Ladies and gentlemen, thank you for standing by. Welcome to the Intuitive Surgical Q1 2019 Earnings Release Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and and as a reminder, this conference is being recorded. I'd now like to turn the conference over to Calvin Darling, Senior Director of Finance, Investor Relations.
Please go ahead.
Thank you. Good afternoon. Welcome to Intuitive Surgical 1st quarter earnings conference call. With me today, we have Gary Guthardt, 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 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. 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 page. In addition, today's press release and supplementary financial Today's format will consist of providing you with highlights of our first quarter results as described in our press release announced earlier today, followed by a question and answer session.
Gary will present the quarter's business and operational highlights. Marshall will provide a review of our first quarter financial results Then I will discuss procedures and clinical highlights and provide our updated financial outlook for 2019. And final we will host a question and answer session. With that, I'll turn it over to Gary.
This first quarter was a solid start to 2019 for Intuitive, Customer response to our products and services is healthy with continued growth in their use of da Vinci to deliver high quality, minimally invasive surgery to a broad base of patients. As I've said in the past, I believe that outstanding product design, robotics, advanced imaging and informatics are just starting to take their place in surgery and in acute interventions more broadly. We have a substantial opportunity and there is significant work to be done. Global procedure growth was strong at approximately 18% in the 1st quarter 2019. Drivers of growth remain consistent with our trailing several quarters with growth in general surgery accounting for strengthening States.
Growth in Japan continues to be healthy with strength in urology, gastrectomy and colorectal procedures. Growth in China met our expectations given constraints on capital placements. Placements of new systems in the quarter was strong 27% from Q1 of 2018. Net of trade ins and retirements, our da Vinci installed base, again, grew 13% over Q1 2018, to approximately 5110. Customers pursue the features of our generation 4 systems and some hospitals seek to standardize.
As we discussed on our previous earnings calls, customers are interested in leasing including usage based models. In Q1 of this year. The increase in trade ins, leasing and usage based models aligns with our strategy in supporting customers. It allows them greater flexibility to have the right systems and the right care delivery environments. For the investor, it can make revenue modeling for systems harder to evaluate relative to prior quarters as trade ins impact our reported ASP and leasing defers revenue to future quarters.
Marshall will take you through greater detail later in the call. Turning to expenses, we described our plans for increased investment in 2019 as we launched new platforms strengthen our computational capabilities and invest in projects that support future scale and provide leverage opportunities as we grow. Over the past year, we've seen our increased flexibility with customers, catalyze growth, which in turn enables us to invest in manufacturing efficiencies that lower our costs. Our spending fell near the top end of the range of projections we shared with you last quarter, supported by procedure growth above the top end of our procedure guidance range Financial highlights of our first quarter are as follows. Procedures grew approximately 18% for the first quarter of last year.
We placed 235 Da Vinci Surgical Systems, up from 185 in the first quarter of 2018. Our installed base again grew 13% from a year ago. Revenue for the quarter was approximately $974,000,000, up 15%. Pro form a gross profit margin was 71.2% compared to 71.6% in the first quarter last year. Instrument and accessory revenue increased to $552,000,000, up 20%.
Total recurring revenue in the quarter was 7 $47,000,000, growing 20 percent over Q1 of twenty eighteen and representing 77% total revenue. We generated a pro form a operating profit of $362,000,000 in the quarter, up 4% from the first quarter last year. And pro form a net income was $312,000,000, up 9%. 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 to treat, for patient episode. Real progress requires more than minimally invasive tools and more than digital technologies.
These technologies are necessary but not sufficient. We believe intelligent surgery takes the integration of 3 elements: First, a deep understanding of human interactions that 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. While we've made significant progress over our history, we believe continuous improvement is required, and we have deployed our investments 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. Our team is in the process of launching several sophisticated products in pursuit of the same and customers are now adopting them broadly.
Our 60 millimeter stapler is now in launch and is used primarily in abdominal surgeries. Our 2nd generation 45 millimeter stapler has recently received 510 clearance. Incorporating several of the learnings from our 80 millimeter line. Surgeon response has been strong and adoption of our stapling line is encouraging. We also launched our 3rd generation vessel sealer.
Its adoption has likewise been strong. Turning to systems, we are in our 1st phase launch of da Vinci SP. We installed 6 systems in Q1, constrained in the quarter by manufacturing availability and bringing our clinical installed base of SP to 21. Roughly 800 procedures have been performed today. Recall we have 2 cleared indications for SP, urologic and transoral surgery.
Surgeon and patient feedback have been positive continued progress in strengthening our production performance to support SP launch at scale. As we've described in the past, we are also pursuing additional clinical indications for SP, and have engaged regulatory agencies regarding their requirements The combination of additional indications for SP production readiness at scale will pace the speed of SP early diagnosis of suspicious lesions for lung cancer. ION received FDA clearance in the first quarter With 510 clearance, we have initiated our next phase focused on clinical use, customer feedback, and production optimization. First cases on the cleared system were performed at the end of Q1 and we plan a measured rollout this year. We do not anticipate material revenues from ION in 2019.
