts that are worth stitching together. One of them is that utilization went up 13% in the quarter procedures per system per year. So folks are using capital more frequently. There was an increase in the benign side. So we're seeing a rotation of mix, putting of those procedures onto systems that they own already. That was a big step-up. I think it speaks to how hospitals are thinking about robotic-assisted surgery programs and how they're thinking about capital.

Operator:

Next, we'll go to Matt Taylor with Jefferies.

Jamie Samath:

Yes, I would say our major international markets, so in Europe, Germany, France, U.K., Italy; in Asia, China, Japan, South Korea, they all performed well in the quarter. They all exceeded our expectations. And what we're seeing within those markets is nice growth in non-urology, so hysterectomy, colorectal, thoracic, depending on the market. We're starting to see, albeit at early stages, some of those procedures in those markets starting to get into an adoption curve. So I think that we're relatively optimistic on the outlook for those markets. Our expectations are reflected in the procedure guidance range that Brian provided .

Jamie Samath:

So I think Brian described what happened in Q1. We saw an impact in January in China. It started to recover in February and March. I think that the dynamics in China are relatively choppy, and I think it's a relatively dynamic market. So rest of the year, I think, there is relatively hard to predict. With respect to COVID impacts in the other markets, nothing that I would highlight. I do think that the financial pressures, staffing dynamics have as much of an impact in many of the European markets as they do the U.S.

Andrew Ranieri:

Gary, just maybe on placements for a moment, you touched on this earlier. But can you give us any more context specifically in the U.S. of like what you're seeing in terms of capacity expansion versus new accounts, just adopting robotics after 20 years? I would just like to hear your perspective there. And I have a follow-up.

Jamie Samath:

If you look at maybe a 5-quarter average, Drew, in the U.S., about 20-ish percent of the persistent placements is for greenfield accounts. But those greenfield accounts are really at hospitals that are part of a regional or national IDN that have not had a robotics program. Generally, they have a higher mix of benign procedures, benign general surgery in particular. And as the IDN at large has seen growing economic and clinical evidence for those procedures, particularly on the economic side, they've started to establish robotics programs in those greenfield accounts, again, as part of an existing IDN that we do business with. If you look at kind of the trend line, last couple of quarters, we've seen a little less greenfield mix in the system placements. I don't know that that's a trend. On a 5- or 6-quarter basis, it's relatively stable.

Andrew Ranieri:

And Gary, just with about 4,700 systems in the U.S. right now, as you're thinking about competition eventually entering the U.S., kind of what are your thoughts on robotic practices being multidisciplinary in robotic systems versus standardization, which has been kind of a key effort of yours over the past several years?

Operator:

Thank you. And that does conclude the call for today. Thanks for your participation of using AT&T Teleconference. You may now disconnect.

Brian King:

Good afternoon, and welcome to Intuitive's fourth quarter earnings conference call. With me today, we have Gary Guthart, our CEO; and Jamie Samath, our CFO. 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 our Securities and Exchange Commission filings, including our most recent Form 10-K filed on February 3, 2022, and Form 10-Q filed on October 21, 2022. Our SEC filings can be found through our website or at the SEC's website. 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 intuitive.com on the Events section under our Investor Relations page. Today's press release and supplementary financial data tables have been posted to our website. Today's format will consist of providing you with highlights of our fourth quarter results, as described in our press release announced earlier today, followed by a question-and-answer session. Gary will present the quarter's business and operational highlights. Jamie will provide a review of our financial results, and I will discuss procedure and clinical highlights and provide our updated financial outlook for 2023. And finally, we will host a question-and-answer session. And with that, I will turn it over to Gary.

Jamie Samath:

Good afternoon. I will describe the highlights of our performance on a non-GAAP or pro forma basis. I will also summarize our GAAP performance later in my prepared remarks. A reconciliation between our pro forma and GAAP results is posted on our website. Q4 and 2022 revenue and procedures are in line with our preliminary press release of January 11. I will briefly review full year 2022 performance before describing our Q4 results in greater detail. 2022 procedures grew by 18% as compared to 2021, or 15% on a three-year compound annual growth rate basis. During the year, we placed 1,264 systems at customers, down 6% year-over-year, driven by a decline in trading volumes of 165 systems due to the declining population of SIs in the field. Recurring revenue, which is correlated to ongoing use of our products represented 79% of total revenue and grew 15% over the prior year. Total revenue of $6.2 billion increased 9% year-over-year and grew approximately 12% on a constant currency basis. Pro forma operating margin was 35% of revenue and reflected the impact of several headwinds, FX, supply chain challenges and inflation together adversely impacted 2022 pro forma operating margin by approximately 1 percentage point. During the year, we repurchased $2.6 billion of our stock or approximately 11.2 million shares, and we have a remaining authorization to repurchase our shares of $1.5 billion. Turning to Q4. With respect to capital performance, we placed 369 systems, 4% lower than the 385 systems we placed in the fourth quarter of last year. There were 110 trading transactions in the quarter, as compared to 117 last year. 51 of the 110 trading transactions were with OUS customers, higher than recent trends primarily driven by customers in Japan and Brazil. As of the end of Q4, there were approximately 620 SIs remaining in the installed base, of which 134 are in the US. Given the continuing decline of older generation systems in the field, we expect trading volumes to decline significantly in 2023. Q4 revenue was $1.66 billion, an increase of 7% from last year. On a constant currency basis, fourth quarter revenue grew approximately 10%. For full year 2022, revenue denominated in non-USD currencies represented 24% of total revenue. The US dollar has weakened recently, and as a result, on a revenue-weighted basis, using current rates, the US dollar is approximately 100 basis points stronger than the average rates realized in 2022. Additional revenue statistics and trends are as follows

Operator:

[Operator Instructions] Our first question today comes from Robbie Marcus, representing JPMorgan. Please go ahead.

Gary Guthart:

All right. Thanks, Robbie. I think, we've been sharing with you over several quarters now. In terms of new technologies and new indications, we've seen in many of the core markets, not every single one, but many of them, additional data requirements. That changed probably four years ago, but has been playing all the way through. So it's not so much that the environment has changed over that period, just the implications of that. And you see that in things like SP, our SP trials, five or six years ago would have come to market differently and they're requiring some prospective human clinical work. That's not unique to SP. It really has to do with what the underlying technologies are and what new indications might be. So I think that is playing through relative to prior iterations of systems and features. That's true. Certainly in the United States, we've seen with the European regulatory changes over the years, increased data requirements in Europe and then it kind of varies by country from there. In terms of OpEx, perhaps I'll let you ask a follow-up question for Jamie on that one.

Jamie Samath:

Yes. It's fair, Robbie, that we're investing differentially across the areas of investment and the functions within the company. Our priorities for 2023 with respect to operating expenses to drive growth in the areas of focus, and we're being focused there. We're looking to execute some opportunities to expand markets by gaining additional clinical indications and geographical clearances. And obviously, we want to advance our technology. Within SG&A, what you see in subsets of the G&A functions is us looking to pursue leverage as we've described. And generally, from an R&D perspective, there are some investments that, as Gary has previously referenced were sequencing, and that's partly motivated by the way in which headcount has expanded over, let's say, the last year or two, and we've moderated our headcount growth as described, and that gives us the opportunity to absorb some of that headcount. So there's differential investment within SG&A and R&D. If I look at R&D and SG&A kind of in aggregate, they're likely to grow at relatively similar rates next year.

Operator:

Then we'll go to the line of Larry Biegelsen with Wells Fargo. Please, go ahead.

Gary Guthart:

Across our systems, we are doing trials in all sorts of places for all sorts of reasons, whether it's SPI or otherwise. And -- so the answer there is we have some places where those are publicly disclosed per normal rules. For competitive reasons, we don't try to detail them too much, and that's the position we'll take going forward.

Gary Guthart:

I'll take what does it mean and I'll ask Jamie to help me on detailing on the finance side. One of the things that's going on is that we are becoming well integrated into many surgical practices in several countries. I think that's a great opportunity for us and a serious responsibility. As we've seen in the last couple of years with regard to supply chain robustness and other things, making sure that -- we have supply chain stability that we want vertically integrating where we can. We have been doing that. A lot of the imaging pipeline work that we've done. We think that both gives us higher quality. It allows us to lower cost to the customer and it gives us robustness. We can plan for that robustness. That's true not only in imaging, but in some core technologies and instruments and accessories. And we think those are good long-term investments. So, that's been really positive. There's another place where our digital tools and our digital products, one of the things that's going on that I think is powerful for the company is not just product architecture, but business architecture. And what I mean by that is that our supply chain can support multiple platforms in multiple countries around the world. It can -- by that, I mean, multiport, single-port and Ion, our digital products architecture also is seamless and can integrate and support those platforms. So, that gives us a great quality advantage, it gives us a leverage capability, and allows us to lower the total cost for our customers and the cost to serve for our customers. Those things take some planning and some forward investment and it can be in core technology. For example, in digital, it can be in facilities, in manufacturing base, so we can build our products. But it's that opportunity. It's a global opportunity to help support the standard of care in multiple countries. I think that the customer advantages are quite clear and I think the cost robustness and long-term durability advantages for the company are quite clear. But that takes some play out over time. Jamie, any help you'll give?

Larry Biegelsen:

All right. Thank you very much.

Operator:

Next we'll go to line of Travis Steed with Bank of America. Please go ahead.

Gary Guthart:

Yeah. We continue to add capabilities into Gen 4. We expect to do so this year as well. Some of it will be in advanced instrumentation. We are doing some nice work in our energy systems on the -- both on the hardware side and some of the software side, and we think there's some capability improvements that we're going to be developing over time around core imaging capability in Gen 4. So we continue to make progress.

Jamie Samath:

On the capital funnel side, what I'd say is, given the macro inputs from customers are our sense is that they are still relatively cautious. I think there's quite a bit of uncertainty still in the macro. And while, for example, staffing shortages have improved, they're still quite a bit worse than pre-pandemic levels in terms of labor costs, vacancy rates for hospitals. So they are being careful from a financial perspective and they're cautious given macroeconomic uncertainty. I think our experiences in the second half of 2022 has been where customers are seeing nice growth in their robotics programs. da Vinci stays as a relatively high priority in terms of their capital budgets. But beyond the fact that they're cautious, I wouldn't say there's anything specific I'd highlight in terms of 2023 outlook.

Operator:

And our next question will come from the line of Rick Wise with Stifel. Please go ahead.

Gary Guthart:

Yeah. Thank you for the question. We think mostly about what can we do that changes the experience of surgery for the patient in terms of outcomes and the care teams in terms of how they deliver that set of outcomes. And what we can do in terms of technology basis, products and services and training that can help that happen. That is the primary thing. That's the thing that is front and center. And we do design studies, research, usability effort, all the things you would expect for us to make progress. And then we try to advance that as quickly as reasonably we can, given the environment that we're in. We don't do too much perfection of timing about what we think the hospital capital environment is going to be. We don't -- you can imagine somebody doing that, that is not my highest motivation. I think these things are sophisticated enough and complex enough to bring to market, that trying to time it perfectly with regard to the macroeconomic environment is not what we're really driven by. We work closely with our technologists who are, I think, spectacular. We work closely with regulatory bodies around the world to understand what their needs and requirements are. And of course, we work very closely with key customers to understand whether the things we think matter, matter. And those are the things that we really do and once we find a pathway, then we work down that pathway. I have to say that supply chain disruptions that have happened in the last three years have impacted not only production capability, but impact new product development as well, because that puts waves and ripples into what kind of items people can procure for prototypes and other forms of focus. So there's a little bit of that in there, too.

