And ladies and gentlemen, thank you for standing by. Welcome to the Initiative Surgical Third quarter 2018 earnings a question and answer session, instructions will be given at that time. As a reminder, this conference is being recorded. I'd now like to turn the conference over to our host, Mr. Calvin Darling, Senior Direct of Financial Investor Relation, Intuitive Surgical.
3rd quarter earnings conference call. With me today, we have Gary Goodhart, our President and CEO and Marshall Moore, our Chief Financial Officer. Before we begin, I would results may differ materially from those expressed or implied as a result of certain risks and uncertainties. Any Securities And Exchange Commission filings, including our most recent Form 10 K filed on February 2, 2018 10 Q filed on July 20, 2018. Our SEC filing can be found through our website or at the SEC's Edgar database.
Investors are cautioned not to place undue reliance on such forward looking statements. Please note that this conference call will be available for audio replay on our website at intuitive.com, on the latest events section under our Investor Relations page. In addition, today's press release and supplementary financial data tables have been posted to our website. Today's format will consist of providing you with highlights of our third quarter results as described in our press release announced earlier today, followed by a question and answer session. Gary will present the quarter's business and operational highlights.
Marshall will provide a review of our third quarter financial results, Then I will discuss procedures and clinical highlights and provide our updated financial outlook for 2018. And finally, we will host a question and answer session. With that, I will turn it over to Gary.
Good afternoon and thank you for joining us on the call today. The third quarter of 2018 was a strong one for Intuitive, with continued clinical adoption of our products and positive steps and product launches. As we mentioned last quarter, we believe acceptance of da Vinci and general surgery in the United States, Growth internationally and appreciation of our generation 4 platform underpins our recent performance. Our team introduced sophisticated new products into the market this quarter as 20% in third quarter of 2018 compared with the third quarter of 2017, increasing modestly from our Q2 growth rate. Trends present in the first half of the year have continued 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 prostatectomy and hysterectomy, was solid again in the quarter. In Japan, procedures grew above 40% year over year, while our team is onboarding customer facing staff, and optimizing training logistics to support market growth. European procedure performance was generally in line with our expectations again this quarter, with particular strength in the UK Calvin will review procedure trends in greater detail later in the call. Our capital placement performance in the 3rd quarter was strong, with growth in total placements over Q3 of 2017 rising 37%, from 169 to 2 31 this quarter. Net of trade ins and retirements, our da Dinchy installed base grew 13% over Q3 2017.
The mix of system placements between our flagship XI system and our value X system aligned with our strategy regionally Capital placements have been historically lumpy, and we anticipate variability in placements going forward. As we indicated on prior calls, we are seeing increased cut customer interest in alternative capital acquisition approaches, including leasing and usage based models. This quarter, the proportion of NUSIS placed under lease increased over prior quarters. We believe it is, it is in both our customer's interest and intuitive to offer alternative financing models for qualified hospitals. The investment front, we are building our organization and making investments to deepen both our technological and regional capabilities.
Fixed cost spending in the quarter was slightly lower than we planned, largely due to timing issues that we anticipate will catch up in future quarters. Use of our products has increased we are investing to drive technology strength and to build operating and supply capability in support of our future growth Financial highlights for our 3rd quarter results are as follows. Revenue for the quarter was $921,000,000, up 14%. Pro form a gross profit margin was 71.5% compared to 71.8% in the third quarter last year. Instrument and accessory revenue increased to $486,000,000, up 21%.
Total recurring revenue the quarter was $660,000,000, representing 72% of total revenue. We generated a pro form a operating profit of $91,000,000 in the quarter, up 12% from the third quarter of last year. And pro form a net income was $337,000,000, up 4% with the difference in growth rate between operating profit and net income, largely driven by a one time tax benefit in Q3 of 2017. Marshall will take you through our finances in greater detail shortly. Delivery of substantive technology and service improvements core to continued progress in surgery.
We measure our innovations by their ability to positively impact outcomes in the hands of our customers, to be used efficiently while lowering the total cost of treatment per patient episode and further positive impact on the experience of surgical patients and the professionals who treat them. We've said in the past, we design our products, systems, instruments and software to work together seamlessly as an ecosystem that enables a holistic approach to a surgical procedure. We obtained FDA clearance for our da Vinci SP surgical system for urologic surgical procedures in Q2 this year. And we submitted our 510 application for Transoral Procedures for SP this quarter. We shipped 3 da Vinci SP Surgical systems in the quarter, all in the United States.