In our cloud computing and informatics efforts, we routinely deliver programmatic insights to our customers using our systems. Which have been smart and connected for 19 focused on several high volume da Vinci institutions that will lead clinical evaluation and analysis. We do not anticipate any revenue from our 2019. In closing, our business fundamentals are strong and 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 iron platforms 3rd, driving intelligent surgery innovation and finally, supporting additional clinical and economic validation in our focused procedures and countries.
I'll now turn the call over to Marshall who will review financial highlights.
Good afternoon. I'll describe the highlights of our performance on a non GAAP or pro form a basis I will also summarize our GAAP performance later in my remarks. A reconciliation between our pro form a and GAAP results is posted on our website. Key business metrics for the first quarter were as follows: first quarter 2019 procedures increased approximately 18% compared with the first quarter and urology worldwide. Calvin will review details of procedure growth later in this call.
1st quarter system placements 235 systems increased 27% compared with 185 systems last year and decreased from the 290 system placements in our seasonally stronger 4th quarter. We expanded our installed base of da Vinci systems by 13% to approximately 1110 systems, which is consistent with the 4th quarter and slightly higher than the 12.6% increase last year. Utilization of current clinical systems in the field measured by procedures per system grew in the mid single digits. Our revenue overview is as follows: first quarter 2019 revenue was $974,000,000, an increase of 15% compared with $848,000,000 for the first quarter of 2018, and a decrease of 7% compared with a seasonally stronger 4th quarter revenue of $1,047,000,000. Instrument and accessory revenue of 5 $52,000,000 increased 20% compared with last year, which is higher than procedure growth, primarily reflecting increased use of our advanced and customer buying patterns.
Instrument and accessory revenue realized per procedure was approximately $1960 an increase of 2% compared with the first quarter of 2018 and an increase of 4% compared with last quarter. Systems revenue for the first quarter of 2019 was $248,000,000, an increase of 6% compared with the first quarter of 2018 and a decrease of 27 compared with last quarter. The variation between 6% systems revenue growth and the 27% system placements growth reflects greater proportion of operating leases, a greater proportion of system trade ins, a greater proportion of X systems, a higher mix of distributor placements and volume based discounts provided to customers purchasing multiple systems. We completed 78 operating lease transactions, representing 33% of total placements compared with 43 or 23% of total placements in the first quarter of 2018 84, 29% of total placements last quarter. As of March 31, we have 4 23 operating leases outstanding and realized approximately $20,000,000 of revenue related to these arrangements in the quarter.
Compared with $10,000,000 last year $16,000,000 last quarter. Operating leases create a future source of recurring revenue and reduce the volatility of system revenue. While the increased number of operating systems placed in the quarter dampened short term revenue growth for the quarter in which they are placed. Operating leases include usage based financing that we provide to certain experienced hospitals. We believe that 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 anticipated usage The proportion of these types of arrangements could increase long term and will be lumpy quarter to quarter. 36% of the current quarter system placements involved trade ins, reflecting customer desire to access or standardize on our 4th generation technology, This is an increase in the proportion of trade ins compared to 31% in the first quarter of 2018 28% last quarter. Trading activity can be lumpy and difficult to predict. 67% of the systems placed in the quarter were da Vinci XIs, 25% were da Vinci X systems compared with 73% da Vinci XIs and 18% da Vinci X's last quarter. 6 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. As mentioned by Gary, SP production was constrained in the first quarter. Globally, our average selling price, which excludes the impact of operating leases and lease buyouts, was approximately 1.31000000 dollars compared with $1,490,000 last year $1,460,000 last quarter. The changes compared with prior periods primarily reflect a greater portion of trade in transactions. Volume based incentives provided customers purchasing multiple system a greater proportion of X systems and higher proportion of distributor sales.
Outside of the U. S. Results were as follows: OUS procedures grew approximately 21% compared with the first quarter of 2018 and increased 6% compared with last quarter. First quarter revenue outside of the U. S.
Of $282,000,000 increased 3% compared with the first quarter of 2018 and decreased 8% compared with last quarter. The 3% year over year revenue distributor arrangements and had greater proportion of operating leases. Outside the U. S, we placed 81 systems in the first quarter compared with 73 in the first quarter of 2018 and 115 systems last quarter. Current quarter system placements included 49 into Europe, 13 into Japan, 8 into Brazil and 3 into China.
36 or 44% of the systems placed in the first quarter were systems compared with 19% last year and 30% last quarter. 11 of the system placements were operating leases compared with 1 last year and 15 last quarter. Placements outside the U. S. Will continue to be lumpy as some of the O U.
S. Markets are in early stages of adoption Some markets are highly seasonal, reflecting budget cycles or vacation patterns, and sales into some markets are constrained by government limitations. Moving on to gross margin and operating expenses. Pro form a gross margin for the first quarter of 2019 was 71.2%, compared with 71.6% for the first quarter of 2018 71.8% last quarter. The decrease compared with the first quarter of 2018 last quarter primarily reflects lower system ASPs and a higher mix of advanced instruments per partially offset by improvements in manufacturing efficiency.
