Ladies and gentlemen, thank you for standing by. Welcome to the Intuitive Surgical Q4 2018 earnings release call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, today's call is being recorded.
I will now turn the call over Senior Director of Finance, Investor Relations, Calvin Darling. Please go ahead, sir.
Thank you. Good afternoon, and welcome to Intuitive Surgical's 4th Quarter Earnings Conference call. With me today, we have Gary Guthardt, our President and CEO and Marshall Moore, our Chief Financial Officer. Before we begin, I would like to inform you that comments mentioned on today's call maybe deemed to contain forward looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties.
These risks and uncertainties are described in detail in the company's Securities And Exchange Commission filings, including our most recent Form 10 K filed on February 2, 2018 10 Q filed on October 22, 2018. 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 providing you with highlights of our 4th 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 fourth 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, Calvin. Entering 2019, 1500 peer reviewed clinical journal articles. And the total peer reviewed clinical database contains over 16,000 articles. While these milestones represent a step forward, I believe that outstanding product design, robotics, advanced imaging and informatics are just starting to take more broadly. Surgery and acute interventions are sophisticated interactions among highly trained professionals.
They have a common goal engineers and interaction designers collaborate closely with physicians to develop smart, connected devices with the goal of the quadruple aim. 1st, decreasing complications 2nd, increasing patient satisfaction 3rd, increasing care team satisfaction and 4th, improved efficiency and lowering of the total cost to treat. Considering our current da Vinci systems and the procedures and countries that are our focus today, We believe applicable procedures exceed $5,000,000 annually as we consider our new concepts coming to market, including, but not limited to, our da Vinci single port system, our advanced imaging technologies and our ion flexible catheters system, the long term total for our products to make a positive difference in physicians and their patients' lives is greater still. Given the positive response of our customers and in pursuit of the substantial opportunity to improve surgery and intervention that lies ahead, We plan to accelerate some investments over the next several quarters. Given our pre release this month, I'll be brief in summarizing our 2018 highlights.
Global procedure growth was strong with approximately 19% growth in the 4th quarter 18% for the full year. Growth in procedures was largely consistent through the year, with the United States showing particular strength in hernia repair, colorectal procedures and practice related general surgery procedures, including cholecystectomy, mature procedure growth in the United States, including Tectomy and hysterectomy was solid again in 2018, though we expect slowing in these mature procedures going forward in some countries. In Japan, procedures grew over 40% in the second half of twenty eighteen in response to additional reimbursements granted in Q2 Aggregate European procedure performance was generally in line with our expectations again this quarter, with particular strength in the UK and France. Calvin will review procedure trends in greater detail later in the call. Our capital placement performance in 2018 was also strong.
With growth in total placements rising 35 percent from 684 in 2017 to 926 in 2018. Net of trade ins and retirements, our da Vinci installed base grew 13% over 2017. The mix of system placements between our flagship X I system and our value X system generally align with our strategy regionally. As we discussed on quarter from 25% in Q3 of 2018 to 29% in Q4. Financial highlights of our 4th quarter results are as follows: Revenue for the quarter was in the fourth quarter last year.
Instrument and accessory revenue increased to $539,000,000, up 18%. Total recurring revenue in the quarter was $722,000,000, representing 69% of total revenue. We generated a pro form a operating of $412,000,000 was $353,000,000, up 16%. We launched the Intuitive Foundation with an initial contribution of $25,000,000 in the quarter. The Intuitive Foundation's mission is to support entropy in the communities which we serve and in which we live.
Financial highlights of the full year 2018 results are as follows: Revenue for the year was $3,700,000,000, up 19%. Pro form a gross profit margin was 71.5% the full year compared to 71.9 percent for 2017. Instrument and accessory revenue increased to $2,000,000,000, up 20%. Total recurring revenue in the a operating profit of $1,500,000,000 in the year, up 17% from 2017, and pro form a net income was $1,300,000,000, 23% with the difference in growth rate between operating profit and net income, largely driven by the 2017 Tax Act and interest income earned. Looking ahead, a review of clinical outcomes for complex surgery and acute interventions across large populations still highlights a substantial need for improvement.
We measure our efforts by their ability to positively impact the quadrupling. 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 second, the development of high quality smart and cloud connected robotic imaging instruments and lastly, informatics and AI to deliver relevant validated insights. While we've made significant progress over our history, we believe continuous improvement required and we've deployed our investments toward these aims.
We're bringing together several efforts in pursuit of our mission, We are early in our phase 1 launch of da Vinci SP. We installed 15 systems in 2018, and a few hundred procedures have been performed to date. Surgeon and patient feedback have been positive for usability and patient experience in these early days of launch. We submitted our transoral robotic surgery in Q4 of 2018 and are responding to FDA questions on the second indication. We're also working through supply chain optimization as we begin to ramp production for SP in addition in anticipation of additional clearances and broader launch.