Jamie Samath:

Yes. I think what we're saying is, we saw China procedures impacted in November. That got more severe in December, has continued so far in the early part of January, and we expect, therefore, procedures in China to be at least impacted in Q1 and perhaps beyond. And I think it's difficult for us to predict, given the relatively unique situation China is in relative to the Zero-COVID policy that they have had. So we're not making any specific predictions as to when and how that might recover. Brian laid out how that's reflected in the procedure guidance that we provided. Separately, on the quota, we're in the third year again of kind of new quota period, the last two quotas have been issued in the third year. We only use that as a historical reference, nothing more. We don't have any particular insight as to when a new quota might come.

Operator:

And our next question will be from the line of Matt Taylor with Jefferies. Please, go ahead.

Jamie Samath:

I would just say that, underlying demand for robotic technology in China, if you take a mid- and long-term view, is quite strong. And our experience so far has been that surgeons care about the capability and feature set of the products that they use there. Again, we don't have any particular insight with respect to timing and size of quota. We saw the last quota we received was higher than the previous one, but we have no ability to predict that it will be larger again. So we'd love to be able to give you greater clarity than that. But what's the second part of your question, Matt?

Matt Taylor:

Okay, clear. Thank you for the color.

Anthony Petrone:

Thanks. One, on overall pricing as it relates to just the update here on the multiport system and then a follow-up on procedure volumes, specifically in the US. On pricing, just trying to understand the dynamics here. We have higher input costs as it relates to R&D, there's inflation, and there's a heavy CapEx cycle. So, you can sort of, on the one hand, push that through the higher pricing for NextGen robot. But on the other side, we have, obviously, hospitals somewhat constrained here and Intuitive now has a licensing model. So, when we think about an elongated regulatory cycle, how does that influence the pricing strategy on the next-gen robot? And then just quickly on procedures, the lower BMI threshold, the new guideline, 40 to 35, it seems like a big deal. Is that contemplated in the 12% to 16% procedure guidance? Thanks.

Gary Guthart:

Maybe I'd add a tiny bit on pricing and margin. On the pricing side, we look all the way across the total cost of ownership for our customers and make sure that's matched to value. So what's the value we bring and then what is the pricing that does that. We do that, as Jamie said, routinely, and we do it by country. It's a global look. With regard to some of the pressures on margin, whether they're inflationary or what have you, Jamie's point, some of those are sticky. We understand the levers that we have, whether it's in design or scale or production or other opportunities. And we're in pursuit of those. I don't think we're confused about where to go from here. Some of them take a little while. So some of the investments we're making, some of the automation that we talked about, some of the factory automation we’re talking about those are things that give us better control of cost over time. And so I don't think we're confused or really caught off guard by some of the changes of the cost influence.

Operator:

And we have a question from the line of Shagun Singh with RBC. Please go ahead.

Gary Guthart:

Okay. Nothing further to detail on multi-port beyond what we've discussed already. With regard to opportunities for our platforms period, we have opportunities across our set. We'll -- I talked to you a little bit about what we're doing in SP already. We'll detail that more as it unfolds in 2023 as to where we see opportunity for SP to create indication expansions and to open new procedure markets for us, which we're excited about. On the Ion front, you asked a little bit about the PRECIsE tier data. I don't have anything more to detail on that. Feedback from the field we have outside of that specific study has been that it's delivering on the promise. Folks are finding that it's usable that it is supplying the outcome that they had hoped and we're seeing that reflected in the adoption. So we're pleased with that. With regard to ablation, we are -- as we said last quarter, we're just at the early innings of engaging customers in Europe and looking at the trial data. We're excited by it. I think there are several indications in the long that we'll pursue over time. We'll detail those more as we get more experience and more time. There are opportunities outside the long too, I want to be clear. We think those are interesting, but they're not areas of current focus. We really think finish the job we started. We have great engagement with pulmonologists and thoracic surgeons. We have opportunity to continue to support them to make our products ever easier, more robust and to move the margin structure where we want it to go. We're going to focus on that. And then we'll move to other indications in the lung. And then from after that, we'll have earned our opportunity to do the next step.

Operator:

And ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and using the AT&T Event Services. You may now disconnect.

Brian King:

Good afternoon, and welcome to Intuitive’s third quarter earnings conference call. With me today we have Gary Guthart, our CEO; and Jamie Samath, our CFO. Before we begin, I would like to inform you that comments mentioned on today’s call maybe 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 our Securities and Exchange Commission filings, including our most recent Form 10-K filed on February 3, 2022 and Form 10-Q filed on July 22, 2022. Our SEC filings can be found through our website or at the SEC’s website. 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 intuitive.com on the Events section under our Investor Relations page. 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 third quarter results as described in our press release announced earlier today, followed by a question-and-answer session. Gary will present the quarter’s business and operational highlights, Jamie will provide a review of our financial results, and I will discuss procedure and clinical highlights and provide our updated financial outlook for 2022, and finally, we will host a question-and-answer session. With that, I will turn it over to Gary.

Jamie Samath:

Good afternoon. I will describe the highlights of our performance on a non-GAAP or pro forma basis. I will also summarize our GAAP performance later in my prepared remarks. A reconciliation between our pro forma and GAAP results is posted on our website. In Q3, growth in procedures, the installed base of da Vinci systems and average system utilization was healthy. The strength of these key business drivers resulted in a pro forma operating margin of 36% and pro forma EPS of $1.19. Simultaneously, we saw headwinds from the strong U.S. dollar, lingering supply chain issues and inflation, which together negatively impacted pro forma operating margin by approximately 2 percentage points compared to the third quarter of last year. I will take you through these details. Q3 procedure growth of 20% reflected an increase in U.S. procedures of 18% and OUS procedure growth of 24%. U.S. procedure growth reflected a favorable comparison to the year ago quarter given the impact of the Delta variant last year. On a three-year compound annual growth rate basis, U.S. procedures grew approximately 13%. In China, our second largest market during the quarter procedures continued to recover from the impact of COVID-related lockdowns that we described on last quarter’s earnings call. However, we continue to see regional lockdowns occur as COVID cases rise. Turning to capital, we placed 305 systems in the third quarter, 9% lower than the 336 systems we placed last year. Third quarter system placements included approximately 15 systems that were delayed at the end of last quarter due to component supply delays. There were 71 trading transactions in the quarter, as compared to 136 in Q3 of 2021, reflecting the decline in the number of SIs remaining in the installed base. As of the end of Q3, there were approximately 739 SIs remaining in the installed base, of which 191 are in the U.S. Excluding trade-in transactions global system placements grew 17% from last year. The installed base of da Vinci systems grew approximately 13% year-over-year, consistent with recent trends. The utilization of clinical systems in the field, measured by procedures per system, increased almost 7% compared to last year. Using a three-year compound annual growth rate, third quarter utilization was consistent with historical averages, increasing almost 5%. Average system utilization in the U.S. grew 6% year-over-year, an improvement from the 1% decline in utilization in Q2. As a result of our procedure and capital performance, Q3 revenue was $1.56 billion, an increase of 11% from the third quarter of 2021. On a constant currency basis, third quarter revenue grew approximately 15%. In the third quarter, revenue denominated in non-USD currencies represented 22% of total revenue. On a revenue weighted basis, using current exchange rates, net of hedges in place for Q4, the U.S. dollar is approximately 3% stronger than the rates realized in Q3. Additional revenue statistics and trends are as follows, in the U.S., we placed 175 systems in the third quarter, lower than the 227 in Q3 of 2021, reflecting a decline of 66 systems associated with trade-in transactions and a challenging macroeconomic environment. Outside the U.S., we placed 130 systems in the third quarter, compared with 109 last year. Current quarter system placements included 54 into Europe, 32 into Japan and 14 into China, compared with 47 into Europe, 20 into Japan and 17 into China in the third quarter of 2021. As of the end of Q3 2022, there were 40 systems remaining under the current quota in China, which is also available to the three domestic competitors that have completed local registration with NMPA. Markets that are served through distributors have represented approximately 10% of system placements so far this year. Our distribution partners purchased product from us in U.S. dollars and sell in their local currencies. While we have not experienced a significant impact so far, the strengthening of the U.S. dollar reduces distributor margins and may cause delays in capital purchases. Leasing represented 37% of Q3 placements, compared with 42% last quarter and 41% in the third quarter of 2021. The lower lease mix is a function of customer and regional mix, and while leasing will fluctuate from quarter-to-quarter, we continue to expect that the proportion of placements under operating leases will increase over time. Third quarter system average selling prices were $1.5 million consistent with last quarter. System ASPs were negatively impacted by a higher trade-in mix and the impact of FX, offset by a higher mix of Xi dual console placements. We recognized $17 million of lease buyout revenue in the third quarter, compared with $22 million last quarter and $25 million last year. Lease buyout revenue has varied significantly quarter-to-quarter and will likely continue to do so. Instrument and accessory revenue per procedure was approximately $1,800, compared with approximately $1,900 for both last quarter and last year. On a year-over-year basis, FX negatively impacted I&A per procedure by approximately $50. The remainder of the year-over-year reduction was primarily a result of customer ordering patterns. During the quarter, our distributors and customers in certain OUS markets reduced their inventory as supply chain predictability moderately improved. We placed 50 Ion systems in the quarter, as compared to 28 in the third quarter of last year. The installed base of Ion systems is now 254 systems, of which 112 are under operating lease arrangements. Third quarter Ion procedures of approximately 6,400 increased 211% on a year-over-year basis. Ion is in the new MDR regulatory review process in Europe, and during the quarter, we submitted Ion into the regulatory process in China. As a reminder, regulatory review timelines in China are lengthy. Moving on to the rest of the P&L. Pro forma gross margin for the third quarter of 2022 was 69.8%, compared with 71.3% for the third quarter of 2021 and 69.2% last quarter. Q3 pro forma gross margin included a one-time benefit of approximately 50 basis points relating to the favorable conclusion of certain indirect tax matters. Pro forma gross margin was lower than last year, primarily due to the stronger U.S. dollar, manufacturing and logistics inefficiencies as a result of the supply chain environment, higher component pricing and increased fixed costs relative to revenue. Indicators of supply and inventory held modestly improved in the quarter but remained well below pre-pandemic levels. Pro forma operating expenses increased 24% compared with third quarter of 2021, driven by increased headcount, higher R&D related project costs and higher travel costs. Growth in operating expenses has been primarily in support of our Ion platform, next-generation robotics capabilities, our digital capabilities and expansion of our infrastructure to allow us to effectively scale. We are also seeing higher regulatory costs as a result of increased regulatory requirements globally and expansion of our new platforms into OUS markets. As Gary mentioned earlier, during the quarter, we slowed our hiring pace, adding approximately 530 employees lower than the 700-plus employees we have added per quarter in the last three quarters. As we look forward to 2023, we expect our operating expense growth will be lower than the growth for this year. The slowing growth rate of operating expenses reflects the completion of some of our infrastructure and business process improvement investments and planned leverage in our enabling functions. As part of our planning process, we are also conducting a review of our capital expenditure priorities and we will provide an update as to the outcome of this review on the next call. Within this framework, we will continue to invest in our new platforms, Ion and SP, next-generation capabilities and our digital ecosystem, given the return profiles we see for those investments. Pro forma other income was $7.2 million for Q3, lower than $10.4 million in the prior quarter, primarily due to the impact of foreign exchange losses from re-measurement of the balance sheet resulting from the continued strengthening of the U.S. dollar. Our pro forma effective tax rate for the third quarter was 23.4%, in line with our expectations. Third quarter 2022 pro forma net income was $429 million or $1.19 per share, compared with $435 million and also $1.19 per share for the third quarter of last year. Capital expenditures in Q3 were $153 million, primarily comprised of infrastructure investments to expand our facilities footprint and increase manufacturing capacity. I will now summarize our GAAP results. GAAP net income was $324 million or $0.90 per share for the third quarter of 2022, compared with GAAP net income of $381 million or $1.04 per share for the third quarter of 2021. The adjustments between pro forma and GAAP net income are outlined and quantified on our website and include excess tax benefits associated with employee stock awards, employee stock-based compensation, amortization of intangibles, litigation charges and gains and losses on strategic investments. We ended the quarter with cash and investments of $7.4 billion, compared with $8.2 billion at the end of Q2. The sequential reduction in cash and investments reflected share repurchases and capital expenditures, partially offset by cash from operating activities. During the quarter, we completed a $1 billion ASR in addition to the $607 million of shares repurchased in the first half. Since the end of 2021, our diluted share count has decreased by approximately 7 million shares or 2% and we have a remaining authorization to repurchase our shares of $2.5 billion. And with that, I would like to turn it over to Brian, who will discuss clinical highlights and provide our updated outlook for 2022.