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 reduce product cost and improved manufacturing efficiency. Pro form a operating expenses increased 27% compared with the first quarter of 2018, and decreased 2% compared with last quarter. 4th quarter 2018 operating expenses included a $25,000,000 contribution to the newly formed Intuitive Foundation. Excluding the Contribution And Foundation, pro form a operating expenses increased 5%. Compared with last quarter.
In order of magnitude of increase, first quarter expenses reflect costs associated with expansion of our OUS markets, spending on our informatics capabilities and investment in our infrastructure in order to scale the business. Our pro form a effective tax rate for the Our tax rates will fluctuate with changes in the mix of U. S. And OUS income and changes in taxation made by local authorities and with the impact of $6.1 per share compared with $288,000,000 or $2.44 per share for the first quarter of 2018 353,000,000 or $2.96 per share for the fourth quarter of 2018. I will now summarize our GAAP results.
GAAP net income was $307,000,000 or $2.56 per share for
the first quarter of
2019. Compared with GAAP net income of $288,000,000 or $2.44 per share for the first quarter of 2018 and GAAP net income of $293,000,000 or $2.45 per share for the fourth quarter of 2018. The adjustments between pro form a and GAAP net income are outlined and quantified on our website and include excess tax benefits associated with stock awards, employee equity and IP charges, and legal settlements. We ended the quarter with cash and investments of 5,100,000,000 compared with $4,800,000,000 at December 31, 2018. The increase generally reflects cash generated from operations partially offset by investments in working capital and infrastructure.
In the quarter, we grew inventory by approximately 60,000,000 $468,000,000 to $468,000,000, representing approximately 1 the growth in the business as well as mitigate risks of disruption that could arise from trade, supplier or other matters. With the growth in the business and our focus on efficiency and scale, we expect capital expenditures will increase to over $250,000,000 in 20.19 In January, our Board of Directors increased our stock buyback authorization to $2,000,000,000. We did not repurchase any shares in the quarter. And with that, I'd like to turn it over to Calvin, who will go over procedure performance, and we'll update our outlook for 2019. Thank you, Marshall.
Last quarter. Our Q1 procedure growth was driven by 17% growth in U. S. Procedures and 21% growth in OUS markets. In the U.
S, Q1 procedure results were generally consistent with recent trends. Q1 growth was again driven by growth in U. S. General Surgery Thurassic and benign gynecology procedures. In general surgery, 1st quarter hernia repair and colorectal procedure growth remains strong, while growth in other general surgery procedures such as cholecystectomy, bariatric and liver and pancreatic cases also contributed to grow 1st quarter U.
S. Gynecology continued to grow in the mid single digits, driven by benign hysterectomy procedures Our data continues to indicate an increasing proportion of overall gynecology procedures are being performed by gynecologic oncologists. In addition, our recently launched vessel sealer Extend instrument is increasingly being adopted by gynecologists. U. S.
Urology 1st quarter growth moderated a bit in Q1, driven by prostatectomy, which moved closer to the underlying incident rate 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 lebectomy and other thoracic procedures was again solid in the first quarter. 1st quarter OUS procedure volume grew 21% compared with 18% for the first quarter 2018 24% last quarter. First 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. 2 weeks ago, we attended the Society of American Gastrointestinal And Endoscopic Surgeons for Sage's Conference in Baltimore.
SAGES is one of the largest general surgery meetings each year attended by many of the world's leading general surge We were encouraged by the emerging consensus view regarding the value of robotic assisted approaches in general surgery procedures. Our booth was highly visited by surgeons interested in hands on access to the full breadth of our generation 4 platform including the da Vinci XIX and SP systems on the floor and our advanced instrumentation, including the SureForm Surgical Stapler. The Sage's conference emphasizes clinical evidence and I will share with you one of the e posters presented at the event analyzing real world evidence. 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.
At this year's SAGES, Doctor. Elizabeth Raskin from Loma Linden University presented research titled reducing variability and outcome conversion rate analysis and minimally invasive sigmoidectomy. The study used the premier healthcare database selecting data from institutions performing at least 100 laparoscopic assisted or robotic assisted sigmoidectomy cases between 2013 2015. Data for 8821 patients from 75 hospitals were analyzed The median conversion rate for minimally invasive surgery to open surgery across the entire sample was 10.85%. The data was split between Among patients from the higher conversion rate hospitals, the conversion rate for lap procedures was 18.41 percent compared to 11.33% for robotic assisted among patients from lower conversion rate hospitals The conversion rate for lap assisted cases was 7.33% compared to 2.89% for the robotic cases.
