Ladies and gentlemen, thank you for standing by. Welcome to the Intuitive Surgical Q2 2019 Earnings Release Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time.
As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Calvin Darling, Senior Director of Finance, Investor Relations. Please go ahead.
Thank you. Good afternoon, and welcome to Intuitive Second Quarter Earnings Conference Call. With me today, we have Gary Goodhart, our CEO and Marshall Moore, our Chief Financial 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 the company's Securities And Exchange Commission filings including our most recent Form 10 K filed on February 4, 2019 10 Q filed on April 19, 2019. 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. In addition, today's press release and supplementary financial data tables have been posted to our website.
Today's format will consist of providing you with highlights of our 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. Marshall will provide a review of our second quarter financial results Then I will discuss procedures and clinical highlights and provide our updated financial outlook for 2019. And finally, we will host a question and answer session. With that, I will turn it over to Gary.
Thank you for joining us today. This second quarter of 2019 was a solid one for Intuitive with healthy customer interest and demand for our products. Overall, procedure growth met our expectations while capital placements exceeded them. Global procedure growth was approximately 17% in the second quarter of 2019. Growth again centered on general surgery in the United States with positive contributions to release of systems under the new quota.
Turning to the United States, year over year growth in the quarter was 16%. General Surgery growth again accounted for the largest increase year over year, accompanied by expected moderation of growth in U. S. Urology and gynecology. Underlying this performance, we saw continued strength in bariatrics and cholecystectomy with modest tempering of growth rate in hernia and colon resection.
Given the different types of procedures being performed by general surgeons, we see additional demands on system access and accounts, as well as increased demands on our representatives' time, to support different procedure types. We believe system placement strength in the U. S. Is driven in part by the desire of general surgeons for increased access. We have efforts ongoing to manage these issues.
Calvin will take you through global procedure dynamics in more detail later in the call. With regard to our installed base, placement of new systems in the quarter was strong with growth in toll placements rising 24% from Q2 of 2018. Net of trade ins and retirements, our da Vinci installed base again grew 13% over Q2 2018 to approximately 5270. The mix of system placements this quarter moved towards our flagship XI system, while both sales of X systems and trade ins remained healthy. The proportions of systems placed under operating leases was 32% this quarter compared with 33% last quarter.
We do not anticipate this quarter to quarter variance is indicative average sales price, the mix of systems and geographies last quarter resulted in a lower ASP when compared to historical trends. The second quarter saw a reversal of mixed dynamics, with more fully featured system sales and a greater proportion of system placements in direct markets, resulting in an ASP that is higher than recent quarterly averages. As we said last quarter, this variance in ASP quarter to quarter is the result of system and regional mix, not a fundamental change in our philosophy. Turning to expenses. We continue to invest as we launch new platforms, strengthen our computational capabilities and execute projects that support future scale and provide leverage opportunities as we grow Our spending met our expectations and supported by solid procedure growth in capital placements.
Financial highlights of our 2nd quarter results are as follows. Procedures grew approximately 17% over the second quarter of last year, We placed 273 da Vinci surgical systems, up from 220 in the second quarter of 2018. Our installed base again grew at 13% from a year ago. Revenue for the quarter compared to 71.1% in the second quarter last year. Instrument and accessory revenue increased to $579,000,000, up 22%.
Total recurring revenue in the quarter was $780,000,000, growing 21% over Q2 of 2018, and representing 71% of total revenue. We generated a pro form a operating profit of $455,000,000 in the quarter, up 17% from the second quarter of last year and pro form a net income was $388,000,000, up 18%. As you know, we measure our efforts by their ability to positively impact the quadruple aim, better outcomes, better patient experience, better care team experience and lower total cost treat per patient episode. We believe intelligent surgery takes the integration of 3 elements. First, the deep understanding of human interactions and inform holistic system design, 2nd, the development of high quality smart and cloud connected robotic imaging and instrument systems, and lastly, informatics and AI to deliver relevant, validated insights.
For our customer, surgery has been digitized for the past 20 years. While we've made significant progress over our history, we believe continuous improvement is required, we have deployed our investment toward these aims. We designed instruments and accessories to enable repeatable, high quality surgeries that are efficient and cost effective relating to total cost to treat. Taking one example of our Advanced Instrument Platforms, our 2nd generation SureForm Stapers are now in the market at both 60 millimeter and 45 millimeter instrument lengths and represent product families. Our 60 millimeter stapler 4 staple links available and is sold in the U.
S, Europe, Korea, Australia and now Japan. Our 45 Millimeter cartridges, as well as a straight tip and curved tip instrument and is available in initial launch in the United States and our direct EU markets. Measured through Q2, surgeons have fired intuitive staplers clinically over a million times cumulatively since our stapling launch. Turning to systems, we are in the 1st phase launch of da Vinci SP. We installed 13 systems in Q2 to bring our clinical installed base of SP to 34.