Our first step into flexible diagnostics, ION, is nearing phase 1 launch. We submitted our 510 in 20 18 and have responded to FDA questions this month. We anticipate a Phase 1 limited launch of ION in 2019, focus on the need for definitive early diagnosis of suspicious lesions for lung cancer. In instruments and accessories plan to broaden the launch of our SureForm 60 millimeter stapler for da Vinci in the first half of twenty nineteen. The 60 millimeter stapler is used primarily in abdominal surgeries in including bariatric surgery.
Surgeon response has been encouraging and our team has performed well in establishing its supply chain. Over the past several years, we've been increasing our cloud computing and informatics capabilities. Today, we routinely customers using our systems, which have been smart and connected for the past decade. We believe there are opportunities to further enhance these capabilities Our advanced imaging programs and augmented reality programs are making progress. We anticipate 1st clinical use of our augmented reality program in 2019.
As described in our pre release, we've also been increasing investments in building our business operations and countries important to our future. Our efforts in China will accelerate in 2019 with the da Vinci distribution arm of Fosun Pharma, Chindex, joining our joint venture this quarter. Combined with the release to serve China over the anticipate strengthening our investments and presence over the next several quarters. We described the multiyear nature of these investments in our JP Morgan talk, using Intuitive Japan as an example. Market Development And Country is an arduous multiyear process.
It involves building a strong management team and company culture, establishing strong working relationships with surgical societies, policymakers, regulators, and key customers as well as together, we plan to accelerate our spend rate above our historical norms for the next several quarters. As described above, the increase in spend is driven primarily by funding and growth of our joint venture in China, the ramp of our informatics efforts, infrastructure to support our procedure growth, including manufacturing lines and facilities and the launch of our new platforms. We paced the rate of investment not just by the opportunity for growth, which we believe is substantial. But by our ability to integrate talented staff and execute against our objectives. In closing, as we start 2019, our focus will be on first.
Supporting adoption of da Vinci and general surgery and in key procedures in global markets second, launching our SP and ion 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 to review financial highlights.
Good afternoon. I'll describe the highlights of our performance on a non GAAP or pro form a basis. Will also summarize our GAAP performance later in my script. A reconciliation between our pro form a and GAAP results is posted on our website. Consistent with our preliminary press release on January 9th, 4th quarter 2018 revenue was $1,047,000,000, an increase of 17% compared with $892,000,000 for the fourth quarter of 2017, and an increase of 14% compared with 3rd quarter revenue of 921,000,000 4th quarter 2018 procedures increased approximately 19% compared with the fourth quarter of 2017 and increased approximately 11% compared with quarter.
Procedure growth continues to be driven by general surgery in the U. S. And urology worldwide. Calvin will review details of procedure growth later in this call. Instrument and accessory revenue of $539,000,000 increased 18 $6,000,000 of INA repurchase from distributors in China and Taiwan in conjunction with transactions to go direct in both geographies and customer buying patterns, partially offset by increased usage of our advanced instruments.
Instrument accessory revenue realized procedure was approximately $1890, a decrease of 1% compared with the fourth quarter of 2017, and relatively unchanged compared with last quarter excluding the buyback of inventory from China and Taiwan, instrument and accessory revenue per procedure was similar to last year. Systems revenue of $341,000,000 increased 20% compared with the fourth quarter of 2017 primarily reflecting higher placements and higher lease related revenue. We placed 290 systems in the fourth quarter of 2018 compared with 216 systems in the fourth quarter of 2017. And 2.31 systems last quarter. 84 operating lease transactions, representing 29% of total play were completed in the current quarter compared with 40 or 19 percent of total placements in the fourth quarter of 2017 and 58 or 25 percent of total placements last quarter.
Operating leases include some usage based financing that we provide certain large hospitals. We believe that these usage based financing alternatives align with customer objectives enabling faster market expansion. As of December 31, we have 350 operating leases outstanding, and we realized approximately $16,000,000 of revenue related to arrangements in the quarter. 28% of the current quarter system placements involve trade ins, reflecting customer desire to access or standardize on our 4th generation technology. This is approximately the same proportion as last quarter last year.
Trading activity can be lumpy and difficult to predict. 73% of the systems placed in the quarter were da Vinci XIs and 18% were da Vinci X systems compared with 68% da Vinci XIs and 28% da Vinci X's last quarter. 12 of the systems placed were SP systems. Our installed base of da Vinci systems increased 13% year over year and our average system utilization grew in the mid single digit range. Globally, our average selling price, which excludes the impact of operating leases, lease buyouts and revenue deferrals, was approximately 1,460,000 compared with $1,470,000 last year $1,450,000 last quarter.
The changes compared with prior periods primarily reflects the mix of systems. Outside of the U. S, results were as follows. 4th quarter revenue outside of the U. S.