These first access sites will focus on clinical data generation and customer feedback. Surgeon and team feedback from first cases has been extremely encouraging. That said, we are in the very early stages of a multiyear pathway for SP and our focus is on satisfying our early customers, expanding clinical indications, improving our processes and technologies and further refining our supply chain. Our team is progressing to plan on ion, our flexible robotics robotics platform initially targeted to address the acute need and diagnosis of lung cancer, one of the most commonly diagnosed and most lethal forms of cancer in the world, and for which early detection is particularly important. As we announced last month, we submitted our 510 for its first indication, We showcased our ION system at the Chest Conference this month.
Feedback from physicians relative to existing and recently announced alternatives has been strongly supportive of our efforts. Our team is focused on SureForm 60 Millimeter Stapler for use with our 4th generation systems this summer. Customer feedback has been encouraging at these early sites with 100 of procedures performed to date. The SureForm 60 brings to surgeons class leading articulation and precision with computer measured and controlled staple firing. Collectively, our SureForm 60 Millimeter Stapler joins our force by Polar Grasper and vessel sealer extend Advanced Energy Instrument to provide an optimized set of tools for general surgeons, particularly in hernia, bariatric and colorectal procedures.
Our vessel sealer extend launched in Q2 this year and our forced bipolar instrument launched in Q3. Feedback on these instruments has been outstanding. We anticipate expanding our rollout of SureForm 60 in 2019, broadening the set of tools available to general surgeons on our 4th generation platform. For the balance of 2018, our focus remains in completing the tasks we set for ourselves. 1st, continued adoption of da Vinci and general surgery, 2nd, continued development of European markets and access to customers in Asia 3rd, advancing our new platforms, imaging advanced instruments to MTSP and our ION platform and finally, support for additional clinical and economic validation by global region.
I'll now turn the call over to Marshall who'll review financial highlights. Good afternoon.
I'll describe the highlights of our performance on a GAAP and non GAAP or pro form a basis. Our results are also posted to our website. 3rd quarter 2018 revenue of $921,000,000 grew 14% compared with 3rd quarter 2017 revenue of $808,000,000 and increased 1% compared with 2nd quarter of $909,000,000. 3rd quarter 2017 revenue included $21,000,000 that had previously been deferred in connection with a customer trade out program that the company had offered certain first quarter 2017 customers. Excluding the $21,000,000, revenue grew 17%.
3rd quarter 2018 procedures increased approximately 20% compared with the third quarter of 2017, and were relatively flat compared with last 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 $486,000,000 increased 21% compared with last year, which is higher than procedure growth, reflecting increased usage of our advanced instruments. Instrument and accessory procedure 3% compared with last quarter. In customer buying patterns. Systems revenue of $275,000,000 increased 5% compared with the third quarter of 2017, primarily reflecting higher system placements and the third quarter of 2017, a high number of system placements under operating lease arrangements and slightly lower ASPs. We placed 2.31 systems in the third quarter of 2018 compared with 169 systems in the third quarter of 2017, and 220 systems last quarter.
58 operating lease transactions, representing 25% of total placements were completed in the current quarter, compared with 20 or 12 percent of total placements in the third quarter of 2017 and 40 4 or 20 percent of total placements last quarter. We provide financing alternatives to hospitals that are well positioned in their markets, including some usage based options, as we believe these alternatives align with customer objectives enabling faster market expansion. As of September 30, we had 279 operating lease and usage based arrangements outstanding, with a net present value of their future revenue stream being approximately $250,000,000. We expect the proportion of these types of arrangements to increase long term. 28% of current quarter system placements involve trade ins, reflecting customer desire to access or standardize on our 4th generation technology.
This is an increase compared with 26% in the third quarter of 2017 and lower than the 34% trade in rate realized last quarter. Trading activity can be lumpy and difficult to predict. 68% of systems placed in the quarter were da Vinci were da Vinci X systems compared with 72% da Vinci XIs and 21% da Vinci X's last quarter. Many of the X systems replaced with cost sensitive customers in Europe and with customers in Japan where we obtained X approval this past May. 3 of the systems placed in the U.
S. 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 $1,450,000 compared with $1,470,000 last year, and $1,420,000 last quarter. The changes compared with prior periods primarily reflects the mix of X systems and trade in transactions.
Outside of the U. S, results were as follows. 3rd quarter revenue outside of the U. S. Was $244,000,000 increased 15% compared with the third quarter of 2017 and decreased 8% compared with last quarter.
Compared with the prior year, instruments and accessories revenue increased $30,000,000 or 34 percent, and systems revenue decreased $5,000,000 or 6%. The increase in instrument and accessory revenue relative to the prior year was primarily driven by procedure growth and customer buying patterns. The decrease in systems revenue was driven by an increase in the number of operating leases lower ASPs, reflecting product mix and the impact of trade in transactions. The decrease in OUS revenue relative to the previous quarter flexibility, it was driven by a decrease in the number of systems placed, a higher number of system lease transactions, and lower 23% compared with the third quarter of 2017 and decreased 1% compared with 2nd quarter. Outside the U.