Our teams have done a nice job resolving the manufacturing variances that slowed our installs in Q1. The highest per system utilization of SP is occurring in is encouraging with regard to the broad possibilities for our platform. In Korea, procedures in urology, gynecology, general surgery and head and neck surgery are being performed. In the United States, we have 2 cleared indications for SP, urologic and trans oral surgery. As you know, we're pursuing additional clinical clinical indications for SP and have engaged regulatory agencies regarding their requirements.
These requirements are in discussion, which implies projected timelines for additional indications are not yet available. Our pipeline of interested SP customers is healthy, and a combination of additional indications for SP and our readiness for deployment at larger scale, pace the speed of our SP commercial expansion. In flexible diagnostics, our ION platform is focused on the need for accurate, timely biopsies to support definitive early diagnosis, of suspicious lung cancers, lesions for lung cancer. IAM received FDA clearance in the 1st quarter With thought 10 K clearance, we have initiated our next phase focused on clinical use, customer feedback and product production optimization. First cases on the cleared system were performed at the end of Q1, and we plan a measured rollout this year.
Placements to date are at hospital sites collecting data so far, 3 have been initiated and over 50 procedures have been performed so far. We're pleased with early clinical results and look forward to our customers' continued progress We expect commercial placements commence in the next few months, along with the initiation of additional clinical collection sites. We do not anticipate material revenue from our own in 2019. Turning to imaging and analytics. This week, we announced the acquisition of the 3 d robotic endoscope business, from our longtime suppliers, Shelley Partner Optic.
The transaction is subject to closing conditions, and thereafter, we look forward to welcoming their employees to the Intuitive team. Leading visualization has been a core pillar of our offerings, and we believe it is essential to the future of intelligent surgery. This acquisition strengthens our design and supply chain capabilities and increases our manufacturing capacity for imaging products. For the balance of the year, our focus remains in completing the tasks we set for ourselves. 1st, supporting adoption of da Vinci and general surgery and in key procedures in global markets, 2nd, launching our SP and ion platforms 3rd, driving intelligent surgery innovation and finally, supporting additional clinical and economic validation in our procedures and countries.
Before I turn the call over to Marshall, I'd like to take a moment to acknowledge our Chief Operating Officer, Mr. Salbronia, who announced his intention to step back from day to day operations after 20 years at Intuitive. Sal has made enormous contributions to building our product line, our capabilities, and in the past few years, our leadership team. I extend my personal thanks and that of the company for his efforts over these past 2 decades. We anticipate working with Sal Post Transition on projects of mutual interest.
I'll now turn the call over to Marshall, who will review financial highlights.
Good afternoon. I will describe the highlights of our performance on a non GAAP and promotional basis. I will also summarize our GAAP performance later in my prepared remarks. A reconciliation between our pro form a and GAAP results is posted on our website. Key business metrics for the second quarter were as follows.
2nd quarter 2019 procedures increased approximately 17% compared with the second quarter of 2018 and increased approximately 7% compared with last quarter. Procedure growth continues to be driven by general surgery in U. S. And urology worldwide. Calvin will review details of procedure growth later in this call.
Second quarter system placements of 273 systems increased 24% compared with 220 systems last year and increased 16% compared with 235 systems last quarter. We expanded our installed base of da Vinci systems by 17% to 5270 systems. This growth is consistent with last quarter and slightly higher than the 12.5% increase last year. Utilization of clinical systems in the field measured by procedures per system grew approximately 3.5%, which is slightly lower, than last quarter growth of approximately 4% and below the 5% growth last year. Our revenue overview is as follows: Second quarter 2019 revenue was $1,100,000,000, an increase of 21% compared with $909,000,000, for the second quarter of 2018, and an increase of 13% compared with $974,000,000 last quarter.
Instrument and accessory revenue of $579,000,000 increased 22% compared with last year, which is higher than procedure growth, primarily reflecting customer buying patterns and increased usage of our advanced instruments. Instrument and accessory revenue realized per procedure was approximately $19.20 an increase of 4% compared with the second quarter of 2018 and a decrease of 2% compared with last quarter. Systems revenue for the second quarter of 2019 was $344,000,000, an increase of 24% compared with the second quarter of 2018 and an increase of 39% compared with last quarter. Systems revenue in the quarter reflected higher system placements higher ASPs and higher lease related revenue. We completed 88 operating lease transactions, representing 32% of total placements, compared with 44% or 20% of total placements in the second quarter of 2018 and 78% or 33% of total placements last quarter.
As of June 30, we have 4.86 operating leases outstanding and realized approximately $25,000,000 of revenue related these arrangements in the quarter compared with $12,000,000 last year $20,000,000 last quarter. Operating leases create a future source of recurring revenue and reduced the volatility of system revenue, while the increased number of operating leases placed in the quarter dampens short term revenue growth for the quarter in which they're placed. Operating leases included usage based financings that we provide to certain experienced hospitals, We believe that our lease financing alternatives align with customer objectives and have enabled faster market adoption related to systems purchased Over the lease period, we earn a small premium reflecting the time value of money and in the case of usage based arrangements, the risk that those systems may not achieve the anticipated usage levels. The proportion of these types of arrangements could increase long term and will vary quarter to quarter. We recognized $27,000,000 of lease buyout revenue in the quarter compared with $12,000,000 last quarter $13,000,000 last year.