Of $307,000,000 in increased 24% compared with the 4th quarter 2017 and increased 25% compared with last quarter. OUS procedures grew approximately 24% compared with the fourth quarter of 2017, an increase of 10% compared with the 3rd quarter. Outside the U. S, we placed 115 systems in the 4th quarter compared with 86 in the fourth quarter of 2017 75 systems last quarter. Current quarter system placements included 55 into Europe, 31 into Japan and 9 into Brazil.
35 of the 115 systems placed in the 4th quarter were X systems, and 15 were operating leases. Placements outside of the U. S. Will continue to be lumpy as some of the OUS markets are in early stages of adoption. Some markets are highly seasonal, reflecting budget cycles or vacation patterns, and sales into some markets are constrained by government regulations.
Moving on to gross margin and operating expenses. The pro form a gross margin for the fourth quarter of 2018 was 71.8% compared with 72.4% for the fourth quarter of 2017, and 71.5% last quarter. The decrease compared with 4th quarter 2017 primarily reflects product mix and costs associated with new products. Future margins will fluctuate based on the mix of our newer products, the mix of systems and instrument and accessory revenue, system ASPs and our ability to further reduce costs and improve manufacturing efficiency. Pro form a operating expenses increased 31% compared with the fourth quarter 2017 and increased 27% compared with last quarter.
Fourth quarter 2018 operating expenses included a $25,000,000 contribution to the newly formed Intuitive Foundation. The foundation is a charitable organization aimed at improving patient outcomes. It will donate to qualified non profit academic organizations directed at surgeon training and education, including fellowships, advanced clinical research, and advanced robotics research. The $25,000,000 will enable the foundation to make meaningful contributions over the next several years. Our pattern or future contributions will vary based on various factors, including the financial performance of the company and opportunities for the foundation to make meaningful contributions within its mission.
Excluding the contribution to the foundation, pro form a operating expenses increased 21% compared with the 4th 2017. The increase in 4th quarter expenses reflect: 1, increased costs that fluctuate directly with revenue including sales and corporate incentive compensation 2, costs we elected to accelerate, including spend on infrastructure in order to scale the business and 3, investments that drive our future opportunity, including costs associated with going direct in China, Taiwan, India, and cost of prototypes. We believe that we are early in our journey to expand minimally invasive surgery feel the fundamentals in the business are strong. In key product areas, including SP, ion, vision and advanced instruments. We will accelerate spending on our informatics capabilities, expansion of our OUS markets, including China, India and Taiwan, investments that enable us to scale the business, including expansion of and automation of manufacturing.
We believe these are important investments. That's increase rates with revenue and procedures like sales, production expenses, and corporate incentive compensation. Other spending is longer term in nature, and positions us for future growth. For example, SP, Ion And Imaging. We would target to spend the lower end of of the 20% to 28% range at the bottom end of procedure growth guidance.
We are investing with an eye toward long term for the company and the market, and as such, don't intend to modulate long term investments in response to transient conditions. Our pro form a effective tax rate for the fourth quarter was 20% compared with our expectations of 19% to 20%. Our tax rates will fluctuate with changes in the mix of both of U. S. And OUS income changes in taxation made by local authorities and with the impact of one time items.
Our 4th quarter 2018 pro form a net income was 353,000,000 or $2.96 per share compared with $305,000,000 or $2.60 per share for the fourth quarter of 2017 $337,000,000 or $2.83 per share for the third quarter of 2018. Excluding the Intuitive Foundation contribution, pro form a net income was $373,000,000 or $3.13 per share. I will now summarize our GAAP results. GAAP net income was $293,000,000 or $2.45 per share for the fourth quarter of 2018, compared with GAAP net loss of $32,000,000 or and GAAP net income of $293,000,000 or $2.45 per share for the third quarter of 2018. The GAAP net loss for the fourth quarter of 2017 reflects the impact of the Tax Act, while the fourth quarter of 2018 includes the 25,000,000 contribution to the Intuitive Foundation.
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, and legal settlements. We ended the quarter with cash and investments of $4,800,000,000 compared with $4,600,000,000 at September 30, 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 $40,000,000 to $409,000,000, representing approximately 4 months of inventory We continue to build inventory to address the growth in and other matters. With 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. We did not repurchase any shares in the quarter and have approximately 7 $1,000,000 remaining under the board buyback authorization.
And with that, I'd like to turn it over to Calvin, who will go over procedure performance and our outlook for 2019. You, Marshall.
Our overall 4th quarter procedure growth was 19% compared to 17% during the fourth quarter of 2017, and 20% last quarter. Our Q4 procedure growth was driven by 18% growth in U. S. Procedures and 24% growth in OUS markets. Overall procedure growth for the full year 2018 was approximately 18% compared to 16% in 2017.
Comprised of 17% growth Q4 and full year procedure results were consistent with recent trends. Q4 growth was again driven by growth in U. S. General surgery and thoracic procedures, augmented by continued contributions from approximately 753 procedures increased approximately 32 percent to 325,000 procedures. Hernia repair, both ventral and Inguinil continued to contribute the most incremental cases in the quarter year with colorectal procedures continuing to show strong growth.