Operator:

All right. Yes. Thank you. [Operator Instructions] And first we have a question from the line of Travis Steed with Bank of America. Please go ahead.

Gary Guthart:

What we are seeing on that side, on the capital side is that, where we see healthy procedure growth, the installed base growth is keeping pace and you are absolutely right in your question to kind of link utilization growth with installed base growth. On the utilization side, the 7% is higher than the norm. It’s got a little artifact in it we think, which is a year ago third quarter was a little bit suppressed because of the Delta variant. So I think it’s hard to keep doing 7% quarterly. If the customers could do that, we would be delighted. It’s -- utilization is good for them, it’s good for us and it’s fine, it’s just hard to move in a durable way because of all the workflow issues in the hospital at large, not just robotics, but just across the system. So we are seeing both. I think the capital side what we have seen here is that capital is available to be competed for if you can become a high priority within the hospital to get it. So it’s not so much that the capital environment is easy as it is competitive and if you can rise on the party list, then we will find that the loop and we are seeing that in installed base growth in greenfields and in Ion.

Amit Hazan:

Thank you. And a couple of questions if that’s okay. First, I think, maybe just to ask about how you are thinking about the pipeline for more mature procedures. If I heard you right, you were urology and gynecology up high-single digits, double digits in the U.S., pretty good numbers, just want to make sure those are clean. And then just kind of the typical question about your own sources, external internal customer discussions, just how you are thinking about the diagnostic pipeline for those slower growing cancer procedures and kind of where we are or where we are heading relative to the trough levels that were observed last year?

Brian King:

Sure. And I think Gary touched on it on the previous answer, an element of that being just a comparison period from last year, but still seeing really healthy growth in those particular categories. As I called out, growth in gynecology, which is our second largest procedure category, did have, I’d say, double-digit growth, probably in the lower end there and then those more mature urologic procedures being those high-single digits, but it’s really favoring from the comparison from last year, but still doing really well.

Gary Guthart:

On just a follow-up point to Brian, your answer, I think, the other thing is that while we are mature in urology and gynecology in the United States, there’s still a little growth there too. But outside the United States and Europe and Asia, we are still relatively early and we think that in those two categories we will continue to see growth. Jamie, just a follow-up point on your answer on the diagnostics side, you were saying it started to come back and we are seeing a little bit of an uptick. It is absolutely clear that there’s been a trough or a bolus of people who stayed out of diagnostic pipelines and that hasn’t fully recovered. And their disease is progressing. That is also absolutely clear in the literature. So how big that is and what that looks like as they come back into the health system in terms of surgery and da Vinci surgery, you are just going to have to wait and see. It’s a hard thing to measure, but I think there’s a bolus out there and it’s unfortunate given disease progression.

Larry Biegelsen:

Hi, good afternoon. Thanks for taking the question and congratulations. Just two for me, I wanted to start, Gary, with the color commentary you gave on OpEx spending next year. If we look at the last five years, you grew EPS faster than sales or pre-COVID, I am sorry, four years to the five years, this year, it looks like earnings will probably be down. How much of a priority is EPS growth and what would need to happen for you to get back to the algorithm where you grew EPS faster than sales and I have one follow-up.

Jamie Samath:

There’s just a couple of framing comments I’d make, Larry. If you look at the midpoint of the procedure guidance we provided, on a three-year CAGR basis, that’s procedure growth of about 15%, just under -- just over 15%. You do the same for our OpEx guidance, that’s just under 15%. So, kind of back to 2019 on a three-year CAGR basis, procedure growth and spending growth relatively in line. Just one other thing I’d highlight to make a point, if you look at the reported revenue growth for Q3 and 11% year-over-year. If you look at our recurring revenue growth, that’s about 80% of our total revenue, 16%. If you adjust that on a constant currency basis, it’s 20% revenue growth and so comparable with the 20% procedure growth. When you look back at 2018, 2019, generally, procedure growth and revenue growth are relatively similar. You are seeing a disconnect right now for the reasons we have described, the lower trade-in volumes, trade-in volumes so far this year are down 40% from the prior year and you are seeing the impact of FX as we have described. And so there are some macro and secular level impacts on what’s happening in the P&L this year. Specifically on spending, we kind of described it in the script. There are some infrastructure investments that we have been making that start to complete and that creates the opportunity for us to spend at a lower growth rate, and given the work that we have done and the investments that we have made, we are going to look for some leverage in our enabling functions, particularly as we get into next year. Final thing that Gary mentioned was as you look at kind of our pipeline, there’s some natural sequencing that you will do with respect to some of our programmatic spending next year and those factors play into the slowing operating expense growth rate that we have described.

Gary Guthart:

Yeah. I love that question. The -- there’s a couple of things. On the kind of the baseline, you need to gather enough of the right data to characterize variability of care teams and variability of patients. So there’s a patient population, it’s got variability and you have got care team or physician variability as well. And getting the right data streams, getting them stored and figuring out how to do the right kind of assessment or analysis on them, curating that data, making sure it’s annotated properly, some basic stuff that you have to do to be able to look for meaningful sources of variation. We are well down that pathway in terms of getting the right data streams, having the right conversations with our customers and starting to do the analysis. So I am excited by it. As we look at how to deliver that, we are still in a I think surgical science discovery phase. We are partnered with many of the top hospitals -- academic hospitals around the world looking at surgical data science, starting to figure out sources of variation and drawing it back to causality, not just correlation. So I think the baseline is there, the ability to collect and gather that data, I think our relationships with top tier researchers are in place and we are starting to see early signals that look really good. Final point I’d make is there are some basic things we can do that are logical and not extraordinarily complicated that can help personalized learning pathways and training pathways, and we are starting to work through that now. That’s kinds of technologies that will come out into the field first. So I think it was a long-term journey. Some of the things we talked to you about Intuitive Hub or some of the baseline capabilities there in terms of the right data collected, annotated the right way and shared with the right hospital customers to get us good outcomes.

Robbie Marcus:

Great. Thanks for taking the question. I will add my congratulations on a nice quarter. Maybe just to dial-in a little bit more on the capital equipment environment, you touched on this and it’s great to see procedures driving placement volumes. But are you seeing any changes, whether it’s in the U.S. or Europe as we are in an uncertain economic environment around the world, it’s clearly not showing up in the numbers yet. But just seeing if there’s any rate of change or if the outlook is any different than the current environment? Thanks a lot.

Operator:

Thank you. And next we have a line -- question from the line of Richard Newitter with Truist. Please go ahead.

Gary Guthart:

Across the platforms, we work on improvements to the robot system side or full innovation there. We work on instruments and accessories and software updates and sometimes partnered product. In general, we maintain our priority and our cadence on those things that we think are going to have the biggest impact to our customers that allow them to get better outcomes or to address new opportunities that they are not addressing today. We continue to invest and have a high priority on quality improvements and things that will make our customers more satisfied. Some other things that tend to be great ideas, but perhaps are not highly urgent, then those things will sequence out and that’s a conversation we routinely have. What do we have to do at high priority and do it at high quality quickly? What are the things that can sequence after that? So hard to answer your question in detail from a process point of view, if it matters a lot to our customers, if it’s a high dissatisfy or high opportunity, those things get put in line first.

Jayson Bedford:

Hi. Good afternoon. Thanks for taking the question. One topic that I thought was interesting, you mentioned ablation technology with respect to Ion and starting a trial in Germany. Can you talk a bit more about the technology and the size and scope of the trial, and maybe any type of timeline you can offer in the U.S. in terms of starting a trial?

Operator:

Thank you. And next we have the line of Matt Taylor with Jefferies. Please go ahead.

Jamie Samath:

Just with respect to prior cycles and this one actually, Matt, is a little interesting in so far as we indicated in Q1, we saw some softness in the capital pipeline in Q1 and Q2, and to some extent, that continued in Q3. If I look back at prior cycles in 2008, you saw three quarters of a year-over-year decline in capital placements, 2013 I think we saw five quarters in a row of declining capital placements and then when COVID hit in 2020, again, three quarters in a row. I only give those as reference points. I don’t think we can say that those are indicative as to what may happen if and when there’s a recession in the U.S. or beyond. So, I think, honestly, if you look at the progression of the economic projections, it’s pretty complex and hard to call at this point. So we just give those historical reference points.

Operator:

Thank you. And next we have Adam Maeder with Piper Sandler. Please go ahead.

Gary Guthart:

I will jump in and Jamie you can help. I think we are still in the early market. We are pleased with the growth and the customer feedback that we have been getting the -- that -- and when we talk to them and survey our customers their satisfaction levels are very high with the Ion product. I think it’s driven by a couple of things. The preliminary data that’s come out of the PRECIsE trial that’s already been talked out and now the later data I think was attractive to the customer base. I think the other thing going on is that as we have installed additional sites and helped them bring their programs up, I think they are able to replicate that data. I think that it’s being commonly adopted. And I think that is having a compounding effect, the idea that the early publications are being repeated in the hands of new teams that are coming on board gives them confidence and this is a little bit of word of mouth amongst the pulmonology community, gives them confidence that they can get what’s being published and I think that’s been strong for us. Jamie, any comments?

Operator:

Thank you. And next we have the line of Matt Miksic with Barclays. Please go ahead.

Jamie Samath:

Maybe the second part of the question I will take, Matt. So we are not going to give anything specific with respect to 2023 numbers. We will wait until January to do that when we conventionally provide guidance. I think what we have said with respect to operating expenses in 2023 for the reasons Gary described, the growth rate for that spending will be lower than the growth rate that we experienced in 2022 and a significant component of that is the number of people that we will hire next year. And again, what Gary described was, given the employees that we have hired, there’s a period here where we are going to ensure that we effectively onboard those new hires and get them to a state of productivity and this will be a period for us to go through that kind of absorption phase. I will let Gary respond to the first part.

Matt Miksic:

Sure. Just in the context of factors affecting the ebbs and flows recovery, what have you of procedures and system -- new system trends, how staffing -- hospital staffing or challenges there are affecting those trends in your business if at all?

Operator:

All right. We have the line of Drew Ranieri with Morgan Stanley. Please go ahead.