These buyout revenue has varied significantly from quarter to quarter and will likely to do so. We do not expect the 2nd quarter a buyout level of buyout revenue to repeat. 38% of the current quarter system placements involve trade ins reflecting customer desire to access or standardize on 4th generation technology. This is an increase in the proportion of tradings compared to 34% in the second quarter of 2018 36 percent last quarter. 74% of the systems placed in the quarter were da Vinci XIs, and 20% were da Vinci X system compared with 67% da Vinci XIs and 25% da Vinci X's last quarter.
13% of the systems placed were SP systems, our rollout of the SP surgical system is measured putting systems in the hands of experienced da Vinci users, while we optimize training pathways in our supply chain. Globally, our average selling price, which excludes the impact of operating leases and lease buyouts, was approximately 1,540,000 compared with 1.42 in the second quarter of 2019 was very favorable relative to prior periods. We had a high mix of XI versus X and SI systems. We also had a added volume discounts. The mix of systems, customers and size of arrangements will vary over time.
We expects system ASPs to be in the range of the midpoint of the 1st 2 quarters. Outside of the U. S, results were as follows: OUS procedures grew approximately 20% compared with the second quarter of 2018 and increased 4% compared with last quarter. 2nd quarter revenue outside of the U. S.
Of $314,000,000 increased 19% compared with the second quarter of 2018 and increased 11% compared with last quarter. The increase compared with the prior year reflects increased instruments and accessory revenue of $34,000,000 or 29 percent growth. The increase in instrument accessory revenue was primarily driven by procedure growth and customer buying patterns, Outside of the U. S, we placed 80 systems in the second quarter compared with 82 in the second quarter of 2018 in 81 systems last quarter. Current quarter system placements included 30 into Europe, 24 into Japan and 8 into China.
61% of the systems placed in the quarter were da Vinci XIs and 33% were da Vinci X systems compared with 38% Davinci X was 6 last year and 11 last quarter. Placements outside of the U. S. Will continue to vary as some of the OUS markets are in the early stages of adoption, some markets are highly seasonal, reflecting budget cycles or vacation patterns, and sales into some markets are constrained by government limitations. Moving on to gross margin and operating expenses.
Pro form a gross margin for the second quarter of 2019 was 71.3%, compared with 71.1% for the second quarter of 2018 and 71.2% last quarter. The increase compared with the second quarter 2018 and last quarter primarily reflects higher system ASPs. Future margins will fluctuate based on the mix of our new products, the mix of systems and instrument and accessory revenue, system ASPs, and our ability to further reduced product costs and improved manufacturing efficiency. Pro form a operating expenses increased 27% compared with the second quarter of 2018, decreased 1% compared with last quarter. Spending is consistent with our plan and includes an order of magnitude of increase costs associated with in order to scale the business.
Our pro form a tax rate for the 2nd quarter was 20%, and within our expectations of 19% to 20%. Our tax rates will fluctuate with changes in the mix of U. S. And OUS income, changes in taxation made by local authorities and with the impact of one time items. Our 2020 tax rate will increase with the return of the medical device tax.
Our second quarter 2019 pro form a net income was $388,000,000 or $3.25 per share compared with $327,000,000 or $0.76 per share for the second quarter of 2018 $312,000,000 or $2.61 per share for the last quarter. I will now summarize our GAAP results. GAAP net income was $318,000,000 or $2.67 per share. For the second quarter of 2019 compared with GAAP net income of $255,000,000 or $2.15 per share for the second quarter of 2018 and GAAP net income of $307,000,000 or $2.56 per share for last quarter. The adjustments between pro form a and GAAP net income are outlined and quantified on our website and include excess tax benefits associated with employee stock awards, employee, equity and IP charges, amortization of intangibles and acquisition related items in legal settlements.
We ended the quarter with cash and investments of 5,100,000,000, approximately the same as March 31, 2019. Cash generated from operations was offset by stock repurchases and investments in working capital and infrastructure during the quarter. We repurchased approximately 400,000 shares for $200,000,000 at an average purchase price of $4.77 per share. In the quarter, we grew inventory by $45,000,000 to $513,000,000, representing approximately 1 140 days of inventory. We continue to build inventory to address the growth in the business as well as mitigate risks of disruption that could arise from trade, supply or other matters.
The growth in the business and our focus on efficiency and scale, we expect our capital expenditures will increase to over $250,000,000 in 20 19. And with that, I'd like to turn it over to Calvin, who will go over procedure performance and our outlook for 2019.
Thank you, Marshall. Our overall 2nd quarter procedure growth was 17% compared to 18% during the second quarter of 2018, and last quarter. Our Q2 procedure growth was driven by 16% growth in U. S. Procedures and 20% growth in OUS markets.