Growth in practice based procedures, including cholecystectomy and bariatric surgery, increased as the year progressed. In U. S. Gynecology, full year 2018 year over year growth increased to mid single digits, driven by higher benign hysterectomy volumes. Fourth quarter 2018 U.
S. Gynecology procedure growth was slightly above the full year growth rate, likely reflecting increasing seasonality in these benign procedures, partially offset by modest headwinds in hysterectomy for cancer, a mature category where da Vinci surgery is standard of care. In the fourth quarter, we continued to see favorable surgical consolidation trends as our da Vinci surgery data indicate that practicing da Vinci Surgeons performed more da Vinci hysterectomies and an increasing proportion of U. S. Gynecology procedures are being performed by higher volume physicians.
Full year 2018 U. S. Urology procedures grew approximately 8%. Q4 2018 growth was at a rate largely consistent with the full year results, driven by prostatectomy volumes. As a mature procedure category, we believe that our US prostatectomy volumes have been tracking to the broader prostate surgery market.
Which has benefited from recent macro trends. In other U. S. Procedures, adoption of levetomies and other thoracic procedures was again solid during the fourth quarter. Full year 2018 OUS procedures grew 22%, consistent overall with 23% growth in 2017.
Q4 OUS procedure growth trends were mostly in line with the full year results. 4th quarter OUS procedure volume grew approximately 24% compared with 21% for the fourth quarter of 2017 23% last quarter. 4th quarter 2018 procedure growth was driven by continued growth in DBP procedures and earlier stage growth in kidney cancer procedures, general surgery and gynecology. Q44 procedure growth in Japan was consistent with Q3 at a rate over 40% as procedures were performed within the set of 12 additional procedures approved for reimbursement effective April 1. Procedure growth in China again moderated in Q4 Davinci System capacity expansion was constrained by system quota requirements.
As Gary mentioned, over 1500 peer reviewed clinical articles regarding da Vinci surgery were published in 2018, and over 16,000 have been published to date. 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 December 2018, a manuscript was published by the journal of gastric cancer titled Clinical Advantages of robotic gastric me for clinical stage 1 and 2 gastric cancer, a multi institutional perspective single arm study, This study was 1 of the largest multicenter prospective studies for gastric cancer, which included 330 patients, a across 15 institutions in Japan. This study was designed to show the safety, effectiveness, and economic effect efficiency of da Vinci Surgery for gastric cancer and was in support of the MHLW extension EROB process, which led to the recent addition of gastrectomy to reimburse status in Japan. The main hypothesis of the study was to demonstrate a reduction in morbidity associated with robotic surgery compared to laparoscopy, The hypothesis was confirmed as the results showed a reduction in the morbidity rate to 2.45% for robotic procedures compared to 6.4% the historical LAP control group.
Patient characteristics and surgical outcomes were compared between the prospective arm, the robotic group, and the historical control scopic group. Preoperative differences were noted in both groups as the robotic group contained more patients of younger age, but also contain more complex patients with higher comorbid conditions. The robotic arm had lower clinical staging no differences were noted in pathological staging between the groups. In the directional analysis, the robotic assisted cohort was noted to have significantly lower intraoperative blood loss, shorter duration of hospital stay 9 days versus 13 days with comparable operative time. The authors of the study concluded that might help demonstrate reduced total cost of care of da Vinci surgery to be likely the same amount as for laparoscopy.
In conclusion, the robotic group reduced the morbidity rate when compared to the findings of the lab group. Robotics surgery might be safe, feasible and effective for gastric cancer. I will now turn As described in our announcement earlier this month, 2018 total da Vinci procedures grew approximately 18% to roughly 1,037,000 procedures performed worldwide. As communicated previously, during 2019, we anticipate full year procedure growth within a range of 13% to 17%. We expect 2019 procedure growth to continue to be driven by U.
S. General surgery and procedures outside of the United States, where we are still in the early stages of adoption. We expect similar seasonal timing of procedures in 2019 as we have experienced in previous years with Q1 being the seasonally weakest quarter as patient deductibles are reset. With respect to revenue, as we have mentioned previously, capital sales are ultimately driven by procedure growth. Catalyzing hospitals to establish or expand robotic system capacity.
Capital sales 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. Within this framework, we'd expect 2019 capital placement seasonality During the fourth quarter of 2018, 84 of the 290 or 29% of the system shipped were under operating leases. We expect that Turning to gross profit, our full year 2018 pro form a gross profit margin was 71.5%.
In 2019, we expect our pro form a gross profit margin to be within a range of between 70% 71% of net revenue. Our actual gross profit margin will vary quarter to quarter depending largely upon product, regional and trade in mix and the impact of new product introductions. Turning to operating expenses. As Gary and Marshall outlined, we will be following through on and expanding our investments in 2019. We expect to grow pro form a 2019 operating expenses between 20% 28% above 2018 levels.