After adjusting for variables, the lab patients in the higher conversion rate hospitals had 75% more risk of converting to open approach. In the lower conversion group laparoscopic approach was found to be While we're encouraged by significant remaining opportunity for surgeons to drive conversion rates meaningfully lower, which has the potential to improve outcomes and patient experience. Furthermore, as evidenced by the large gap between the higher and lower conversion rate hospitals there remains significant opportunity to reduce the variability of outcomes across care teams. Starting with procedures. On our last call, we forecast full year 2019 procedure growth within a range of 13% to 17%.
We are now refining our With respect to revenue, as we have mentioned previously in mature markets, capital sales are ultimately driven by procedure growth. Catalyzing hospitals to establish or expand robotic system capacity. Capital sales revenue can vary substantially from period to period based upon many factors including U. S. Healthcare policy, hospital capital spending cycles, reimbursement and government quotas, product cycles, economic cycles, and competitive factors.
Indeed, the impact of leasing, trade in and product mix are reflected in our systems revenue results for Q1. While these factors are aligned with our strategy and positive business levers, the revenue result was lower than historical norms relative to the number of systems placed. Looking forward, we expect continued variation by quarter and we expect to continue to see meaningful proportions of capital placements involving trade our pro form a gross profit margin to be within a range of between 70% 71% of net revenue. Our actual gross the as Gary and Marshall outlined, expect to 18 levels compared to the 20 stock compensation expense to range between $320,000,000 $340,000,000 in 2019 compared with 310 to $340,000,000 forecast on our last call. We continue to expect other income which has comprised mostly of interest income to total between $120,000,000 $130,000,000 in 20.19.
With regard to income tax, we continue to estimate our 2019 pro form a income tax rate to be between 19% 20% of pre tax income. That concludes our prepared remarks we will now open the call
Our first question will come from Tycho Peterson at JP Morgan. Please go ahead.
Hey, thanks Maybe I'll start with bariatric. Obviously, a lot of excitement coming out of stages on the opportunity around bariatric. Gary, can you just talk about the ramp and the traction you're seeing between gastric bypass leads, Redews, and, you know, if we think about the 180,000 sectors in the U. S, what do you think the adoption curve looks like over the next couple of years?
Thank you. For starters on bariatrics, we're excited about the long term opportunity. And as you described, there's interest in all of the procedures subcategories you've laid out, I'll I'll, in a minute, turn it over to Calvin and speak a little bit about sizing. Where we are in terms of commercial focus The commercial team is largely focused now on, hernia and colorectal procedures. We see some early interest in bariatrics and we'll support that early interest, but we'll we'd like to make sure we satisfy the hernia markets and the colorectal markets we're in today.
And then we'll pivot over time to support Barrett's more broadly. Calvin, you might speak to
No, Tycho, you're right. I mean, the 180,000 is about right in aggregate, but there's a lot of different types of procedures within that category from sleeve gastrectomies to the full bypasses to the redo procedures you mentioned where I think there's some clear benefits to robotic approach for those complex surgeries. At this point in time, we've seen some very nice early stage adoption, obviously based upon the patient benefits, but also there is some pretty significant surgeon benefit as well from an ergonomic standpoint. So it's a nice foundation that's building and this point, as Gary mentioned, we haven't focused the team entirely there.
Great. And then on China, Gary, you characterized the market is still being constrained that you only had kind of 3 this quarter. Can you talk about your latest thinking on the quota impact and when do you think things start to free up there
a little bit? Through that.
Sure. So just to replay, the quota is 154 systems for robotic systems. That is a quota that is available to anybody that has approval to sell robotic systems. So if there were to be another company that came along that got approval through CFDA, they would also be able to share a net that quota. The quota has been distributed to provinces.
The provinces are responsible for identifying the specific hospitals and then to the hospitals that then have to launch a tendering process. All of that takes time. And the tendering process is can take quite a bit of time. And in fact, if you replay back to when we got to 2015 or the 2013 quota, it took till near the end of 2015 when we saw a majority of those systems get done. So what we had what we had told you before was that you should plan on fewer systems early and more systems later.
And, and in fact, the 3 systems that were done this quarter were not done within that we have not seen any systems from the coil yet.
Okay. And then just last one on ION, now that you're out on the market, how do about the kind of data collection window here and what time frame you could start to see some publications? Could we see some by the back half of the year? And then can you maybe talk to your supply optimization efforts and where you are in that?
Sure. I think we'll be gathering 2 sets of data. Some are position preference and workflow data and the other is outcomes over time. I imagine you'll see various interim public toward the end of the year. It will take some time to get the full set written and reviewed that may come after 2019, but I think you'll see updates from key customers as we go through the year.
In terms of manufacturing optimization, so far so good, a lot of this is really just starting to create the manufacturing process in lines to build things at a little bit bigger scale and incorporate learnings and update tolerances and other kinds of validation work. So far so good. I think the team is doing a nice job, Darren.
Okay. Thank you.
Thank you.
Thank you. And next we go to Bob Hopkins with Bank of America. Please go ahead.
Thanks for taking the questions. Just two for me. 1st, Marshall, to start out. I just want to get your latest thinking on operating leases. Obviously, it's accelerated up to 33% of placements.