In the U. S, Q2 procedure results were generally consistent with recent trends. Q2 growth was again driven by growth in U. S. General Surgery Thurassic and benign gynecology procedures, Q2 2019 U.
S. Procedure growth was 16% compared to 17% last year and last quarter, reflecting anticipated slight moderation in mature urology and gynecology procedures and general surgery growth rates. In U. S. General surgery, 2nd quarter hernia repair and colorectal procedure growth remained solid, although at slightly lower growth rates, than last quarter cases made increasing contributions to procedure growth in mature urology and gynecology procedure categories moderated in Q2 compared to last year.
US gynecology growth and urology growth were in the mid single incident rate for prostate cancer. As a mature procedure category, we believe that our U. S. Prostatectomy volumes have been tracking to the broader prostate surgery market. In other U.
S. Procedures, adoption of lebectomies and other thoracic procedures was again solid during the second quarter. Second quarter OUS procedure volume quarter 2018 21% last quarter. 2nd quarter 2019 OUS procedure growth was driven by continued growth in DBP procedures, and earlier stage growth in kidney cancer procedures, general surgery and gynecology. Q2 O EOS procedure growth based modest working day wins due to the timing of the Easter holiday, mostly affecting Europe and other national holidays, particularly in Japan.
Japan procedure procedures as we reach higher levels of market penetration, the impact of holidays, and the anniversary of the new procedure reimbursements. In China, after several quarters of declining procedure growth, procedure growth accelerated slightly in Q2 driven by procedures performed on new systems installed under the latest system quota. In Europe, procedure growth was driven by strong results in Germany and France, Overall, European procedure growth was largely consistent with prior periods with variation by country. Now, turning to 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. We are pleased to see the evidence landscape regarding our recently cleared ion and aluminum systems start to grow.
A manuscript describing the first term and use experience led by Doctor. David Fielding from the Royal Brisbane And Women's Hospital in Brisbane, Australia has recently been accepted Conference in 2017, this study was designed to evaluate the safety and feasibility of the ION and Illumina platform, and included 20 peripheral part of the lung and the mean nodule size was approximately 15 millimeters, approximately 97% of the nodules were reached with a tissue sample suitable for assessment obtained. Importantly, across the entire study population No instances of pneumothorax, bleeding or device related adverse events were reported, suggesting a good safety profile. We believe that further scientific study and clinical evidence will be essential we initiated a post market clinical study called Precise, intending to enroll 360 subjects across 6 key centers in the United States. Full details regarding the construct of the PRECICE study are available on the web at clinicaltrials dotgov.
In May of this year, a large scale real world comparative study using the National Cancer database was published in the journal colorectal disease. The analysis led by Doctor. Ravi Kieran from New York Presbyterian Columbia University Medical Center compared the results of over 40 1000 patients from between 2010 2015 by surgical approach. The national cancer database captures data from over 1500 cancer accredited facilities and represents approximately 70% of newly diagnosed endoscopic and 52% open procedures. In propensity score matched analysis, with over 4000 subjects in each cohort, comparing the robotic LAR approach to the laparoscopic approach, the robotic LAR was associated with shorter length of stay.
6.3 days versus 6.8 days and lower risk of conversion to open 7.5% versus 14.95% with multi varied analysis showing laparoscopic LAR patient being 2.2 times more likely to be converted to open. Compared to open LAR, the robotic assisted approach had shorter length of stay. 6.3 days versus 7.8 days, a higher rate of negative margins, 97.01% versus 95.96% and higher nodal yield 17 versus 16.4. The authors concluded, and I quote, for patients with rectal cancer, robotic LAR shows recovery benefits over both open and laparoscopic LAR with reduced conversion to open compared with laparoscopic LAR and less prolonged length of stay compared with laparoscopic LAR and open LAR. Robotic LAR is associated with short porting its use in minimally invasive surgery for rectal cancer.
I will now turn to our financial outlook for 2019. Starting with procedures. Last quarter, we forecast 2019 procedure growth of 15% to 17% We are now refining 16% to 17%. Full year pro form a gross profit margin to be within 70% 71% of net revenue We now expect regional and trade and mix and the impact of new product introductions. Turning to operating expenses, we continue to expect to grow pro form a 2019 operating expenses between 24% 28% above 2018 levels.
We continue to expect our non cash stock compensation expense to range between $320,000,000 $340,000,000 in 20 19. We expect other income, which is comprised mostly of interest income to total between $130,000,000 $135,000,000 in 20.19. Up from $120,000,000 to $130,000,000 forecast on our last call. With regard to income tax, we continue to estimate our 2019 pro form a income tax rate to be between 19% 20% of pretax income. That concludes our prepared
And our first question comes from the line of Bob Hopkins with Bank of America. Please go ahead.
First question I want to ask about, U. S. Procedure growth. If I ask the overall Q2 U. S.
Growth on the procedure side, accelerated a little bit when you take into consideration the year, rigle comp, but you called out some slight moderation in hernia and colorectal. Was wondering if you could just talk about that a little bit. Like, was that, was the growth you experienced in hernia and colorectal this quarter different than you expected? And how do you manage through this issue of kind of managing access? Thank you.