Gary Guthart:

On the supply side, we are working extremely hard to meet demand on the capital side. I think we are about there. We are pretty close, pretty close to balanced. I don’t think we are way ahead or way behind. And likewise, on the consumable or per procedure side, we are working extremely hard to meet demand and I think we are slightly behind, not way ahead and not way behind. We are probably running close but pushing hard to keep growing. So on the penetration side, I think, we are a little bit early to go into share mix and things like that, I think we are not quite ready to describe where we are either on the account side or on the pulmonology side. So we will save that for a future call. Anyway, thank you. That was our last question. In closing, we continue to believe there is a substantial and durable opportunity to fundamentally improve surgery and acute interventions. Our teams continue to work closely with hospitals, physicians and care teams in pursuit of what our customers have termed the quadruple aim, better, more predictable patient outcomes, better experiences for patients, better experiences for their care teams, and ultimately, a lower total cost of care. We believe value creation in surgery and acute care is foundationally human. It flows from respect for and understanding of patients and care teams, their needs and their environment. At Intuitive, we envision a future of care that is less invasive and profoundly better, where diseases are identified earlier and treated quickly so patients can get back to what matters most. Thank you for your support on this extraordinary journey. We look forward to talking with you again in three months.

Brian King:

Thank you. So good afternoon, and welcome to Intuitive's second quarter earnings conference call. With me today, we have Gary Guthart, our CEO; and Jamie Samath, our CFO. 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 our Securities and Exchange Commission filings, including our most recent Form 10-K filed on February 3, 2022, and Form 10-Q filed on April 22, 2022. Our SEC filings can be found through our website or at the SEC's website. 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 intuitive.com on the Events section under our Investor Relations page. 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 second 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, Jamie will provide a review of our financial results, and I will discuss procedure and clinical highlights and provide our updated financial outlook for 2022. And finally, we will host a question-and-answer session. And with that, I will turn it over to Gary.

Jamie Samath:

Good afternoon. I will describe the highlights of our performance on a non-GAAP or pro forma basis. I will also summarize our GAAP performance later in my prepared remarks. A reconciliation between our pro forma and GAAP results is posted on our website. Q2 procedure growth of 14% reflected an increase in U.S. procedures of 11% and OUS procedure growth of 22%. As a reminder procedures in the U.S. in the second quarter of last year included a recovery of procedures that were delayed as a result of the significant impact of Omicron variant. Brian will provide additional procedure commentary later in the call. We placed 279 systems in the second quarter as compared to 328 systems in the second quarter of 2021 and 311 systems last quarter. Q2 system placements were 15% lower than the second quarter of 2021, primarily due to a significant decline in trade-in transactions. There were 56 trade-in transactions in the quarter as compared to 125 in Q2 of 2021, reflecting the decline in the number of SIs remaining in the installed base. The supply chain environment continues to be challenging and during the quarter we experienced delays in the supply of certain semiconductor components that caused manufacturing output of da Vinci systems to be later in the quarter than historical norms. As a result, a number of systems that we would have expected to place in the latter part of June experienced minor delays and were shipped and installed in July. We indicated on last quarter’s call that we had experienced softening in the U.S. capital pipeline. That softness persisted in Q2. Financial pressures have increased on hospitals, given higher inflation, increasing interest rates, supply chain challenges, and continued staffing shortages. Some of the larger IDNs have indicated that as a consequence of the financial pressures they face, they are lowering their capital investment plans and tightening operational budgets. We expected demand for capital, particularly in the U.S., will be impacted while macro conditions remain challenging. Where a particular hospital requires additional da Vinci capacity, given growth in their programs, we will leverage our flexible acquisition models to meet the financial objectives of our customers. Given the system placements in Q2, the installed base of da Vinci systems grew approximately 13% year-over-year. Utilization of clinical systems in the field measured by procedures per system increased approximately 1% compared to last year. Using a three-year compound annual growth rate second quarter utilization grew almost 5%, which is in line with historical averages. In more mature markets like the U.S. capital demand is sensitive to procedure growth. And therefore we monitor changes in system utilization closely. As a result of our procedure and capital performance, Q2 revenue was $1.52 billion, an increase of 4% from the second quarter of 2021. On a constant currency basis second quarter revenue grew approximately 6% over last year. It is worth highlighting that recurring revenue grew 14% year-over-year to $1.24 billion representing 81% of total revenue. Additional revenue, statistics and trends are as follows

Operator:

[Operator Instructions] And we’re going to begin today with Larry Biegelsen representing Wells Fargo. Please go ahead, sir.

Gary Guthart:

Okay. On the supply constraint side, I’ll give you a qualitative perspective and Jamie you can fill in a little bit of a quantitative perspective. What’s happening is semiconductor suppliers and some other raw material suppliers giving us choppy delivery time lines. So estimates that are sometimes moving around and that can bring product in late in the quarter. When we assemble that product, it can sometimes make it hard at very quarter end to match system configurations to customers and that’s largely what happened in Q2. Jamie, you want to add to that?

Gary Guthart:

That continues to be choppy, and we expect, certainly for Q3 and perhaps forward that we’ll continue to fight those fights in terms of timing of supply. On the second question – the second part of your question on recession, clearly, our hospital customers are under financial pressure. We have seen that at the end of Q1 and had communicated with you at that time. I think relative to where we were as Intuitive a decade ago, the size and strength of the installed base, the relative position that we have in terms of centrality to surgery and multiple disciplines and the expression of that in recurring revenue, the percentage of our business that’s in recurring revenue, I think gives us a little bit better shock absorption and predictability in terms of a large part of the revenue of the business. And gives us a few more degrees of freedom in terms of how we make our investments and time those investments relative to 2008, 2009. We are close with our customers. I am personally in contact with many. The trends that we’ve been describing to you, I think we understood pretty well the size and duration of those trends in terms of pressure, very hard for any of us to predict. And you had a follow-on.

Gary Guthart:

Looking at two things, I think let me broaden the question. Looking at the regulatory environment globally and in particular, in the United States and Europe, we have seen a trend in medical device and in robotic-assisted surgery for increasing data requirements. Sometimes those are trials, sometimes there are other kind of data. That trend has continued, and it’s impacting all of us in the market, including Intuitive. You can expect that we will improve the Gen 4 product that’s out there. We can get good ideas and technologies into our existing customer base hands and improve their utility, we will do that. We are, of course, working on next generations. And as I’ve said before, generations after that, without answering your question specifically, the deeper the technologic opportunities and the clinical impact, the more likely you have a deeper validation work to do. And we’re not afraid of that work. I’d rather do things that are really clinically meaningful for the customer. And if we have to do the work, then we’ll do the work. I will say for everybody on the call, it’s clear that relative to a decade ago, the investment trough and the time lines for new systems have both increased. The time lines have increased because of the changing regulatory environments in several countries. And as a result, the amount of investment that has to go into that has also changed. It’s also increased. I think, and this is a prediction that it will also extend the useful life of products that we design. So it’s taking a little longer to get to market than it used to, maybe more than a little, it’s costing us more to get there. But that change in environment also means that really well-designed systems probably have longer use for life in the field. And I think we’re starting to see that early evidence of that as well. So thank you for the question, Larry.

Operator:

And next, we’ll go to the line of Amit Hazan representing Goldman Sachs. You’re open.

Gary Guthart:

I’ll start, and Jamie, you can lean in. First, I want to acknowledge our operating teams and the supply chain teams. They have done a spectacular job in the number of components that we manage in a robotic surgery system, both on the capital side and on the instruments and accessories side and the management of those supply chains is remarkable, perhaps bigger than most people expect relative to the size of our company. They have been really good at being proactive and thoughtful about supply chain, robustness about strategic reserves and about the ability to pivot into alternative components when we need to. And that has really been a spectacular performance. That’s a long way of saying that they have been proactive. They will continue to be forward-looking and design for supply chain robustness. What that looks like depends a lot on the underlying product, whether it’s creating second sources or using alternatives or thinking about regional deployment. We have been working through regional deployment prior to the pandemic, and we’ve done that work as we’ve gone on. That does incur some costs. We’re thoughtful about it. And Jamie, why don’t you provide your perspective?

Amit Hazan:

Thanks for that. And maybe just to hit on just earnings and going into the future with the components that you give us, it seems pretty clear this year, we’re probably not going to get earnings growth. You had some interesting comments. It sounds like R&D, you’re going to keep spending and you believe what you’re doing organically that makes sense. And sir, if you have more comments on SG&A, but just thinking through, okay, no earnings this year, in terms of your commitment to shareholders, is it okay for you not to grow earnings next year, too? Would that become a bigger focus for you just given how this year has gone? How do you think about earnings growth after kind of what this year is going to end up looking like? Thanks.

Amit Hazan:

Thank you.

Travis Steed:

All right. Thanks for taking the questions. Gary, I'd love a little more color just on the overall hospital capital environment. Are you seeing hospitals just being more cautious on the near term or do you think we're in for a longer duration CapEx, slowdown? I'm curious how you think the slowdown could range in terms of outcomes, if it's like, 2008, 2009 or 2013, 2014 or 2020 and also like leases ticked up to 42% this quarter, I'm curious where you think that could peak in the slower CapEx environment?

Jamie Samath:

Yeah. If I split between U.S. and O-U.S., what you've seen in the U.S. is relative maturity in understanding and acceptance use of our leasing program. It's been ticking up slowly over time while it will fluctuate quarter-to-quarter based on customer preference. I do think that will slowly continue to tick up just based on what we hear from customers. In O-U.S. where we offer leasing, which is not in every market, we’re at an earlier stage. And so you're seeing growing understand and acceptance as leasing as an option as they acquire capital. And so I'd expect that to continue to climb over time.

Gary Guthart:

Yeah, it was a kind of a directional comment more about averages than about a particular product line. So I discourage anybody looking at a particular product line and try to infer from it. We have a basket of things we do and on average, it's gotten longer. Strategically I think there are a couple of things that strengths in the business versus a decade ago that help us and give us more flexibility, more freedom. And that is both the deep penetration we have in the market, the large size of the customer base in terms of active users. If we can get them a technology and increments, we’re not as dependent on capital revenue. And as years pass, I think, the recurring revenue side is a strength for us. If that increases productivity for the hospital, that’s great. It turns out that gives them better financial returns on the investments they made. But also our economic profile is stronger in repeat use utilization than it is in capital change. So what that means to us is bring capital change when it really is differentiated, when it really brings incremental clinical value or new market access to our customers. And that’s what we’re focused on. With regard to the regulatory side, our goal is to be really good at it to get the right data we need at the right time to underwrite the first time and take care of it. And those types of requirements ebb and flow over time. And we’re in a particular state where the requirements are quite high and we’ll deal with it.

Operator:

And we’ll go to the line of Robbie Marcus representing JPMorgan. Please go ahead.

Gary Guthart:

Yes. Robbie, on that first question, it’s a good one. And I appreciate it. Clearly, the utilization of systems and the posture of hospital acquisition relative to systems differs by country based on the maturity of our markets and the depth of penetration of da Vinci. We tried to call that out a little bit in the script. Jamie, I don’t know if there’s additional color you’d like to apply.

Gary Guthart:

On – you had asked kind of how do we expect China to proceed in procedures in the back half. Of course that’s impossible for us to predict what I might ask Brian is you might just reiterate some of your comments as what’s assumed in the model in terms of [indiscernible].

Robbie Marcus:

Great. Thanks for the color.