I guess the way I'd ask the question is, would you be surprised if that moved up to 50% or do you think we're kind of getting close to a top here with a a third of the placements?
Yeah. You know, we we introduced leasing and other alternatives, financing alternatives a few years ago. And we did that in the face of what we thought was because demand. And in fact, we think it's played out quite well and that we have been able to allow customers to expand more quickly their installed base. I think, so it's really customer driven, the demand.
Having said that, if, if it were my choice, you know, I find that leases and the alternatives that we're providing customers are favorable to us and that it creates a recurring revenue stream, eliminates some of the volatility system placement revenue. And I think in the long term, it will enhance any type of upgrade cycle that might come along. So if, it's hard for me to predict exactly how far it'll go. But again, if it were my choice, I'd like to see it go further.
But, you know, it doesn't it seems like it's going to go higher from here. I mean, it clearly seems like there's no momentum in that. And I don't think it's that big of a deal. I'm just curious as your thoughts as to where we might be headed. Yes.
I've given you my thought. It's hard to predict what
the anchor point is likely a little more from here.
Okay. And then one last question. Gary, you guys, or for Marshall, you spent at the high end of the guidance, this quarter, and it was particularly the R and D spend, I think, 38% now annualizing at roughly $400,000,000. I was wondering if you could just go into a little more detail on where that incremental R and D spending is going. And I know we talked about it last quarter, but any incremental details on where that big uptick in R and D spending is going would be helpful.
Yes, it's a fair question. So first, just total spending in context, the bigger component of the increase was actually, expanding our field teams outside the U. S. So on a percentage basis, R and D grew on an absolute basis was actually investments in commercial teams and field teams in Asia. Drove the biggest sign.
With breaking down the R and D to answer your question, in kind of priority order, additional capability and informatics, both in the product and back in the office, is the largest uptick followed by ION, followed by Advanced Instrument Investments, followed by Imaging Investments. Those are the ones that are responsible for growth down that pathway. And We think we're on our front foot there and making progress where we audit, and we are putting those investments out to support our future growth but that's the rough priority order. Perfect. Thanks very much.
Thank you. And next we have David Lewis with Morgan Stanley. Please go ahead. Great.
Good afternoon. Just a couple of questions for me. And Marshall, I wanted to come back to this dynamic of systems mix more broadly. You gave a lot more detail on some mix this quarter that we've heard in the last several quarters Calvin highlighted this in guidance. So I think it's going to create this notion of something has really changed.
Cyclically, this is just a weird quarter or structurally there's different dynamics we should be considering for 'nineteen and beyond. So can you sort of talk in more detail? You talked about trade ins ex distributors volume based discounting. So it does seem like mix dynamics shifted more materially this quarter than perhaps in the last 2 to 3 quarters I wonder if you just highlight what changed and what's driving some of those changes?
Sure. So to be clear, there was a shift, you're right. That we've seen an increase in the trade ins, the percentage of trade ins. And as I said earlier, it was 36% compared to 28% a year ago. And what we're seeing is just customers wanting to avail themselves
to the 4th generation technology and
standardizes and standardize, have multiple systems and standardize their portfolio. And, and then we, we've seen more multi system deals. And some of that has to do with what Gary just talking about their desire to expand their base. And as they are doing that, they would rather deal with one set of I and A, one set of training protocol and so forth. And so they standardize on the platform.
So the 2 are somewhat intertwined. We also saw a greater proportion of X systems, and that's been a kind of a volatile statistic actually if you go back in time since we introduced X. And it jumped around a little bit. But indeed, we introduced X with the intention of being able to deliver a lower cost product to geographies where reimbursements are lower. And in fact, in Europe, we saw 45% of the systems sold were Xs, which is exactly the market we targeted it for.
So these are all things that we think are positive trends, and leasing as well as I spoke to earlier. But, the confluence of them all this quarter did drive systems revenue to only grow 6% and also ASPs be a little lower. If you were looking out into the future, for the rest of this year. It's more likely, given the trend in trade ins and a trend in the multisystem arrangements that will be closer to, let's say, the ASPs we saw this quarter than we saw for
the whole of last year, if
you go back to year. We were pretty much around $1,450,000 on a consistent basis last year. And, and so that's where I think we are and where we're going.
I don't want to put words in your mouth, Marshall, but it sounds like this trade in dynamics been going on for 6 to 8 quarters. That's sort of been there the X the X mix number can move around quarter by quarter. So it sounds like the only incremental new piece of information is some of these larger system order Is that a fair characterization of what's probably the incremental new piece of information?
True, yes.
Okay, very, very helpful. Just two more for me and I'll jump back in Q1. Gary, you mentioned SP manufacturing constraints here in the first quarter. Are those resolved and sort of what's the pace to resolve them? And then maybe for Calvin, just there's been a lot of, channel dynamics around women's health, well, broadly women's health, general surgery, breast.
So you're kind of you're a gynecological FDA letters, any impact in the underlying procedure base targeted on either those 2 letters or channel disruption? Thanks so much, two questions.