Yes, this is Gary. We saw a tad of moderation, I think demand remains strong. And what we're really seeing is what we indicated to you. We have 2 things going on. One is There are a lot of different procedure types and now in busy centers, competition for system access, we can, of course, solve that with additional systems placed, as well as work with folks on efficiency of use, and we're doing both.
And you've heard that from us over the last several quarters. The next one is our commercial teams have been growing in the United States to support the growth of the company. And it takes some time to have teams come up to full productivity. And we're the percentage of new folks in new territories has been ticking up the last couple of quarters, and it's the new ratio is, amongst the highest we've had in the last few. Employee retention has been great.
It's really around increased need to get increased case coverage. And so there, it's supporting our new folks in the field with, tools and some of it is just time on task
Yes, Bob, you know, from a just a pure mathematical standpoint, you know, we track adoption curves pretty regularly around here and it's it's a mathematical reality that really all points along the curve, the rate of growth actually declines. So our results here Q2 is aligned with what we would have expected. And clearly, there's a substantial remaining opportunity in both hernia and colorectal procedures and surgeons generally indicate healthy demand.
That's great. Thank you for the color. And then just one on the system side, because revenue growth from system sales this quarter was, much higher than the first quarter due to mix, as you called out. But the placement numbers and the placement growth in both quarters suggest very strong underlying demand for your systems in both quarters. I was just wondering if you could talk a little bit about the differences you saw from Q1 to Q2 in that mix dynamic, and what that suggests about the outlook for the rest of the year on systems side.
Thank you.
Yes, we're, this is Marshall. We have seen, as you suggested, reasonable strength in terms of system placements, I don't think there's anything really different quarter to quarter other than the mix. And in other words, the buying behaviors of the customers hasn't changed. We're seeing, a nice cycle on, trade outs. And, but we did see, again, more excise this quarter And there's volatility or variability between quarter to quarter as it relates to, particularly our distribution channel.
And so we saw a fewer distributors sales this quarter and more direct sales. And our direct sales are at a higher price than what we saw to our the cost associated with those systems. So that's really, that's the color that we would provide on, on, systems revenue.
Great. Thank you.
Marshall, is it fair to look at it and say, you know, if you view the first half as a whole rather than in different quarters, you get a better picture?
That's true, Gary. You should, when you look at the ASPs, you should think about the combination of the 2, because 1.31 was a low point and 1.54 is a high point.
Next question comes from the line of Tycho Peterson with JP Morgan. Please go ahead. Hey, thanks.
Maybe I'll just follow-up on that question, why should ASPs take a little bit of a step back? You did use to skew more toward fully featured system sales. Obviously, your procedure mix expanding, why logically should ASP step down a little bit going forward?
You should expect that the, again, distributor sales tend to be, variable quarter to quarter. So I think you should blend the first quarter and the second quarter when you're looking at what level of the distributor sales, you should expect. And then I think, same thing with the mix of XIX just depending on the geography, X is targeting, geographies where reimbursements are pressured. And so, this quarter, just based on mix, we wound up selling fewer X's, and that should even out as well.
And we've had a couple of quarters now of operating leases and kind of the low 30s. It was 29% at the end of last year. Is this kind of the new norm in your view or how should we think about operating in terms of mix going forward?
I don't think about it as a norm. I think that there's going to be variability quarter to quarter. And yeah, Q2 was slightly lower, if not close to being same as Q1. But I think over time, we will accommodate, And we think that, on the other hand, leases that increases the recurring revenue eliminates volatility. It also enables a, upgrade cycle when and if, new systems come out.
So, we think it's a positive, and so we'll supply those to customers as they ask for them, I would guess that over time, we're predicting over time that there's the possibility that the percentage actually will increase.
Okay. And then on Iris, I know it's early days. I didn't really hear you bring it up in the comments, but can you just talk a little bit about interest levels for kidney and liver and how we should think about the expanded use of that going forward?
I think interest from the forward leading surgeons is very high. I think in general, people looking out saying additional access to data. Iris, just a reminder for everybody, is the integration of preoperative imaging, 3 d imaging into a case in real time. We're not in the clinic yet. We do have our 510 clearance.
We're working through agreements with first customers, we don't expect revenue this, this year. I think directionally, there's quite a lot of support. I think part of what we want to develop in the market as we go forward are use cases and really getting the value statement for them in terms of what it drives either accuracy or efficiency or both. Early response is great, but these things take a little time to develop and, and to develop the evidence base that goes behind it.
Okay. Thank you.
Next question comes from the line of David Lewis with Morgan Stanley. Please go ahead.
Good afternoon. A couple of questions here. I'll start with Gary. Gary, last year, procedures began to inflect from a mental perspective and they still remain pretty strong. As you think about the next inflection for procedure growth, I mean, do you think it's more likely that it comes from in new systems, obviously, SPI on, creating this access you've already talked about on this call or accessing new geographies, your Japan and China.