Rick Wise:

Good afternoon, guys. Again, reflecting on history a little bit. When I think back to the end of the financial crisis to early last decade, obviously, there were periods of marked capital slowdown and yes, those – the recovery following that was in part of macro recovery. But it was also in 2014, the launch of the Xi, it was procedure volume uptake, expanded instruments. I mean, there were many drivers of the recovery under the umbrella of the macro recovery. As we look ahead and think about the next few years assuming the macro recovery occurs, I was just reflecting that the mix might be different this time, but what’s the – on the procedure side and the system or instrument side, I mean, what are the drivers that get us back to that accelerated growth again? Is it international instruments and yes, inevitably a new system at some point, or how would you talk about the next few years in thinking about a recovery from this period?

Rick Wise:

Okay. And just one last quick one for me, it's a little bit of a fishing expedition kind of question of just reflecting on your comments about partnering with hospitals. One aspect is financially and with leases, et cetera, but I know you have many initiatives underway in terms of data collection and management, any update in terms of your initiatives there? And is there anything on that side of the house we should be paying attention to? Thank you, Gary.

Rick Wise:

Thank you.

Operator:

All right. Our final question today will come from the line of Richard Newitter representing Truist. You’re open.

Gary Guthart:

I – we've said this before, in our digital efforts in terms of digital tools, some of them are – the way we do our financial analysis, some of them are value creating through efficiency and labor savings on our side or on the hospital side and the investments are really a reduction in our cost to serve. So that's one category. There's another category that is around accelerated time to competency that lowers our cost to serve through having people get through their implementation and programmatic processes more quickly. The third category is direct revenue opportunity. We have things in the field working in all three of those categories. So none of them is empty. In terms of pricing and customer acceptance of our value proposition, we are out in our training opportunities in some of our augmented reality spaces and in our Intuitive Hub starting to explore those. Some of them are very, very early. Some of them are reasonably mature in terms of what our pricing and other models look like. What I would tell you is that relative to other sources of revenue, these should be accretive to our bottom line because of some of the cost savings, but they won't be huge revenue lines in the near term. I would not set the expectation that all of that turns into big time revenue. Our biggest thing and our focus is to help our customers, hospitals get to great, high-functioning, minimally invasive surgery programs using our products. If we do that, then they will find a way to pay us. And so far, that economic engine has worked well for them and it's worked well for us.

Jamie Samath:

Yes. On the micro question, so that was malignant TORS. It's a small but high-value segment. Roughly TAM number of surgeries performed is in the 10,000 per year range. So a relatively small market. But like I said, for surgeons and patients, really high value. In terms of where it might go, I'll let Gary expand on that.

Operator:

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and using the AT&T Event Services. You may now disconnect.

Brian King:

Good afternoon and welcome to Intuitive's first quarter earnings conference call. With me today we have Gary Guthart, our CEO; and Jamie Samath CFO. Before we begin, I would like to inform you that comments mentioned on today's call maybe 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 our Securities and Exchange Commission filings, including our most recent Form 10-K filed on February 3rd, 2022. Our SEC filings can be found through our website or at the SEC’s website. 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 intuitive.com on the Events section under our Investor Relations page. 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. Jamie will provide a review of our financial results then I will discuss procedure and clinical highlights and provide our updated financial outlook for 2022. And finally we will host a question-and-answer session. With that I will turn it over to Gary.

Jamie Samath:

Good afternoon. I will describe the highlights of our performance on a non-GAAP or pro forma basis. I will also summarize our GAAP performance later in my prepared remarks. A reconciliation between our pro forma and GAAP results is posted on our website. Overall, Q1 results reflected approximately 19% procedure growth as compared to the first quarter of 2021 and system placements of 311 systems, resulting in an expansion of the installed base of da Vinci systems of approximately 13%. As a result of our procedure and capital performance, Q1 revenue increased by 15% year-over-year. Key business metrics for the first quarter of 2022 were as follows. Within the 19% procedure growth, procedures in the US increased 16% and OUS procedures grew by 25%. Procedures in the US were impacted in January by the significant number of hospitalizations related to the Omicron variant. As rates of COVID-related hospitalizations declined in February and March, da Vinci procedures recovered quickly. On a three-year compound annual growth rate basis, first quarter procedures grew approximately 15%. First quarter system placements of 311 increased 4% from the 298 systems placed last year. The number of systems placed in conjunction with the trade-in of an older generation system declined by 18% from the first quarter of 2021. That decline was entirely driven by the US. Utilization of clinical systems in the field, measured by procedures per system, increased approximately 6% compared to last year. Using a three-year CAGR, first quarter utilization grew 4%. During the quarter, the supply chain environment continued to be challenging and remains dynamic. In Q1, we continued to experience constraints in our ability to meet customer demand, and as a result, on-time delivery performance to our customers was lower than we have experienced so far during the pandemic. In Europe, recently, we have experienced some geographically limited delays in fulfilling orders for some da Vinci instruments and accessories. These delays were due to a combination of the global supply chain and logistics issues, including our freight forwarder's unanticipated shutdown of its computer system. While these constraints did not have a material impact to our Q1 financial results, risks associated with potential disruption to our manufacturing operations and our ability to supply certain products to our customers remain significant. During the quarter, we also experienced higher logistics costs and manufacturing inefficiencies that impacted our gross margin. US procedure growth of 16% over Q1 of 2021 reflected continued relative strength in bariatrics, cholecystectomy and hernia repair. In Europe, we experienced strong growth in the UK, reflecting in part the significant adverse impact of COVID in Q1 of 2021. Procedure growth in the UK also reflected strong early-stage growth in hysterectomy, colorectal and thoracic procedures. Procedure growth in Germany and Italy was also strong while procedure growth in France was adversely impacted by COVID-mitigation measures in the first part of the quarter. Overall procedure growth in Asia was solid with growth across a broad set of procedure categories. Q1 procedures in China and Korea were slightly lower than our expectations given the impact of the Omicron variant later in the quarter. Procedure growth in Japan was strong reflecting some recovery in urologic procedures and strong growth in rectal hysterectomy and thoracic, key procedures that were granted da Vinci reimbursement in April of 2020. The impact of the Delta variant in Q3 of last year and the impact of the Omicron variant in this past quarter highlight the continued risk of future COVID waves and the associate significant risks to the number of da Vinci procedures that maybe performed. Brian will provide additional procedure commentary later in this call. As Gary indicated, during the quarter we experienced a softening in our US capital pipeline, which we expect to impact system placements in the near term. In the US, we placed 186 systems in the first quarter lower than 190 in Q1 of 2021, reflecting a decline of 28 systems associated with trade-in transactions, partially offset by increased placements to greenfield customers. The remaining installed base of SI systems in the US is approximately 268 systems. Outside the US, we placed 125 systems in the first quarter compared with 108 in the first quarter of 2021. Current core assistant placements included 78 into Europe, 19 into Japan and nine into China compared with 59 into Europe, eight into Japan and 23 into China in the first quarter of 2021. We placed 30 systems in the UK in Q1, driven in part by the timing of government budget cycles. We do not expect to place similar levels of systems in the remainder of 2022 in the UK. Capital performance in Japan was driven primarily by greenfield accounts and some existing customers adding capacity in anticipation of the eight additional procedure reimbursements taking effect on April 1. System placements in China were moderately impacted by longer logistics cycle times as a result of lockdowns in response to increased COVID cases. As of the end of Q1 2022, there were 55 systems remaining under the current quota in China, which may also be available to competitors that have received local regulatory clearance. Globally trade-in transactions represented 35% of placements in the quarter compared to 38% for the full year of 2021 and 48% for the full year 2020. Given the lower number of older-generation systems in the field, we expect the volume of trade-ins to be significantly lower in 2022 as compared to 2021. Hospitals continue to experience financial and operational pressures as a result of staffing shortages, the supply chain environment and resulting inflation. Since the start of the pandemic in 2020, the impact of COVID has placed a significant burden on hospitals. The financial pressures our customers have faced have been partially mitigated by government funding, such as the approximately $178 billion of CARES Act and other relief made available to hospitals in the U.S. The rising interest rate environment increases debt servicing costs and may make access to new debt more challenging. To the extent that hospitals continue to face financial pressures, reductions in government funding and higher interest rates, hospital capital spending may be adversely impacted. In addition, as competition progresses in various markets, we will likely experience longer selling cycles and price pressure. Additional revenue statistics and trends are as follows. Total first quarter revenue was $1.49 billion, an increase of 15% from last year. Leasing represented 35% of Q1 placements, compared with 37% last year -- last quarter rather. The slightly lower first quarter lease mix primarily reflected the mix of customers who prefer to purchase systems. While leasing will fluctuate from quarter-to-quarter, we continue to expect that the proportion of placements under operating leases will increase over time. First quarter system average selling prices were $1.54 million higher than the $1.45 million last quarter. The sequential increase was primarily driven by a lower mix of bulk by transactions with large customers and a favorable product mix in particular a higher proportion of Xi dual system placements in the quarter. We recognized $16 million of lease buyout revenue in Q1, compared with $26 million last quarter, and $19 million last year. Lease buyout revenue has varied significantly quarter-to-quarter and will likely continue to do so. Instrument and accessory revenue per procedure was approximately $1,870 per procedure, compared with $1,940 per procedure in the fourth quarter of 2021, and down 4% from the $1,950 realized in the first quarter of last year. The year-over-year decrease primarily reflects the benefit of stocking orders in Q1 of 2021 associated with the launch of our extended use instruments program in the U.S. and Europe, and an unfavorable FX impact from the stronger U.S. dollar. The sequential decline primarily reflects lower stocking orders associated with lower system placements, hospital ordering patterns and a small unfavorable impact from FX. We placed 34 Ion systems in the quarter, as compared to 14 Ion placements in the first quarter of last year. The installed base of Ion systems is now 163 systems of which 70 are under operating lease arrangements. First quarter Ion procedures of just over 3,900 are up over 4x compared to the first quarter of 2021. Seven of the systems placed in the first quarter were SP systems, including three systems placed at customers in Korea. Our installed base of SP systems is now 106. First quarter SP procedures grew approximately 36% year-over-year with approximately 50% growth in transoral procedures small but high-value segment. Growth of the SP platform will continue to be gated by additional clinical indications and clearances in market beyond the U.S. and Korea. Moving on to gross margin and operating expenses. Pro forma gross margin for the first quarter of 2022 was 69.8%, compared with 71.8% for the first quarter 2021 and 70.1% last quarter. Pro forma gross margin was lower than last quarter, primarily as a result of higher logistics costs and increased fixed costs relative to revenue, as we invest in our infrastructure and manufacturing capacity to serve our long-term needs. While net inventory grew approximately $66 million quarter-over-quarter, there are still a number of components and products that are below our targeted levels. Pro forma operating expenses increased 26% compared with the first quarter 2021. The increase in first quarter operating expenses from a year ago reflected an, increase in head count increased variable compensation and higher customer-facing costs customer training, travel costs and marketing programs. As of the end of Q1, we had just over 10,500 employees, an increase of 26% from the first quarter of 2021 or an increase of 20% on a three-year CAGR basis. Of the approximately 2,100 employees we have added over the last year approximately 900 are manufacturing employees. Capital expenditures in Q1 were $95 million, primarily comprised of infrastructure investments to expand our facilities' footprint, increase manufacturing capacity and automation of certain production lines. Our pro forma effective tax rate for the first quarter was 23.3%, slightly above our expectations primarily due to certain discrete tax items. Our pro forma tax rate was above the 22.2% for 2021, primarily due to a previous change in U.S. tax law that became effective on January 1st 2022. Our first quarter 2022 pro forma net income was $413 million or $1.13 per share, compared with $427 million or $1.17 per share for the first quarter of 2021. I will now summarize our GAAP results. GAAP net income was $366 million or $1 per share for the first quarter of 2022, compared with GAAP net income of $426 million or $1.17 per share for the first quarter of 2021. The adjustments between pro forma and GAAP net income are outlined and quantified on our website and include excess tax benefits associated with employee stock awards, employee stock-based compensation, amortization of intangibles and gains and losses on strategic investments. We ended the quarter with cash and investments of $8.4 billion, compared with $8.6 billion as of December 31st 2021. The sequential reduction in cash and investments in the first quarter primarily reflected share repurchases, capital expenditures and unrealized losses on interest-bearing investments classified as available for sale, partially offset by cash from operating activities and proceeds from employee stock plans. During the quarter we repurchased 398,000 shares, at an average price of $268 per share for a total expenditure of $107 million. And with that, I would like to turn it over to Brian, who will discuss clinical highlights and provide our updated outlook for 2022.