Okay. On the SP side, the manufacturing constraint was a mechanical thing having to do with frictions and rails and the way these things bolt together. I think the team has got it. I think we'll meet our SP shipment plan for the year. So, I think they're knocking you down just the timing issue there.
With regard, I'll start on the, on the broader one. With regard to FDA environment, as it relates to medical devices in Remington Health. Clearly, they're signaling a more conservative approach and and are speaking about it broadly across the industry. With regard to Intuitive, that may change some future data requirements and it may introduce some uncertainty and timelines for indications of kinds of things we're interested in over time. With regard to what it looks like in the installed base and things like cyclical perplexity.
Calvin, I'll turn that back to you.
Yeah. And as it relates to the, there are actually, the FDX relates to the use of mesh intended for transvaginal or pelvic organ prolapse, there are actually various methods of medical management for pelvic organ prolapse, including observation, pessary management, and surgery. Da Vinci's sacrocolpopexy is a minimally invasive method of abdominal surgery, so not transvaginal. And so since our procedure is abdominal, we don't think that the this This action is going to negatively impact our sacrocolpopexy volumes. Last year, we did something like 15,000 to 20,000 cases in that category and we about 40% of the
And our next question is from Larry Biegelsen with Wells Fargo. Please go ahead.
Marshall. I'll start with the one for Gary. Intuitive has launched a new system every, call it, 6 to 7 years. Expect to maintain that cadence? I think it's been about 5 years since you launched XI.
And what can you tell us about, you know, how you're thinking about, enhancing XI? Should we expect a low cost system perhaps for the ASC setting? And I have one follow-up.
With regard to innovation cadence, we continue to be committed to innovation on exact cadences. We won't predict timelines because some certain based on what kind of technologies we're developing and based on the regulatory environment. But you can be assured that we are committed to bringing to market things that help our customers solve their problems. With regard to the specific question of, economics and price points, You can see our history historically, X and XI and what we've done there. But just frankly, we routinely assess and balance customer needs, the features that they're interested in to achieve their aims and the price points.
And we explore and invent broadly. We don't disclose what our specific plans are or timing for competitive reasons. Understood.
And Marshall, based on your guidance for procedure growth and OpEx growth, in 2019, your operating margin will likely decline So, how do you want investors to think about your operating margin beyond 2019, especially in 2020 when we could start to see new competition? Thanks for taking the question.
Sure. We haven't provided, guidance beyond this year. And I think what we said at the beginning of this year was you would see a decline in our operating margins given the level of increased spending that we were going to embark on. Calvin gave you the guidance for increased operating spending. As you know, it did not change from our previous guidance.
So I think that's all early to say
I'd add something. I think as we look out, the opportunity for improvement in acute interventions in surgery with the kinds of things we do, robotics, informatics, imaging, advanced imaging, we think it's substantial. And as a result, we take a long term view. We think these are multi year developments and multi year investments, but ultimately, the size of that opportunity is quite large. And as a result, we try not to tune it perfectly quarter by quarter or year by year, but really look over
the very long Thanks for taking the questions guys.
Next we will go to Amit Hazan with Citigroup. Please go ahead.
Hey, thanks for taking the question. Let me start with procedures for the quarter. Just a picture of it. It looked like a bit of a comp adjusted down in growth in the U. S.
And OUS. And I'm just wondering, I want to make sure we're not missing anything. So if there's anything to call out that was off trend, I heard you say prostate, we got that one, but if there's any other headwinds that you saw in the quarter on a year over year basis that would have kind of driven a slight slowdown, is there anything there at all?
No, I think we're the comments pretty much reflected that we were on trend in most of the major growth drivers in general surgery continuation of what we've seen before. And you can look at the Q1 comp, but then another thing to look at is workdays, right? So we had one fewer operating day in the first quarter just due to timing of weekends. It was partially offset by Easter. So I think you overcame that a little bit too.
So I'd I don't think there's anything more to add to that.
Okay. Good. And then secondly, I want to ask about the da Vinci Si. So we spent some time with a few of your customers this quarter and they basically told us that you guys are have sent them a letter that you're sunsetting the da Vinci Si and its instruments by 2020 4. And so I just want to see if we could 1st of all get a confirmation of that and also some context for how many SIs are still there and how you'd expect it to play out in terms of the replacement cycle?
Yes, I'll let Calvin speak to the number of SIs that are out there. Indeed, we did put a letter out. The letter really talked about discontinuation of stapling and certain energy instruments specifically and that those would be coming to an end in 2020. We also indicated that we would discontinue annual service pricing in 2025. The, having said that, we're committed to supporting SI.
We'll continue to deliver instruments and accessories even beyond the end date of 2024. And, we will even provide services beyond 2024, just not in the form of annual service, but rather in the form of time and materials.
Yes, in terms of the installed base, we just turned the crossed the line here this quarter. The slight majority are now da Vinci X I systems, but still nearly half our SI and previous models. And we've talked a lot about trade in cycle and the impact and number of trade in. So there's still significant number of SI and Previous out there.