I noticed you already in that comment that just a few systems in Japan, sorry, in China, was able to drive some demand. So across those three buckets, Gary systems, access geographies, what is the most likely driver of the next wave of procedure inflection?
I think in the near term, access in core markets, is going to be important. And, you know, it's, what's been nice here in the last few years is the procedure base has been building. So, healthy double digit growth rates and procedures, in absolute growth numbers are starting to become substantial and making sure that, those surgeons who want access to the system have it has been important. It's been one of the drivers for, our increased flexibility and agility and capital acquisition models. As you look at SP and ion, Both of those are interesting platforms that I think over time will expand the total available market for robotic systems in diagnostics and in single port or single access surgery, they take some time to develop and the speed with which they develop is, as I said in the script, paste by additional indications and manufacturing scale.
Longer term, I think those things are exciting, but it'll take some time to go through Geography, we've seen real successes, but they take time. Japan has been a great success. They're doing a really nice job. It is really heavy lifting to do all the things required, to build market access from Procter And Networks to training centers to clinical evidence base to support additional adoption. So I think those things are important.
We have invested in them and we'll continue to do so. So short answer, maybe not a perfect modeling answer, but I'll leave that to you.
Okay. And then just maybe a follow-up if you get, I'm just trying to get a sense of thinking about the SP rollout and the iron rollout. Your iron commentary was fairly consistent with the first quarter. If I think about the first four quarters of SP, obviously, exiting out the manufacturing issues last quarter, do you see ION rolling out from a system placement perspective in a similar fashion to SP is there a reason why it would be faster in the 1st 4 quarter commercialization or slower? Thanks so much.
Yes, I'd anticipate, a measured in this 1st, 1st four quarters of launch as we optimize our systems on our side and also are gathering our data. After that, we'll see. I don't think I've predicted one way or another for you. The indications in ion, we feel pretty good about to get started. I think the size of that market is real.
And so we'll see a year from now, I think, as to how fast we want to move. On SP, has, I think, great long term potential if it requires additional, clearances in the U. S. Anyway to keep moving. And so we'll do that in sequence.
Next, we'll go to the line of Amit Hassan with Citigroup. Please go ahead.
Thanks. Hey, good afternoon guys. Let me start with one on the quarter and just follow that to that. So on the quarter, the I and A versus procedures, I and A was up 22%, procedures up 17%. That's the widest gap I can recall in a little while.
You touched on it a bit, but maybe just a little bit more color, is that the new and advanced instruments driving something that's sustainable or are there one time things in there that we should consider?
Yes, I think in general, we have seen increasing, revenue, instrument accessory revenue per procedure. Obviously, there's variability by quarter based mostly on the timing of customer orders. But in general, we've been gradually increasing. And the biggest aspect of that has been increasing usage of the advanced instruments from vessel sealing, the vessel sealer extend. We launched recently now to stapling as well in the 60 millimeter state where we launched last year and more fully available this year in the U.
S. So I think that's been the biggest factor that probably been more than offsetting most everything else, whether it's more, procedures in general surgery, hernia repair, others that may be lower, lower tool usage. So I think that's the biggest factor there.
And just a slightly longer term question on flexible endoscopy with surgical instruments. One of your bigger future robotic competitors has been talking about this publicly now for the first time in just the past month or so. Can you talk to what priority this is for intuitive? What you can tell us about the opportunity from a robotics perspective?
Sure. In general, as we've described before, we like to think in platforms. And what I mean by that is if we can build some core technologies from advanced imaging to a great precision to great software that we can mix and match those core capabilities to pursue different endpoints, clinically. And so when you look at SP, SP is, exceptionally powerful system that brings together, 4 instruments through a single access point. If you look at ion and ion has exquisite sensing and a flexible, endoscopy or a flexible diagnostic platform Over time, I think those 2 different sets of ingredients give us a lot of opportunity and optionality.
And so I think those things are interesting and they could open for us additional clinical markets over the long term. That said, product design is is subtle. And, architectural choices are really, really important. Doing it right, getting a great clinical outcome comes down to submillimeter precision and, microsecond timings of these electronics. As a result, we want to make sure that we really deliver on the things we put in the market from SP to ION.
So, We're not sprinting to go as broad as possible. We really want to make sure we deliver, against the commitments we make and for the customers who purchase our products. There's a fair amount of, history out there of companies that have failed to attend to the details and start strong in Peter Al. And so we're careful and thoughtful about it.
Next question comes from the line of Larry Biegelsen with Wells Fargo. Please go ahead.
Thanks guys. Thanks for taking the questions. First, could you talk about the strategic and financial implications of the fiber optics acquisition? And I had one follow-up.
Sure. I'll speak to why we did it. This is a, Chile is a strong team and and a supply chain partner that has been important for us over many years. Clearly, great imaging, imaging manufacturing capability, design capability, image processing, is a core part of the surgery of the future and, interventions of the future. As we've grown, we've wanted to make sure that we can to invest in that, space, both on the design side and on manufacturing and production capability side.