Operator:

Thank you. And our first question is, sorry, from the line of Amit Hazan. Please, go ahead.

Gary Guthart:

Yes. Let me take the second question first and then I'll ask Jamie to step in on a little bit more on the trade-in side. So what we're seeing now, where we're at is, a little bit less delay of planned purchases, a little bit less what we're signaling more around -- Q4 demand looks strong. Q1 in terms of the early parts of the pipeline process and some of the contracting, some of the later parts, we're seeing in the US just a little bit lower volume. It may clear itself. It may entirely be that, this was just a pull-forward of a little bit of demand and some budget flushing, as hospitals got ready for the retirement of some of the government support for COVID. But it's not clear. We don't know yet. We know for sure that we're getting toward the end of the SI trade-in cycle in the United States. So that will soften some of the US capital. The final point I'll -- and then there's forecasted additional pressures on hospitals and finances. The short answer to that is, we're going to have to see. We'll see if those come to fruition or not. So that's a little bit of where that lays out. With regard to kind of what does the trade-in ratio look like, let me turn it to you Jamie.

Gary Guthart:

Just a capping remark on that. Final thought is, the core driver in a mature multiport market segment in a country like the United States, the core driver is procedure demand. And we feel like procedure demand is healthy. It's healthy in our target areas. Our major focus is making sure that we can supply the customer with what they need in a way that's high quality and timely. So, it's really managing the supply chain. If that goes well and we are successful in closing those gaps, I think capital demand will work itself out. It will play through because it ultimately in those markets is driven by core procedure demand.

Gary Guthart:

Yes. It's a good question. The -- what I'd say here is a couple. One is, as the technologies have matured and the installed base has gotten bigger, we've made an intentional decision to invest a lot in upgrading the capabilities of Gen 4 platforms that are out there. So the first thing has been that the SI that somebody purchases today is more capable than the SI that they had in -- when it was first launched and we keep doing that. In part that's easier those kind of incremental adds to platform architecture that's pretty mature are easier for the customer base to absorb. And they also compound utilization. They allow them to get more utility out of the capital they have. They get higher throughput through it and they do more procedures with it. And in Gen 4, we're not done with that. We have continued to do it and whether it's instruments and accessories or endoscopy or software. And we have some things up our sleeves for that too. So that was intentional. We were doing more kind of structural changes early on in that product and we have intentionally moved some things into more incremental changes on Gen 4. We do think that there are bigger structural changes that will make sense. We are working on them. They are interesting. I think they have long-term implications for the surgical market segments we participated and I'm excited about them. Some of those things are around technology development. Some of them are around manufacturing and supply chain development and some of them are around clinical pathways and regulatory pathways. So all of those things play out. I will reinforce what you said. We work on incremental changes. We work on structural changes and we work kind of multiple generations ahead and that remains true. We continue to do that. Timing-wise, sometimes a little bit hard to predict perfectly based on both supply chain readiness, and how FDA thinks about those things. For us, I want to make sure that every time we make a step that the customers value it, that it's done with them in mind rather than with us in mind. And we continue to have that philosophy and we'll pursue it.

Operator:

Thank you. The next question is from Rick Wise from Stifel. Please go ahead.

Gary Guthart:

Thanks, Rick. On submission for Europe, the -- we just submitted our dossier. Europe has changed over their -- the framing of their medical device regulation. They call it, EU MDR. It's relatively new for the world. As a result, projecting exact timing to get those clearances is a little different relative to historical norms. We don't anticipate it completing in 2022. That's just -- it's a little bit of what's the odds game, but we think it's several quarters to finish, mostly because it's new for the regulators and it's new for us. On the point of how is Ion ongoing, it's being driven right now on the single indication of biopsy and bronchoscopy. I think it's driving well because it meets a need. I think alternate technologies manual and robotic are less capable. And we see a lot of peer-to-peer word of mouth that is driving interest and that's backed by data like the PRECIsE trial. So that's been helpful for us. A lot of our focus here has been developing our manufacturing capacity, continuously improving the product in terms of usability, quality, robustness and efficacy. And the teams are doing a great job and working extremely hard to do all of those things make sure that we can maintain supply and improve. I'm just delighted with what they're up to. They are both increasing capacity and improving robustness and quality simultaneously. So that's been wonderful, and I think we have room. We're seeing the combination of Ion bronchoscopic evaluation combined with robotic surgery thereafter sometimes people do it on the same day. And that has seen some real value for patients. It's not every part of the patient population, but there are some patients for whom that's a good solution. And we see a lot of excitement. So the tie-through of Ion diagnostics with follow-through treatment is creating patient value. It's shortening the time to definitive answers and then a surgery if a surgery is indicated. So that's been great. We think Ion as a platform has multiple future indications that it can provide clinical value that it can bring and we are pursuing them assertively in various places. We are not yet publicly describing what those things are in part because we have some technology to develop in part there's some regulatory pathways in and it's a competitive space. And so we're working down those elements. As we get a little closer have a little bit better visibility into which ones when then we'll be sure to share.

Gary Guthart:

There's absolutely a relationship between procedure growth and demand, and increased utilization on capital, right? And it's inversely related. If you have lower utilization, you sell more capital to do the same number of procedures. We have believed and have pursued assertively that while higher utilization decreases the number of systems that we sell, it increases the utility the economic value derived by our customers to get higher throughput. And so we put programs in both in terms of design and workflow, as well as consulting services to help them get higher utilization. We've been doing that for years. It's a number that, you can move in a sustained way but it's hard to move quickly. And I'll turn it over to Jamie shortly, who'll talk a little bit about what the trend line and utilization growth has been. But from an intent point of view, we are happy to see increased utilization, even if that pressures near-term capital because it creates better ROI conditions for our customers. And from a pure marginal economics point of view at Intuitive, the marginal economics work out well for us too. So it's a win-win even though at the top line in placements, it may look like pressure. So then you had asked the question kind of what is peak utilization, and how do you think about that. I'll also turn it over to Jamie. It has a lot to do with mix and operating conditions in the hospital. It's a little bit less a technology question, a little bit more how they use it. So Jamie, perhaps a little bit on utilization.

Rick Wise:

Thank you so much.

Operator:

Thank you. And the next question is from Larry Biegelsen from Wells Fargo. Please go ahead.

Gary Guthart:

I'll turn those both to Jamie.

Gary Guthart:

In general, if the quota…

Gary Guthart:

If the quota, is responsive to demand we think demand is high and the question is how responsive to that demand is the central government quota when they do it. Sorry, Larry go ahead.

Jamie Samath:

Yes. I would just maybe ground the impact of inflation a couple of ways. If you look back at history, our gross margin has been in, let's say, the 71%-ish range versus what we just guided 69% to 70.5%. And there's really two drivers in the gap between our history and that range. One are the investments we're making in fixed costs in infrastructure and manufacturing capacity, that's being invested effectively for long-term need. So some of that is ahead of when we will need it. But the lead times require that we put that in place ahead of time. The second impact is this impact from the supply chain and inflation in the form of logistics costs, higher component prices, et cetera. I can't give you perfect kind of delineation between the two. I would say roughly slightly more of that the impact of that gap is on the fixed cost side. The remainder is in inflation supply chain impacts. With respect to how we're managing through the supply chain, there are significant efforts by our operations team just to respond to the whack-a-mole that you described. It's a constant battle of issue resolution. And our number one goal as Gary described is to ensure continuity of supply to customers. So that's where our efforts and focus is. As the supply chain environment rebalances in whatever point that is in the future, certainly, we will kind of refocus our operations teams to focus on cost reductions, getting our manufacturing efficiencies back to our targets. But that's going to really be a question of when will that be. On the inventory side, you saw us actually increase inventories. I referenced in my prepared remarks almost $70 million sequentially. The mix of that though is clearly not perfect. We're replenishing inventory where we can if and as supply lasts. But we have an imbalance currently. Certainly, if you look at the medium to long-term, we're going to look carefully at what levels of inventory we want to hold, as one risk mitigation. I think the other thing we'll look at is, how do we make ourselves less dependent on sole suppliers.

Gary Guthart :

Just a tiny bit of color on that capping sentence, the current situation -- it's a little bit hard to predict the future, because there's enough moving parts that determining what or forecasting exactly how it will move is probably difficult at this moment. Currently, the number of parts that are under stress has decreased, but the intensity of the stress around a few parts has increased. So, the issue of -- the number of things that are a challenge is narrowing, but the ones that remain are more stubborn. And Jamie, your point of we use various tools whether it's buying ahead, buying safety stock, or redundancy and supply chain. We'll use any and all of those if we can to help mitigate the risk.

Operator:

Thank you. Our next question is from Drew Ranieri from Morgan Stanley. Please go ahead.

Gary Guthart:

The -- I won't speak to the quantitative approach. And perhaps Jamie you have a perspective. But just to give you a little bit of a qualitative view, many of the hospitals out there that are greenfields, while they may not have one of our programs today are part of an integrated delivery network that somewhere in the system they have our products and knowledge. The way we work with that is collaboratively with IDN leadership. As they start to understand what the value of the programs are, they will start to move within their own system our products into locations they care about. And so we've seen a really nice move and collaborative expansion with our customer base into those spaces. Increasingly, we have conversations about moving into different sites of care, especially as benign -- general surgery procedures and some other procedures that are benign and often done in smaller ambulatory environments become more prevalent in our workspace we see that improving over time. So we think we can follow our customers where they want to go. There is the concentrating effect of robotics and capital investment. It is capital investment. When that happens it does concentrate regionally those patients and procedures into Centers of Excellence. We think that's good for our customer to get higher utilization. We think it's good for surgical outcomes because they get more practice. So I think it's a combination of the two. I don't think we just look at it and think we have to go to where every patient is today. We do think consolidation helps and works but it will expand from where it is in this moment. Jamie, I don't know if you want to add anything to that.

Gary Guthart:

Drew, I'll give you a fast follow-up here at the end.

Brian King:

Drew hi, this is Brian. I guess I would say, really the opportunity for adoption on those eight newly reimbursed procedures, it's a bit difficult I'd say, to estimate at this time, right? I mean, if you were to take procedures like colon resection, as an example, it's highly penetrated by lap today. So I think adoption of da Vinci will actually be dependent on, say, demonstrating clinical and economic benefits, which I think it's going to take some time. And I think it's going to take some time to develop our training and proctoring capabilities and really to establish key opinion leaders. So, I think it's just going to take some time. It's really hard to estimate how quickly da Vinci will adopt locally.