Next we have JP McKim with Piper Jaffray. Please go ahead.
Hi, good afternoon. Thanks for taking my question. I wanted to ask one on SP. I think you said there was around 800 procedures performed on that platform to date. Maybe could you just talk about whether those were procedures that would have been done robotically previously or if it is expanding the market a little bit.
And then maybe your thought on other indications this year and some rough timing around when those could happen?
Thanks for the question. The bulk of the procedures so far were in urology would likely have been done robotically anyway. Indication the additional indication we got in transoral robotic surgery was relatively recent. That will grow in time. That will likely be a small expansion relative to what's being done robotically.
The next likely procedure for us to pursue is a colorectal indication. That will not occur in 2019. We will do a lot of the work, but I do not anticipate additional clearance in 'nineteen for colorectal, but it's likely next on deck, that we expect to be more expansive than substituting.
That's helpful. And then there's clearly a push to get everything onto the 4th generation just in terms of the program you talked about earlier, but maybe if you could talk about strategically how important that is for you as a company, either just to standardize manufacturing more or ahead of competition to get more and more customers standardized on this 4th generation platform?
Our primary motivation is that the 4th gen is well optimized to the kinds of things our customers So our our first motivation is we think it's beneficial for them, particularly things like advanced instruments stapling and so on, we're at more mature products in those kind of advanced instruments. And in that sense, you the trading numbers go up in some of the ASP conversations, we think we want to be aligned with our customers to both standardize and get the right access to the right technologies in the right place. We think that helps them. We think that helps us. And if we're helping both sides, we think that's good for our competitive position over time.
We go now to Larry Keusch with Raymond James. Please go ahead.
Gary, just one relative to hernia, you obviously indicated that you still have the sales organization very much focused in the general surgical area on hernia and colorectal. And you're not ready yet to quite get going on bariatric yet with with meaningful field support. So just on hernia itself, since that remains a focal point, help us think a little bit sort of what inning we're in at this point as you look U. S? And I guess the follow on question is, What will it take to to really start to drive general surgical procedures in in Europe?
Because, again, still being dominated by by urology.
Yes. I think in the hernia markets, I think we're in the end of the early innings is kind of where I put it. I think starting to enter more mainstream use. How far it goes, depends a little bit on clinical condition, as you know, not every hernia is the same, not every patient is the same in terms of comorbidities. So assessing total size of the market and applicability is always a bit of an estimate, but I I don't think we're halfway done yet and that's why we have our sales force focused, the way it is.
Second half of the question, I'm sorry, Europe And Urology. So on, in the European side, we're starting to see some early interest in general surgery and visceral surgery. Certainly on the more complex procedure side, we see interest in procedures that are done where the underlying causes cancer also has interest. There may be an opportunity in benign general surgery as well. The economics may be slightly different and that may require a slightly different adjustment from the company to make sure we satisfy that market.
Early on, we have work to do to finish urology. We're not done yet. And then we're looking at the next indications in the more complex side is the next step.
Okay, perfect. And then one quick one from Marshall, just on the operating leases. I know it's still early in the experience in terms of ramping those up, they did ramp relative consistently through last year, I guess, the 2Q was down a little bit, but, is should we think about any seasonality just in the lease percentages given what you know today?
No, I don't think seen enough of a pattern to know whether there's any kind of seasonality to it. And I suppose that there's the possibility that there's some seasonality associated with hospital budgeting cycles and so forth. But, again, we haven't we haven't seen any particular patterns we point out at this point.
Okay, perfect. Thanks guys.
And next in queue, we have Richard Newitter at SVB Leerink. Please go ahead.
I have 2. First one for you, Gary, just on, I appreciate that maybe you're not as focused with the commercial, focus to move into bariatrics with Permian colorectal, the priorities now. But, you know, with the with the, introduction of the 60 millimeter stapler, have you noticed any kind of inflection in the demand curve at least with respect to interest in bariatrics and you know, are we nearing that point where you would start to allocate the resources there? And then I have a follow-up.
Remember in terms of sequencing to activate a market. There's optimizing the product set to get them there. There's helping build the Proctoring Networks and the capacity for training and team training. So there's some pre work and then there's the building of the Salesforce competencies and support. Customer base.
So we're engaged in the pre work first from the products and now into building the pathways and engaging those who, who will lead. So we're excited about it. I think there's real interest and there's real long term opportunity. And it's really just a question of timing In terms of results, I wouldn't call anything out one way or another showing strength or weakness. I think we're really in a building capability phase.
Before we expect more out of the commercial team.
Okay. Thanks. And then just as we think about a higher proportion of systems getting placed under flexible financing arrangements, minimum volume committed, commit, arrangements. You know, I'm just curious, a straight operating lease model, one would have thought, hey, some of these systems maybe are more the customers are more susceptible to a trialing, phenomenon as competitors come into the market. But the more I hear you talk about these kind of multi system sales and these volume commitments.
I'm wondering, does that just raise the switching costs as we think of a higher percentage of getting placed in there?