We expect our non cash stock compensation expense to range between $310,000,000 $340,000,000 in 20.19 compared to $261,000,000 in 2018. We expect other income, which is comprised mostly of interest income, total between $120,000,000 $130,000,000 in 20.19. With regard to income tax, consistent with our 2018 results, We estimate our 2019 pro form a income tax rate to be between 19% 20% of pretax income. That concludes our prepared comments.
First question will be from the line of David Lewis, Morgan Stanley. Please go ahead.
Good morning. Maybe I'll start financial and then work to Gary for strategic. So just Marshall and maybe a little bit for Gary as well. Just thinking about the spending breakdown for 2019. Your two questions.
And then I'll just do one follow-up. On financial pieces, Marc, so any sense of R and D relative to SG and A, we're sort of assuming continue to grow R and D at a similar rate to 2018 and the material step up in spending relative to model models more SG and A. And maybe just sort of walk through a couple of the components there in R&D And SG And A that are driving the majority of the spend. And then I had a quick follow-up for Gary.
Yes, I that the, the step up in spend is maybe slightly weighted towards SG And A, but pretty even across the categories. The, the elements of SG And A are, as I discussed, the expansion OUS and the investments we're making in China, India and Taiwan. Those are commercial organizations and that appears in SG And A. Of course, SG and A will grow a lot of the costs that fluctuate with revenue such as, sales compensation and incentive compensation flow through SG And A. However, in the R and D area, We will continue to invest in SP, ion, Envision and advanced instruments.
And then as I said, we'll be accelerating some of our investments in digital capabilities or informatics.
Okay. Very helpful, Marshall. Then Gary, there's been some media reports about one of your competitors drawing instruments from a much larger company. And I'd say barriers to entry is perhaps the most common incoming question we get from investors. So
I wonder if you
could help us articulate, what is the intuitive moat as you see it or investors asking the wrong question and they should be more focused on TAM expansion? Thanks so much.
I think a little bit of both, that are going on, I think, competitive world. On the first side, how are customers going to choose? I think customers appreciate choice, and we'll expect it from us and from others. And I'll think they'll evaluate competitive offerings. For us, we focus a lot on understanding what the workflow environment is, understanding the total cost, not just the constituent costs of price of the system or price of the instruments and accessories is really total cost, to use the product, stability, usability, supply chain stability, all of those things, I think, are valued when people are putting a fair amount of their, surgical volume on to apply form.
And I think it'll take some time for folks to fully absorb and understand that. And I think also there's some nice effect about surgeons, training surgeons. So there's a large install base of surgeons. They interact with each other through, surgical societies, they proctor each other. And I think that, that, allows a compound cycle of learning that's been effective.
To the question of what does it do as some of the other larger competitors, declare their desire to answer. I do think validates, for the broader market, the things we believe for many years, and have been investing towards for many years. So I think it's a signal to everybody that these technologies and approaches are going to be important to the future. That said, there are smart people in all these organizations outside of our company. And, we'll see.
We have evaluated many of the competitive concepts that we see out there often making them for ourselves and evaluating them over the years. We really make our decision based on what we think the customer needs and as a forward look. And as a result, I think we may be wrong about some of our decisions, but we've tried to be well in informed about our decisions.
Our
next question is from the line of Bob Hopkins, Bank of America. Please go ahead.
Thanks very much for taking the questions. And I have sort of 2, 2 similar lines of questioning here. First, just to follow-up a little bit on the, on the comments on spend in 2019. For 2018, there was a 17% increase for 2019, you're talking about a at the midpoint of 24% increase. I mean, that's roughly $75,000,000 I was wondering if you could kind of lay out how much of that is the investment in China and Taiwan and going direct And then also, how would you just sort of characterize that incremental $75,000,000 in the growth rate you're experiencing this year?
Is this more of kind of one time increase in the growth of expenses or could this be sort of a growth rate that we would experience for another couple of years? Thank you.
Yes. So I think, Bob, these are multiyear investments. And as, as Gary referred to in his script, if you go back and you look at what we said we did in Japan. The investments were made early on, but you continue to make those investments over time to get to a point of where you might see a real return from them. And in the case of Japan, we've been investing in Japan for 10 years.
And we're now seeing the fruits of that investment in terms of a 12 procedure reimbursement. So I wouldn't characterize these as a one time event. I think we'll continue to invest in some of those things for quite some time. As far as how this you came up with $75,000,000. How the how you would proportion the pieces, I think I pretty much laid it out for David, the, there's a chunk of spending associated with the expansion OUS in China, India, in Taiwan, that will, you'll see that primarily in the SG and A line.
But there's an equal set of investments being made in terms of informatics as well as investments to scale the business, investments in expansion and automation of the manufacturing group.