It's been a great partnership with that team. We respect them and, and have been very productive with them. And so that gives us additional optionality and agility going forward in a core part of our business. On more of a deal specifics and logistics. I'll turn it over to Marshall.
So we entered into an agreement to acquire certain assets and operations from Scholey. For her cash consideration of approximately $100,000,000. The exact amount of the consideration and timing of the closing, is subject to certain closing conditions. And so that will occur, over the next future periods. And the employees will transfer after each of the closing events occurs.
Thanks, Marshall. And then, on ION, we haven't heard talked about the opportunity or timing outside the U. S. What's the status, particularly in China? And rest of the world.
Thanks for taking the questions guys.
Yes. On the, specifics on China, we're in discussions. With the Chinese regulatory agencies about how best to bring it to market and timing there. I don't have a definitive answer for you yet, but it's an active discussion. Clearly, we believe there are, you to bring in China and in Europe and in other markets.
And we'll take it in sequence. We think this is a powerful set of technologies in a powerful platform. We are still in the early days. Our greatest organizational focus right now is on really understanding the technology and the use of it, carefully. The early clinical results are great and they are differentiated relative to other products in the market.
So far in these early days. That's really important to us. We will focus there. And as we build strength and, and experience and scale, then it gives us a lot of opportunities to engage the rest of the world.
Next we go to the line of Lawrence Keusch with Raymond James. Please go ahead.
Great, thanks. This is John Hsu on for Larry. Maybe if we could start without providing guidance for 2020, can you give us some high level guidepost for how we should generally think about investment spend next year going into 2019. You obviously had a lot of products on your plate this year, but just any high level color would be greatly appreciated.
Well, we'll give you a better color when it comes to January about what's going to happen next year. But the things that we're investing in are not short term investments. They take, they occur over a long period. And so you should expect that spending will continue to continue on those and on other matters going forward. And as we grow the company, of course, there's an increased amount of support necessary to grow the company, particularly on the sales side in terms of personnel and commissions.
And so I think, spending will increase. I won't give you anything more specific than that until we get later in the year.
Maybe I'll just speak for lots of people, but we think the opportunity for, improved performance and therefore opportunities for the business are substantial. And what paces us is to how we decide how much we'll invest and when is that, which we think we can do, with excellence. Generally speaking, we see more opportunity than we think we can pursue. We wind up saying no to some things that are probably good ideas we don't know that we can perform them well. And so that's what balances our, investment portfolio And we'll continue to use that philosophy as we plan out 2020 and go forward.
Great. And then just on the balance sheet, you obviously have $5,000,000,000 plus in cash. You bought back some stock in the quarter. You also did a tuck in acquisition for imaging capabilities. Can you just remind us how you think about your capital deployment priorities at this point?
Yes. The philosophy and approach to capital deployment hasn't really changed But to remind you, we think about, that cash obviously to operate the company. We're making investments in our future. The, we want cash. The market is volatile in terms of, the environment volatile in terms of, tariffs and other things going on.
We want to make sure we've got proper investments to be able to deal with those. And then, ultimately, we look for opportunities to buy back stock and returns cash to shareholders.
Okay, great. And then just I could see one last one in on the tax rate. I think you mentioned the medical device tax coming back in 2020. By my estimate, I think we're coming up with an impact of roughly $30,000,000. Is that a decent ballpark for how you're thinking about the impact of product gross margin in 2020?
Yes, when we're talking about medical device tax, we were recognizing in the past, we charged that expense item to cost of sales. So it impacts our gross margin there. We saw an impact around 70 to 100 basis points then and it's probably a similar kind of impact should that be reenacted.
Next, we'll go to the line of JP McKim with Piper Jaffray. Please go ahead.
Hi, good afternoon. Thanks for taking my question. I wanted to ask one on just this push to on trade ins and upgrading the installed base to generation 4. I think after last quarter, I think half installed base is still older generation. So can you give us an update on where that is today?
And then just how strategically, how important is that to you to get everyone on Gen 4 ahead of competition that in theory should come sometime next year or after that?
Yes, I'll give you the numbers and let Gary talk to strategy. You heard on this call was another 38% of our system sales involved trade ins this quarter. It's likely to continue to be a significant part of our capital sales and future periods At this point in time, it is about 45% of our installed base of 50, 270 systems that are, Gen III and prior, mostly SIs.
We think it helps. I mean, after the strategy, we think our our customers appreciate it. Many customers now are multi system, owners or across their integrated delivery network. They have, systems at different hospitals where surgeons visit. So having consistency helps them Gen4 products have a greater access to advanced instruments and other technologies, and are well appreciated.
So in that sense, We think we can lean in and help those organizations go do it. There's a different set of regulatory, clearances in different countries around the world. There are different trade and economics in each country. So, as you think about the analysis, you think a little bit about which region and which country can move most quickly and we work through that as well.
Okay. And then if I could ask one on just the comments you made on the general surgery dynamics attorney and some of the other ones are tempering based on just law of large numbers, but the shift to bariatrics and some more on COLI, I mean, the shift in turn on General Security, what does that do for your Insulin ASPs? Are they more advanced instruments as you shift to different procedures in general surgery?