Gary Guthart:

In closing, we continue to believe there's a substantial and durable opportunity to fundamentally improve surgery and acute interventions. Our teams continue to work closely with hospitals, physicians and care teams in pursuit of what our customers have termed the Quadruple Aim

Brian King :

Thank you. So good afternoon, and welcome to Intuitive's fourth quarter earnings conference call. With me today, we have Gary Guthart, our CEO; and Jamie Samath, our CFO. 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 our Securities and Exchange Commission filings, including our most recent Form 10-K filed on February 10, 2021, and Form 10-Q filed on October 20, 2021. Our SEC filings can be found through our website or at the SEC's website. 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 intuitive.com on the Latest Events section under our Investor Relations page. Today's press release and supplementary financial data tables have been posted to our website. Today's format will consist of providing you with highlights of our fourth quarter results as described in our press release announced earlier today, followed by a question-and-answer session. Gary will present the quarter's business and operational highlights; Jamie will provide a review of our financial results; and I will discuss procedure and clinical highlights and provide our financial outlook for 2022. And finally, we will host a question-and-answer session. And with that, I'll turn it over to Gary.

Jamie Samath:

Good afternoon. I will describe the highlights of our performance on a non-GAAP or pro forma basis. I will also summarize our GAAP performance later in my prepared remarks. Reconciliation between our pro forma and GAAP results is posted on our website. Q4 and 2021 revenue and procedures are in line with our preliminary press release of January 12. Before I dive into our Q4 results, let me start with a summary of our full year 2021 performance. Given the significant impact of COVID, we believe it's appropriate to review our 2021 results on both a year-over-year and a 2-year compound annual growth rate basis. Procedures increased by 28% as compared to 2020 and increased by approximately 14% using a 2-year CAGR. We placed 1,347 systems of customers during the year, an increase of 44% as compared to 2020 and up 10% using a 2-year CAGR. As a result of this procedure and system placement performance, 2021 revenue increased by 31% year-over-year and increased by 13% using a 2-year CAGR. Key business metrics for the fourth quarter were as follows

Operator:

. Our first question is going to come from the line of Larry Biegelsen from Wells Fargo.

Gary Guthart:

No. I think we have -- thanks, Larry. I think we have a broad opportunity as a company here to take the methods that we have designed around identifying clinical need, doing the design and development of tech-enabled ecosystems to address that need and then working with customers to deliver it and train it. And there's, I think, long term, a lot of opportunity. As we look out there is substantial opportunity in existing markets and in new ones to do better for the quad aim. Doing this set, getting that set of ecosystem investments ready is heavy work. It's a multiyear effort. But we think we've shown that it can be done. And I think that's really what we're talking about here is the ability to start to impact other opportunities in international markets as we go forward. And Ion is such an example.

Gary Guthart:

Yes. Kind of -- I'll take the top and then I'll let Jamie take some more. At the very top part, it's kind of 3 big buckets. One of them is specific products themselves, semiconductors come to mind. The second bucket is some raw material constraints and the kinds of things we build. And the third is just logistics and motion of materials. Jamie, I'll let you fill in that perspective.

Operator:

Our next question now will come from the line of Tycho Peterson from JPMorgan.

Gary Guthart:

Yes. Let's talk for a moment about replacement cycles. I think you're referring to the SI, Jamie had mentioned it in his prepared remarks, and Brian had touched on it. I think they were pretty clear, and I won't go through that. I do think that from a business model point of view, we don't think that we need to drive capital upgrades on Intuitive's calendar to have a healthy business. What we look at is where can we drive the quadruple aim and how can we effectively do that for our customers. And in that setting, we have been investing in our Gen 4 platform and expansion, I talked about that in my prepared remarks as well. And it's been great for the customers and for us. That's not the only thing we'll do, but it's an important thing that we do. You had mentioned a little bit on the technology stack, what are the kinds of things we care about. And a lot of what we were driven by are what kinds of things can we do inside the body, in imaging, in informatics that will dramatically change outcomes or the experience of the patients or the care team. And that has -- you can see that in the kinds of things that we've brought to market. We have fantastic teams. We have things that we're working on that we have not yet discussed that we think will drive differences in outcomes. So it's not just working on new indications or just working on ease of use. I think those things are both important, but it's not limited to that. There are other things that are going on that we think can change the nature of our interaction with tissue and drive outcomes again and raise the bar there once more. Jamie, anything you'd want to add on the issue of SR replacement cycle?

Tycho Peterson:

Okay. That's helpful. And speaking of innovation, can you touch on some of the SP enhancements? You talked about 510 clearance for extension of life for some of the instruments. Can you just clarify exactly what you got through?

Gary Guthart:

We've done some other things, too. We have, as you know, dual console that helps with training of new surgeons and teaching environments. We extended the dual console capability into the SP space. Recently, we've launched and then upgraded some of the accessories that go with SP. So part of the process, for those of you who've been with us for a while, is continuous innovation that these things don't end where they start, and that's been true for SP.

Jamie Samath:

I think if you look at the OpEx increase range that Brian provided, I think you can kind of draw a correlation between how headcount has kind of correlated to spending increase and I think that's a relevant starting point for '22.

Operator:

Our next question then will come from the line of Amit Hazan from Goldman Sachs.

Jamie Samath:

I mean I'll give you a couple of data points. So the greatest correlation we've seen historically on procedures is rates of hospitalizations. I believe that currently, U.S. hospitalizations related to COVID are beyond any of the previous ways. So I think you can kind of track how that has progressed so far and what some of the third parties are projecting for the remainder of the quarter. There's some modeling benefit to doing that. What I would point to is if you look at pre-COVID, so 2017, '18, '19, those -- the sequential change between Q4 and Q1 was about even, meaning it was about the same Q1 as Q4. So that's in a normal quarter. Most of the current wave will be in Q1. The impact of Omicron in Q4 was kind of later in the quarter. So I kind of start with a normal quarter would be flat sequentially and then model the rest of Q1 based on just hospitalization rates. With respect to capital, there's nothing at this point that we would call out. I do think that the combination of what's happening right now with COVID, along with staffing shortages, along with the extent to which the supply chain environment broadly could impact hospitals could make it challenging for hospital capital spending. They may manage that more carefully in such an environment. But there's nothing specific that we would call out at this point. What was the third part of your question, Amit?

Gary Guthart:

Sure. On the issue of kind of recurring revenue or service models versus kind of capital single charge, we have taken a posture of being really flexible with what our customer wants. There are some really nice things about as the transition -- as the company has transitioned to a recurring model that customers can come to choose when they're ready to engage us and it doesn't require large upfront capital expenditures. For some things that are inherently services and if you think about simulation, it's not really about the hardware in the case of simulation. It's really about access to modules and modules that improve over time and modules that get built to be specific to competency-based training. Subscriptions make a lot of sense because you're not really trying to sell a piece of hardware, you're really helping them develop a training program over time. So we think increasingly, as our business in software and analytics and some of the digital tools that we're bringing come up, then subscriptions may make sense. And to the extent that they align with customers, we're happy to do it. I also like the idea of recurring revenue in that it focuses the organization on earning the customer's business every day that it's a lot less lumpy for them and it's a lot less lumpy for us. And if we're bringing value and helping them achieve their quadruple aim goals, then they're happy to stay with us in those events. So I would expect that the recurring revenue portion of our business keeps creeping up as a percentage of total revenue over time. So long as customers are aligned to that, that, that makes sense from their finances point of view, then that's what we'll pursue. And to the extent that they're interested in other models, then we are open-minded.

Rick Wise:

Gary, I thought I'd follow up on a couple of things. You highlighted very specifically for both Ion and da Vinci SP this concept of margins aren't where they will be. And over time, you're going to bring the business to scale. I was wondering if you could expand on that, maybe give us a flavor for where margins are now? And how do we think about is this 2 years away? Is it 5 years away? How do we think about the trajectory going forward there?

Jamie Samath:

Rick, I would split the question kind of into 2 categories. There's gross margin and then there's, let's call it, the equivalent of operating margin. On a gross margin basis, kind of the actions that we have to take to get both Ion and SP to kind of, let's call it, target gross margins are well understood and it's really about execution over a period of time, a component of that will obviously be building scale. But I think those actions are well defined. They're a multiple-year effort. On the operating margin side, it's really, what's revenue in relation to the amounts that we're investing. And that's obviously going to be a function of, in the case of Ion, how we adopt in lung cancer biopsy over time. And with SP, it's the additional indications and new geographies in terms of clearances. I don't have a scale for when we might reach those corporate average margins. I would say, though, for '22, given that SP and Ion are newer products, the gross margins there are dilutive as you'd expect.

Gary Guthart:

I'd characterize it a little bit differently, Rick. The starting point on Asia, it is clearly an interesting market, country by country. We are making investments in Asia. I don't think I'd say that they are the dominant investments, but they're substantial because we think there's substantial opportunity there to make a difference in those markets. So it's a leg of growth, but not the only one. There are opportunities for us in other regions, whether it's Europe or elsewhere. There are also opportunities for us in other clinical indications and some of the clinical trial work we're doing as well as the expansion of platforms and other technologies that we're working on. So I'd characterize it as one of the legs, not necessarily the dominant leg. Jamie, anything you would like to add?

Operator:

Our next question now comes from the line of Matt Taylor from UBS.

Gary Guthart:

Yes. On the -- with regard to kind of forecasting future launches, of course, we won't give you any detail here. We'll launch them when we're ready to launch. In terms of the framing of your question, we are routinely developing applications for the platforms we have, whether it's bariatric, thoracic surgery in our multiport indications to new indications in SP and we're doing some trials in thoracic surgery and colorectal to new opportunities and flexible robotics and Ion. And other platform investments that are currently not disclosed, the things that we're working on. So we're going to continue to do that. And some of them will come to fruition and be fantastic. And some of them may be things that we assess and then pivot as we learn more. So there's all of those things going on. And somebody was out scanning what we're hiring and scanning the kinds of patent applications we have, you'll see a great diversity of things we're interested. And it's a little bit like the first question on the call, when we say what are we talking about in terms of possibility. We really scour the acute intervention opportunity from the bottom of your feet to the top of your head and everything in between and start asking questions about whether we think there's a real opportunity for improvements in the quad aim and whether we could design a tech-enabled ecosystem to do something about it. And that's what informs a lot of that hiring. Some of it is near term and existing platforms. And some of it is future-oriented on platforms that may come to pass. So that's kind of how we think about it.

Gary Guthart:

Matt, we'll give you one follow-up.

Jamie Samath:

Certainly, you can see the competition is active at accounts. I think we've characterized that mostly as kind of reciprocal arrangements with respect to training center investments or reciprocal research investments. I don't think we call out any specific significant impact yet on selling cycles. But certainly, you can see the potential for over time.

Operator:

Ladies and gentlemen, that will conclude our conference for today. Thank you for your participation for using AT&T Event Services. You may now disconnect.

Jamie Samath:

Good afternoon and welcome to Intuitive’s third quarter earnings conference call. With me today we have Gary Guthart, our CEO, Marshall Mohr, our CFO, and Brian King, our Treasurer. Before we begin, I would like to let you know that Philip Kim, our Head of Investor Relations for the last couple of years, has moved onto pursue his next opportunity. We appreciate his contributions and wish him well in his next endeavor. Joining us on the call today is Brian King, who has been our Treasurer for the last seven years. Brian will be expanding his responsibilities to include the role of Head of Investor Relations. Moving on, I would like to inform you that comments mentioned on today's call maybe 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 our Securities and Exchange Commission filings, including our most recent Form 10-K filed on February 10th, 2021, and Form 10-Q filed on July 21st, 2021. Our SEC filings can be found through our website or at the SEC’s website. 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 intuitive.com on the latest events section under our Investor Relations page. 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 third quarter results as described in our press release announced earlier today, followed by a question and answer session. Gary will present the quarter's business and operational highlights, Marshall will provide a review of our financial results, I will discuss procedure, and clinical highlights, and provide an update of our financial outlook, and finally, we will host a question-and-answer session. With that, I will turn it over to Gary.