Well, 1st of all, when you say volume commitments, there are not volume commitments, there are targets that we established, but we we don't have a volume commitment per se. Second, I think there are costs to switch, of course, that go beyond the system itself, training surgeons and, and staff as well as protocols and how you how you've set up the the, how you set up the OR and how you manage the product and how you use the product. And so I think those are barriers as well. As far as switching cost associated with the system itself, you do run a risk with the, some of the variations we're putting out there in financing that it may be easier for a customer to switch out. But we think that broadening the base now and getting the commitment of the surgeons and getting them trained so that we, increase the barrier on that front is a better route to go.
Okay. Thanks for the clarification.
Thank you. And next we have Craig Bijou with Cantor Fitzgerald. Please go ahead.
Hi guys. Thanks for taking the questions. I wanted to ask on Japan. I appreciate the comment. That, procedure growth was still strong.
But wanted to see, is it, are you still seeing some of the growth that you saw in the last couple of quarters? Just how should we think about where exactly or I guess how strong that growth is with the new procedures?
Yes. We're a full year now, right? We got clearance for those 12 new procedures, April 1, 2018. And even after full year, it's still fairly early. And so we're focused on things like we were talking about the training support proctoring networks, building a solid foundation surgeons, the OR teams and really emphasizing the clinical outcomes.
We talked about back in Q3 of 'eighteen procedure growth moving above the 4 percent line in Japan that continued in Q4. And in fact, here in Q1 of 2019, it kind of held on to that kind of rate of growth.
And maybe just a follow-up on Japan. I know you added 13 systems in the quarter, but Maybe just help us get a sense for what the demand or where I guess system demand is. I know that, I believe that utilization of the Japan systems was one of your lower geographic regions. So just maybe a little color there.
Yes, I think what we've said before and we're still on that same page is that the systems are utilized poorly at this point. And there is the opportunity to increase the number of procedures that could be done on them. However, the 12 procedures that were approved last year are not necessarily all done at the same hospitals. So, you've seen us sell systems because there are hospitals that do those procedures that and nephrectomies and now want to do robotic surgery. So it's hard for us to gauge exactly how much more how many more systems we can sell given the opportunity in front of us.
The number of procedures being performed that had previously been approved, which was prostatectomy and nephrectomy was around 25,000 to 30,000. And these additional 12 procedures was 200,000 although they were highly laparoscopically penetrated. And so it's also difficult to know how many of those will actually adopt or switch.
Okay. Thanks for, thanks for the color.
Just one more questioner, please. Operator?
Absolutely. Our final question will come from Imran Zafar with Deutsche Bank. Please go ahead.
Good afternoon. Thanks for taking my questions. First on U. S. General Surgery.
I'm curious if you could give us some insight how much of the growth you're seeing is coming from higher penetration within your, your existing users versus new general surgeons embracing robotics?
Yes. You just look at what we're selling. The large majority of capital are going into existing customers. So, we're expanding their programs and we're working with them as thoughtfully as we can with analytics and insights and expanding programs to build them out in the hospitals. So a large part of the remaining opportunity and procedures that are currently adopting are in hospitals or hospital networks that we have established relationships.
Yes, we still have some great field opportunities to be sure, but terms for a
portion that's heavy on existing. Quick question may have been asked from the point of view of surgeons themselves more from a surgeon or newly trained surgeons and it clearly a balanced mix of both.
Okay. Thank you. And then, can you just talk about the long term opportunity for a mastectomy? I know you have clinical study ongoing or it's getting underway? And, is it fair to assume that that's more of an SP opportunity rather than the multi port?
I'm not ready to characterize anything yet. And we know that there are some folks who are interested in it, who are starting to work through what studies might look like, but we are not yet prepared to talk about what the long term looks like there.
Okay. And then just one last quick one for Marshall. There's been a pretty sizable increase in your headcount since the third quarter. I think it's up like 800 something. I assume some of that is just headcount accretion from some of your, distributor acquisitions, late last year, but can you just talk about what geographies those hires are targeting?
Yeah. 2 greatest increases. 1 is what you characterize, which is that we took on distributor headcounts. So, specifically, Over the last year, we've added over 300 heads associated with our growth in Asia Pacific and The second area is really manufacturing headcount. And we bring, manufacturing headcount in to, on a temporary basis at first, and then we hire them in boluses.
And in fact, we hired a bolus of them in the last 6 months.
Great. Thanks so much.
Well, thank you. That was our last question. In closing, we believe there's a substantial and durable opportunity to fundamentally improve surgery and acute interventions. Our teams continue to work closely with hospitals, positions 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 care teams, and ultimately a lower total cost of care.
We believe that accomplishing the same takes the integration of 3 elements: 1st, a deep understanding of 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 analytical insights and translation of these insights into action that drives positive change. 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. Thank you for your support on this extraordinary journey We look forward to talking with you again in 3 months.
And that does conclude our conference for today. Thank you for your participation and for using AT and T Teleconference.