Highly variable. You look at COLI's, those are lower revenue procedure cases, you look at bariatrics, it's the other side where a lot of staple fires are used. So it's a highly variable landscape.
Bariatrics is in early innings. And, as we start to optimize the instrument kit, their end, we're seeing really pull from the market there. We haven't changed our priorities in, the U. S. Sales force with regard to general surgery.
We continue to believe there is opportunity and value in, of course, hernia colorectal procedures, the, the bariatric side are really customers coming to us and starting to move that along.
Thank you.
Next we go to the line of Richard Nowitter with SVB Leerink. Please go ahead.
Hi, thanks. I have 2 in housekeeping. With the housekeeping, can you just quantify what the selling day headwind was, what your procedure growth would have been excluding the not the selling, given some of the headwinds that you had described related to the holiday timing and whatnot. And then, Gary, I was wondering if there with respect to the the capacity issues, just getting robot time.
Are there certain types of procedure mix
cases or certain types of institutions where you can practically get in front of those capacity issues, to get there before they occur. And is there any kind of characteristic of the institution's procedure mix that, specifically is leading to the capacity constraints?
Yes. First, on the working days, really minor in the quarter, not a big thing. We mentioned in the commentary overall, maybe a 30 ish basis point impact on the on procedure volume with a much larger attributable outside the U. S. Due to the timing of the Easter?
On the capacity side, as we've said in the past, our customer base doesn't, one size does not fit all, not each institution runs with different operating cadences within their organization. So in some places, we see extremely efficient capital utilization, really focused factory approach where they have very high predictability and get a lot of procedures out of the system. We're delighted to support that and we help to benchmark and teach others as they needed. We see other institutions that, for various reasons, are operating at lower capital capacity for some reasons that are quite good. Some may be teaching institutions, some may be institutions that take on the most complex comorbid, patient sets where predictability of procedure duration is difficult So you can imagine if you're sharing a system between a thoracic surgeon who's performing lung cancer procedures and and a general surgeon who's doing hernia repairs, the cadences and rhythms and scheduling are quite different and you're going to get less optimal scheduling.
To the extent that we can have those conversations upfront and help them optimize we do, that's something we've been strengthening over time. So I think we can do better than we do today.
Great. Thanks. If I get one more, just the China utilization pickup on just eight systems placed under the quota. Did that surprise you that it was able to translate into a pickup in volumes so quickly? It was also the impression that you needed.
There was going to be a lag time to train institutions, if you could comment there. Thanks.
I don't know if we were surprised that I'd say we were pleased. That tells you the level of commitment and, motivation of those customers to make their investment productive. Last questioner, please.
The last question comes from the line of Imran Zafar with Deutsche Bank. Please go ahead.
Hi, good afternoon. Thanks a lot for taking my question. First question is on Japan. I believe you noted some moderation in procedure growth there, but at the same time, we're still seeing some very strong capital equipment placement numbers this quarter. Can you just sort of give us some color on what's driving these placements?
Is it more sort of greenfield robotics programs that are looking to get into presumably urology, or is it the established customers wanting to get more into general surgery, in light of sort of the West incentive that they have. I'm just wondering if there's any if the growth should continue to slow going forward in general surgery?
It's a combination of greenfields for where you have hospitals that, are positioning themselves to do, the newer procedures that were approved for reimbursement last year. And there's still a trade in cycle going on in Japan. Our distributor had sold SIs on leases. And as those leases are coming up, are coming due, then we see customers wanting to upgrade to, to the newer technology.
Okay. Thank you. And then, we've heard some mention from, some surgeons on some, third parties that hospitals can ship instruments to that are approaching the end of their useful life and that this limited, useful life can be extended, presumably via some sort of a software intervention or something. Is this something that you're seeing any impact from, or is there any regulatory, preclusion that, that would limit the ability for companies to do this kind of stuff?
On the, on the, how good an idea is it the, the people who reprocess like that are bound by the same regulatory framework that we are in terms of assuring, the quality of that product. And and making sure it's not sold as an adulterated product. And they have to, take on that burden and it is a sophisticated one. Calvin will let you respond?
No, yeah, I think that's essentially it.
In terms of materiality, I don't Yes,
and you look at our revenue per procedure, I mean, it's, we've talked about that a little I don't think we've seen any impact on that.
Opportunity to fundamentally improve surgery and acute intervention. Our teams continue to work closely with hospitals, physicians, and care teams in pursuit of what our customers have termed that quadruple aim, better, more predictable patient outcomes, better experiences for patients, better experiences for the care teams, ultimately a lower total cost to treat. We believe that accomplishing the same takes the integration of 3 elements: 1st, a deep understanding of the human interactions across the continuum of care 2nd, smart and connected systems, imaging and instruments that augment care teams and 3rd, the ability to measure impact through analytic insights and translation of these insights into action driving positive change. Thank you for support on this extraordinary journey. We look forward to talking with you again in 3
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