Okay. I appreciate that. And then one for, for Gary. Just a question on competition, frame it just a little bit differently. J And J Medtronic both continue to suggest that sometime late in 2020, they'll bring some some sort of technology to the, to the market, in robotic form.
That both suggested they're going to have lower cost systems They haven't given as much details, but in my view, both have sort of implied that their systems will be geared towards converting LAPFO surgeons to a robotic platform. So my question to you is, I realize you don't comment much on your pipeline. But I was just curious if you could comment, do you see potential value in advancing lap through robotics? And is this a priority for, for, intuitive today?
I do believe that some advance MIS surgeons are becoming increasingly open to the use of robotics surgery and intelligent surgery. We see it today in the market. We see Bariatric Surgeons interested in our technologies. And that's a domain that is high laparoscopic penetration So I believe there's an opportunity there. I would separate the idea of capital being the only thing to think about, as an opportunity to pursue that, that growing idea in advanced laparoscopy.
And what I'd say is that I think physicians are going to balance multiple criteria. They're going to look at total cost to treat. So the capital, the cost, the cost to service that capital, instruments and accessories, the outcomes that they get from it efficiencies and human capital time or human labor time in the OR, and they're going to balance that. And I think all of those are up for discussion when you think about trade offs between advanced fibrosis and intelligent surgery, think there's an opportunity there. We will pursue that opportunity.
When I hear folks, kind of over rotate to just capital costs on systems, I kind of think about, how excited are people to jump aboard, just good enough commercial airliner. For sure, if you're flying commercial airline, you want to tow the lowest total cost per passenger mile, you can get that a lot of different ways in cheapening the capital, maybe not the best way. We evaluate all of those elements. We've thought about them deeply, we've made investments to pursue what we think is the right leadership position there.
Next question is from the line of Tycho Peterson, JP Morgan. Please go ahead.
Hey, thanks.
I want to maybe just pick up where you left off on some of these new initiatives. You talked about the first clinical use case for augmented reality this year. Can you talk a little bit about how you think about commercializing that? Where you see the key application areas? And then similarly on the informatics investments, can you talk a little bit about what you're hoping to accomplish there?
Sure. Those 2 are related, but we'll start with augmented reality or mixed reality. And that's something we have been working on for some time and the world has been interested in. The idea here is to use multiple sources of information, preoperative CT scans or MRI scans, intraoperative, other imaging like ultrasound or fluorescence imaging, molecular imaging, and combine them in ways that allow the surgeon or position to see things differently. It is embedded and inherent in ION already that some of that core capability is required.
We're also bringing some of that core capability to our da Vinci systems In the beginning, it'll be around preoperative imaging and some intraoperative imaging mixed together for the surgeon in real time. First, I'd expect 1st clinical uses this year and the beginnings of the study that go around that. I don't think it will be a meaningful revenue contributor in the near term. But I think it's one of the things that can really change outcomes, efficiency in the procedure and outcomes now it remains to be proven. But, we're excited about it.
That's one leg of our thoughts around informatics. And you've heard us talk about this over the years. From strengthening our cloud computing capabilities. We internet connected our systems a decade ago to a partnership and then an increased and closer investment within Touch Health around routing of data quickly and low latency in real time. 2 internal capabilities around managing data lakes and providing for customers, offline processing that allows them to compare their programs and take advantage of some advances in machine learning.
Those are the types of elements that we're bringing to bear. It's nice. We have a foothold. We have some brilliant scientists who are advancing and leading that cause. And we think we have discrete deliverable steps that we can do and then validate, that will start bringing real value to the market.
And then I guess a follow-up on ION, a couple questions here. Any risk of timelines slipping with the government shutdown? I mean, now that you've submitted the 510 and then should we expect additional clinical data to come out this year. And it sounds like for the gross margin commentary, you're not expecting any real impact on negative impact on gross margins with the rollout. Can you confirm that?
Let me speak to the first 2 and I'll let Marshall speak to the last one on margin. There's always a risk that things slow down. We are in engaged contact with FDA. And so far, we're feeling pretty good about it, but I can't speak to what the long term implications will be in terms of shutdown dynamics. In terms of clinical data, there'll be, if things proceed the way we hope, we'll start collecting additional data as they comes out.
In terms of ones that gets published, I think it'll depend on the timing of the clearance and the speed with which some of the installs happen. We think that the demand pipeline for ION looks really good the scientific response to FDA's questions we feel good about and the engineering team and supply chain team bringing those early systems up looks really good too. So I'm really pleased with the internal team's performance and the setup of activities with regard to margin impact, Marshall?
Yes. I and will be rolled out in a measured fashion to create a good foundation. And so there the consequences of both on the revenue and the gross margin line will be very small.
Okay. And if I could just ask one last one on the cadence placements in China, you're expecting now that you've had a little bit of time to digest the quota, anything to think about in the first half of the year here?