Marshall Mohr:

Good afternoon. I want to describe the highlights of our performance on a non-GAAP or pro forma basis. I will also summarize our GAAP performance, later in my prepared remarks. Reconciliation between our pro forma and GAAP result is posted on our website. The information in our earnings release and within our prepared remarks reflects the 3-for-1 stock split completed earlier in October. Overall, third quarter procedures grew 20% year-over-year and reflect the impact of Delta variant resurgence. COVID also impacted third quarter 2020 procedures, making year-over-year comparisons complicated. In the U.S., procedures grew 16%, reflecting the impact that COVID resurgence had on hospital resources regionally, the impact of the resurgence was most pronounced in August and early September, and regionally in the south and southeast. Later in the quarter, as COVID cases began to slow, procedures began to recover. However, it is difficult to estimate the extent to which this resurgence or future resurgences will impact da Vinci procedures. Year-over-year, OUS procedures grew 30% with the impact of COVID varying regionally. In Europe, COVID had a greater impact in Italy and France, and less in UK and Germany. While there continued to be COVID hotspots within some of our Asia-Pacific markets, overall procedures in the region performed well. China growth in the third quarter continued to be far higher than other regions, primarily reflecting system installation growth over the past year. Relative to the beginning of the pandemic, many hospitals are able to better manage increased COVID patient hospitalization. However, staffing shortages and hospital supply chain issues are challenging some hospital capacities and could impact deferrable procedures, including da Vinci procedures, going forward. Jamie will provide additional procedure commentary later in this call. Key business metrics for the third quarter were as follows. Third quarter 2021 procedures increased approximately 20% compared with third quarter 2020 and decreased approximately 3% compared to the last quarter. Compound annual growth between the second quarters of 2019 and 2021 was 13.5%. Third quarter system placements of 336 systems increased 72% compared with 195 systems for the third quarter of 2020, and increased 2% compared with 328 systems last quarter. We expanded our installed base of da Vinci systems over the last year by 11% to approximately 6,525 systems. This growth rate compares with 8% last year and 10% last quarter. Utilization of clinical systems in the field measured by procedures per system, increased approximately 9% compared with last year, and decreased 6% compared with last quarter. Compounded annual utilization growth rate between the third quarters of 2019 and 2021 was 3%. Moving on to capital placements, system placements in the quarter reflected a continued trend of IDN multi-system purchases and were driven by procedure growth and hospitals upgrading in order to access our standardized and fourth-generation capabilities. Looking forward, we see the following capital revenue dynamics. Procedure growth drives capital purchases in many of our markets, to the extent that COVID impacts procedures, it will also impact capital purchases. The trading cycle has been a tailwind to system placements. However, as the installed base of older generation product declines, the number of trade-ins will decline over time. Leasing and alternative financing arrangements enabled customer access to our systems. While the percentage of systems placed under operating leases fluctuate quarter-to-quarter, we believe leasing will increase as a percentage of sales over time, which will result in the deferral of otherwise current revenue into future periods. Macroeconomic conditions created by COVID could regionally impact hospital capital spending, and as competition progresses in various markets, we will likely experience longer selling cycles and price pressure. Additional revenue statistics and trends are as follows. Third quarter revenue was 1.4 billion, representing a 30% increase from last year and a 4% decrease from last quarter. The compound annual revenue growth rate between the third quarters of 2019 and 2021 was 12%. The year-over-year revenue increase reflected growth in both procedures and system placements. The decrease relative to the second quarter of 2021 reflects lower instrument and accessory revenue associated with lower procedures and increased leasing as a percentage of placements. Leasing represent 41% of current quarter placements compared with 35% last year and 33% last quarter. Leasing as a percentage of total sales has and will continue to fluctuate with customer and geographic mix. However, we anticipate more customers will seek leasing or alternative financing arrangements than reflected in historical run rates. 40% of systems placed in the third quarter involve trade-ins, which is consistent with the 40% last year and higher than the 38% last quarter. As customers continue to upgrade to fourth-generation capabilities, the population of installed SI is decreasing, particularly in U.S. where 97 trade-ins were completed in the third quarter, leaving an installed base of SIs of approximately 425 systems. As a result, we expect lower trade-out transactions over time. Trading activity can fluctuate and be difficult to predict. Third quarter average selling prices increased to 1.57 million from 1.55 million for both the third quarter of 2020 and the second quarter of 2021. Average selling prices will fluctuate with geographic and product mix. Consistent with historical patterns, we expect a higher mix and systems sold to distributors in the fourth quarter, which carry lower prices. We recognized 25 million of lease buyout revenue in the third quarter compared to 17 million last year and 26 million last quarter. Lease buyout revenue has varied significantly quarter-to-quarter, and will likely continue to do so. Instrument accessory revenue per procedure of $1,900 decreased slightly compared with $1,910 per procedure for the third quarter of last year, and decreased compared with $1,940 per procedure in the second quarter. The year-over-year change reflects increased usage of extended-use instruments, mostly offset by increased usage of our advanced instruments. The decrease from the previous quarter reflects customers continuing to adjust their instrument buying patterns to reflect the additional uses per instrument included in extended-use instruments. Ten of the systems placed in the third quarter were SP Systems. Our installed base of SP Systems is now 89, 10 in Korea, and 79 in the U.S. We continue our measured roll out of SP as we work on gathering clinical data to gain additional procedure clearances in the U.S. We placed 28 Ion systems in the quarter, bringing the installed base to 98 systems. There were approximately 2,000 Ion procedures completed in the third quarter. Ion system placements and procedures are excluded from our overall da Vinci system and procedure counts. Our rollout of Progressing well. Outside the U.S. we placed 109 systems in the third quarter compared with 79 in the third quarter of 2020 and 115 systems last quarter. Current quarter system placements included 47 into Europe, 20 into Japan, and 17 into China, compared with 39 into Europe, 15 into Japan, and 12 into China in the third quarter of 2020. We also placed 9 systems in Brazil in the third quarter and now have placed 23 systems in Brazil over the past four quarters. Moving on to gross margin, and operating expenses. Pro forma gross margin for the third quarter of 2021 was 71.3% compared with 70.2% for the third quarter of 2020 and 71.7% last quarter. The third quarter of 2020 included 23 million of service credits issued in conjunction with our customer relief program, higher period costs associated with lower production levels, and higher excess and obsolete inventory charges. The decline in gross margin relative to the second quarter primarily reflects product mix. Product and customer mix fluctuate quarter-to-quarter, which can cause fluctuations in gross margins. COVID has impacted global supplier of semiconductors and other materials used in our products. While to date we've been able to secure supply necessary to ensure fulfillment of customer demand, our teams are expending significant time and effort to bridge future supply with demand. To date we've experienced immaterial component increase, cost increases, and freight expedition fees. However, global shortages could result in future supply disruptions as well as delayed development and regulatory activities. We also expect supply issues to result in higher production costs. Pro forma operating expenses increased 21% compared with the third quarter of 2020, and increased 2% compared with last quarter. The increase, compared to the prior year, reflects costs associated with higher headcount, increased variable compensation, and increased spending in areas impacted by COVID. Third quarter spending was below our expectations due to delays in headcount hiring and lower spending on activities restricted by COVID, including clinical development, marketing events, and travel costs. In addition, COVID delayed some R&D work resulting in under spend on prototypes. We expect spending on activities restricted by COVID to increase as the impacts of the pandemic decline. We also expect spending to increase as a percentage of revenue as investments in headcount infrastructure and other support area s catch-up to the growth of the business. Finally, we expect to continue to invest in expanding and accelerating our ecosystem of products and capabilities. Jamie will provide spend guidance later in this call. Our pro forma effective tax rate for the third quarter was approximately 24%. We recorded expense of 11 million associated with periods prior to 2020 related to guidance recently provided by the IRS associated with stock-based compensation. We expect our pro forma tax rate for the fourth quarter to be approximately 21.5%. Our actual tax rate will fluctuate with changes in geographic mix of income, changes in taxation made by local authorities, and with the impact of one-time items. Our third quarter pro forma net income was 435 million, or $1.19 per share, compared with 334 million, or $0.92 per share, for the third quarter of 2020, and 477 million or $1.31 per share for the last quarter. Third quarter 2021 and 2020 included pre -tax gains of approximately 8 million and 62 million associated with investments in companies that resulted from development agreements entered into in prior years. I will now summarize our GAAP results. GAAP net income was 381 million or $1.04 per share for the third quarter of 2021 compared with GAAP net income of 314 million or $0.87 per share for the third quarter of 2020 and GAAP net income of 517 million or $1.42 per share for the last quarter. We ended the quarter with cash and investments of 8.2 billion compared with 7.7 billion last quarter. The increase in cash in the third quarter primarily reflected cash from operations and stock exercises. We did not repurchase any shares in the quarter. And with that, I'd like to turn it over to Jamie.

Operator:

Ladies and gentlemen, if you'd like to ask a question . We'll go first to Amit Hassan with Goldman Sachs. Your line is open. Please go ahead.

Marshall Mohr:

Yes. I think -- Amit, it's Marshall. The environment, as it relates to supply chain, has deteriorated and got more difficult over time. And as we said, we've dedicated substantial resources to dealing with those shortages. And it has not, to-date, created an issue with us supplying customer demand. But there is a risk, and it's a real risk until we call it out to make sure that everybody is aware of that. From the perspective of costs, we talked some cost increased material costs last quarter. They were not significant. And we also incurred some expediting fees associated with freight. Again, not material. But going forward, we do expect increased costs, and that will probably hit the margin in Q4 or Q1. It's hard to predict exactly how much until -- I think that summarizes it for you. It's difficult environment right now.

Operator:

Our next question we go to Larry Biegelstein with Wells Fargo. Go ahead, please.

Gary Guthart:

Yeah. I think that the architecture as a whole, the shape sensor, the way it works, the design choices about making a soft catheter that's quite and can go deep into the been really strong for us. And I think the data speaks for itself. You can compare for yourself the data that focuses and that for Monarch, and we feel great about where we are. I think it is catalyzing. As we speak, I think that those results are helping us in the market. Our customers are giving us really good feedback. And we continue to invest in operations part of that program as well as the innovation side. We feel really good about.

Jamie Samath:

Thank you, Larry, by the way. I would say this, what are reflected in the high-end of our procedure guidance are really two things. Those COVID-19 related hospitalizations in the U.S. continued the recovery that began in September, and that was in the middle part of September that that recovery commenced. So there's a progression there that continues through Q4. It also assumes that the mitigation measures in OUS markets, which are typically a little more conservative than we see in the U.S., continued to ease, and those also started to ease in September. At the low end, what we see is a slower recovery in the U.S. from what we saw in Q3 and choppiness OUS in terms of the on-off of mitigation measures in various markets. And so that range of 27% to 29% that we provided, really it's just a function of the rate at which we recover from what occurred in Q3 with the Delta variant. That was a little color on that.

Gary Guthart:

Just jumping in. I think there are two things that are going on. One is, what will pace us is hospital availability for surgery it. It's not infection rate, it's going to be resourced consumption at the hospital and their ability to pivot their resources, both human capital and facilities, back towards surgery. As you double-click on that, some of it is regional variance, but some of it is actually just hospital system variance. There are differences in how each hospital has managed it. So it's hard to generalize, I think, beware of averages.

Operator:

Next question comes from Bob Hopkins with Bank of America. Go ahead, please.