Yes. So the, the quota, the quota, just to recap for everybody, 154 systems, keep in mind that 150 4 systems is for, for, surgical robots. If there were to be competitors that got their product approved in China, they would share in that quota. So it's not just quota for us. The quota has been released.
However, there are tendering processes that the hospitals have to go through. To remind you, the last time we got a quota in 2013, most of the systems were shipped near the end of 2015. So it took a while. The, what I would say, and then finally, the other implication is that, there is a 25% tariff on the robots. That the Chinese have imposed.
We think that there's high interest in robotics in China. So I don't know what that 25, how that 25% will affect their desire to buy. What I would say is that the pattern of placements will be few into first, first half and more near the end of the quota period, which is 2020. Okay. Thank you.
Our next question is from the line of Larry Biegelsen, Wells Fargo. Please go ahead.
Good afternoon. Thanks for taking the question. 1 on SP and 1 strategic question for you, Gary. So, on SP, I heard the commentary upfront, about a few 100 procedures. Any themes you would highlight, and, remind us again of when we can expect the the full launch.
With regard to early themes, the feedback has been that, usability on the new platform is got a little slightly different set of operating principles has been a positive surprise. The, also the physician excitement about its ability to reach into small places and some of the flexibility it exhibits relative to setup and access has been a really positive surprise for us, which has been great. So that's been good. I think, pacing demand looks really good. We're, for sure, supply constrained.
Relative to demand. And the pacing there will really be around a couple of things. One is, we want to get our supply chain partners ready for real volumes. So we knocked down some of the issues that, that make it took them a while to produce things. We want to solve some of the manufacturing bottlenecks.
The second thing is we want some of the additional indications that give our customers a little more flexibility with how they can use the product. So that will pace it. We don't have a timeline yet for you on those two things. Both of them have a little bit of uncertainty in them. The FDA review of submissions being 1 and working down some of the technical bottlenecks is the other.
I don't see any insurmountable technical challenges. I think it's just work. But so far so good and we're feeling like they're meeting the plan we set.
That's helpful. And Gary, as you know, we're seeing procedures in the U. S. Moving to the outpatient and ASC settings. Do you believe your current Gen Four offering and leasing provide adequate terms for expansion into this environment?
Thanks for taking the questions.
Yes, thank you. When you think about freestanding centers, there's kind of two dimensions on which you think about freestanding surgery centers. One of them are hospital owned, outpatient departments. We are already, well used and appreciated in those settings. So that's the physical structure is kind of the same.
It's just how the ownership and operations are organized. Freestanding centers that are owned by group practices, not hospital owned, have a little bit different reimbursement and economics. We actually do see some of them starting to express interest and adopt robotics. I think that, as we were saying earlier in the call, which procedures go there depends both on the reimbursement of the procedure and the efficiencies with which products get used. And, I think that for the right settings Gen 4 can be quite strong.
Thank you.
Our next question is from the line of Amit Hazan, Citigroup. Please go ahead.
Thanks. Hey, good afternoon. Let me start with a system or a unit growth question first. Totally understanding the macro comments you made about that. But if I look at the data, look at the numbers, 2nd year of accelerating growth, lots of drivers kind of seeming to be accelerating at the same time, trade ins, operating leases, new products, procedure growth accelerating.
So a lot's happening that's accelerating. I've got very little really nothing to tell me that growth trends are going to change that much. So help me out and tell me, outside of the macro issues, why would unit growth trends change much in 2019?
Yes. I mean, regarding procedures, like we said, in the prepared comments, it's really the procedure growth that drives demand for capital placements. You mentioned a number of other factors, things like trade in leasing programs, new product introductions, things like that can have an effect on the results either, but we talk about these things fluctuating quarter to quarter. And it comes down to just laying out your model and your frame of thought and working backwards from the installed base. And working at the installations.
But there's a
lot of the factors you described are what's in the world. And mature procedures will, moderate growth for sure. And we also know that, in some cases, for example, there was a publication of a couple of articles about cervical cancer in New England Journal, and that can change procedure growth rates too, so, and create a headwind. So there's a little bit of puts and takes here. In general, we are feeling like the business is strong and there's strong momentum, but there are some things that, that will moderate as well.
And as I follow-up on the operating lease side and in the U. S. In particular, obviously, I think it's up above 30% of units sold. In 2018. I think it was 20 percent of units sold in 2017.
So we're starting to see kind of a trend line. And I do get what you're saying with volatility, but the question I think for us, especially as we start to model or try to model your system revenue number accurately for the year is how to think about that trend for 2019 and even 2020. It seems like you're focusing more on it. You're offering more programs. And that trend line could continue.
So we could kind of be towards the mid-30s to 40% range in the U. S. In 2019. Are there other things that I should be considering for that that wouldn't happen?
Well, it's been a successful program. I mean, I mean, it's been a way for us to, offer hospitals in to expand their capacities without the initial capital investment. So it's been very successful. I'm not sure the numbers completely jive with what you said. We were 25% of placement in Q3 and 29% in Q4 were under operating leases.
So you saw that step up quite a bit in the last couple of quarters. And so our comments are like, okay, we're here now. It's likely to fluctuate quarter to quarter from where we ended the year. And then, over the long term, it could increase.
We believe that operating leases a good thing. We would, we would, having the choice place a system under an operating lease rather than sell the system. It reduces the fluctuation. Like you said, it stabilizes sort of the revenue stream, if you will. It also in terms of if there were an upgrade cycle, what we've seen in studies is that the upgrade cycle is quicker when there's leases versus purchase product.
So we think it's positive in a number of ways. However, it's up to customers. We really leave it to customers to decide what is best for them and we will fill that. And so it's hard for us to predict exactly where the customer will go and to what level will wind up with leases versus purchase.
Fair enough guys. Thank you.
Our next question is from the line of Rick Wise, Stifel. Please go ahead.
Good afternoon, Gary. Maybe turning back to the acquisition of your your DaVinci business in Indian Taiwan again. I heard you clearly, these are long term investments. It will take a long time to play out. I'd be curious to hear more about your thoughts about the relative size of the opportunities in India and Taiwan.
Is this sort of you mentioned Japan's a proxy, a little bit, but do Indian and Taiwan match up with China and Japan in terms of magnitude. I mean, I assume you must think the opportunity there is significant. Just maybe help us think about that and frame it for us.
Clearly, the strategic motivation behind India and Taiwan are a little bit different. With regard to Taiwan, In terms of absolute supply, it's not going to be a huge part of the business. However, it's an influential market, we, the distributor there that we were working with was, well built. And, and we think that it's a group that, does good surgery and has a good influence in the region. I think it's important to to serve that customer base well, but it's not a massive financial impact buying gains nor do we expect it to be.
India, has, I think, a fair amount of runway, where it is today and where it might be in a decade can be quite different. And so here, the idea is it will take some time to build our capabilities in India, but we also think It's an economy that's been growing. There's strength in the surgical community in India. Both there and globally. And so it's an important long term market for us.
We think that financially, of course, it can become a significant part of Intuitas business over the years. And the point of illustrating some of the Japanese example is that, building a real presence and building the organization and the trust within the healthcare community in those markets takes time. So if you want to get there in a decade, then you better start. And that's really what's driven us in those 2 markets.
Okay. Just as a follow-up on different topic, you highlighted, obviously, some puts and takes in terms of growth procedure growth. And you mentioned specifically slowing mature procedure growth in some countries. Maybe just expand on that. Is this just penetrated the market and it's slowing or is there something else going on?
Maybe just give us a little more color there. Thanks so much.
In several countries, we are a substantial share of the surgical market, I think, of the United States Techme or partial nephrectomy in the United States or hysterectomies for certain conditions. And as a result, we see that part really growing at demographic trends rather than at changing share of approach trends. And that's true in the U. S. It's true in some countries in Europe with regard to prostatectomy and some of the urologic procedures and Japan were already quite highly penetrated in prosthetectomy and increasingly so in nephrectomy.
So that, that was, what's some of the detail or examples of what underlies the more general comment. Just one more questioner, please.
And that question is from the line of Richard Newitter. Please go ahead, sir.
Hi, thank you. I wanted to start off on the percentage of operating leases and flexible financing arrangements. That's clearly increasing as a percent. The total placements. Can you characterize for us what the, what the utilization rate differences are on the systems that are getting placed under those types of contracts versus the rest of the installed base.
I would imagine it's higher, but can you quantify it at all?
We do quantify it. We monitor it closely. And there is not a market difference between what the utilization rates are on leases versus purchase product.
Okay. Thanks. And then just on the follow-up to the last last question, Rick's question. You think about the low end and the high end of your 2019 procedure growth range, is there, is the slowing mature procedure growth commentary kind of meant to be throughout the entire range or is that contemplated at the at the low end instead of the high end?
Yes, some level of moderation, particularly in the U. S. Is part of the trend and obviously more moderation at the lower end and less moderation at the higher end. But the range will be largely the range itself is largely reflective. The biggest is going to be the breadth and pace of growth in U.
S. General surgery, our largest category now, then the matured procedures and some other factors regarding growth in China timing of placements of new systems and the pace of adoption of reimbursed procedures in Japan.
Thank you.
Well, thank you. Thank you for
the questions. That was our last one. As we've said previously, while we focus on financial metrics, such as revenues, profits and cash flow during these conference calls, our organizational focus remains on increasing value by enabling surgeons to improve surgical outcomes. Reduce surgical trauma. We've built our company to take surgery beyond the limits of the human hand, and I assure you that we remain committed to driving the vital few things that truly make a difference.
This concludes today's call. We thank you for your participation and support on this extra ordinary journey. To improve surgery. And we look forward to talking to you again in 3 months.
Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining. You may now disconnect.