S, we replaced 75 systems in the 3rd quarter compared with 62 in the third quarter of 2017 and 82 last quarter. Current quarter system placements included 30 into Europe and 30 into Japan. 36 of the 75 systems placed in the 3rd quarter were X systems. 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 the remainder of the P and L,
the pro form a gross margin for
the third quarter of 2018 was 71.5%. Compared with 71.8% for the third quarter of 2017 71.1% last quarter. The decrease compared with the third quarter of 2017 primarily reflects lower system ASPs, partially offset by a higher mix of INA. The increase compared with last quarter primarily reflects higher system ASPs and higher production levels. 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 product costs and improve manufacturing efficiency.
Pro form a operating expenses increased 16% compared with the third quarter of 2017 and increased 4% compared with last quarter. Overall, our spending was below our annual guidance, reflecting and OUS market expansion and expect spending to increase next quarter into 2019. Our pro form a effective tax rate for the third quarter was 18.5% compared with our expectations of 19.5% to 20.5%. Our tax rates will fluctuate with changes in the mix of U. S.
And OUS income, changes in taxation made by local authorities, and with the impact of one time items. Our third quarter 2017 pro form a tax rate of 9.7 percent reflected $68,000,000 of tax benefits associated with the expiry of statutes of limitations. Our third quarter 2018 net income was $337,000,000 or $2.83 per share, compared with $325,000,000 or $2.78 per share for the third quarter of 2017 and $327,000,000 or 2.6 $7.6 per share for the second quarter of 2018. Our third quarter 2017 net income benefited from the 21,000,000 deferred revenue, net of costs, and the $68,000,000 of tax benefits associated with the expiration of statutes of limitations, or a total of $0.68 per share. I will now summarize our GAAP results.
GAAP net income was 2 dollars per share for the third quarter of 2018 compared with GAAP net income of $299,000,000 or $2.56 per share for the third quarter of 2017 and GAAP net income of $255,000,000 or $2.15 per share for the second 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. Employee stock awards, employee equity and IP charges, and legal settlements. Note that the IRS has not issued final tax regulations associated with recent U. S. Tax legislation.
Therefore, impacts of the U. S. Tax Cuts and Jobs Act reflected in our results and our projection of future tax rates represent our best estimates further interpreted. We ended the quarter with cash and investments of 4.3000000000 at June 30, 2018. The increase generally reflects cash generated from operations.
We did not repurchase any shares in the quarter and have approximately $718,000,000 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 2018. Thank
you, Marshall. Our overall third quarter procedure growth was 20% compared to growth in U. S. Procedures and 23% growth in OUS markets. In the U.
S, procedure performance across general surgery, gynecology and urology all exceeded our expectations, with Q3 year over year growth rates increasing modestly across these large categories as they did in the 2nd quarter. Q3 procedure performance was again driven by growth in general surgery, led by hernia repair and colorectal procedures. Hernia repair, both ventral and inguinal, continued to contribute the most incremental cases in the quarter. Colecystectomy, bariatric and other practice based general surgery procedures all had strong growth in the 3rd quarter. In U.
S. Gynecology, third quarter 2018 year over year growth increased to mid single digits, driven by higher benign hysterectomy volumes. In the third quarter, we continue to see favorable surgical consolidation trends as our da Vinci surgery data indicate that practicing da Vinci's surgeons perform more da Vinci hysterectomies and an increasing proportion of U. S. Gynecology procedures are being performed by higher volume positions that specializing complex benign and cancer surgery.
Q3 U. S. Urology procedures had growth rates consistent with 2017 year to date 2018, driven by prostatectomy volumes. As mature procedure category, we believe that our U. S.
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 lubectomies and other thoracic procedures was again solid during the third quarter. Our overall U.
S. Procedure growth rate likely benefited from a weaker Q3 2017 comparison. Q3 OUS procedure growth trends were largely consistent with Q2. 3rd quarter OUS procedure volume grew approximately 23% compared to 23 procedure growth was driven by continued growth in DBP procedures and earlier stage growth in kidney cancer procedures, general surgery and gynecology. Procedure growth in Japan again accelerated as procedures were performed within the set of 12 additional procedures approved for reimbursement effective April 1st.
Procedure growth in China, again, moderated in Q3 as da Vinci System capacity expansion is constrained by system quota requirements. Most recent of which expired at the end of 2015. In Europe, procedure results vary by country with continued strength in the UK. Adoption of our products is ultimately based upon differentiated patient outcomes and procedure economics compared to alternative therapies. Intuitive supports the generation of high quality clinical evidence through collaborative research initiatives.
We work with clinicians, hospitals, and medical and surgical societies to study da Vinci clinical outcomes, while maintaining a patient's first mindset. Intuitive's currently supporting comparative multicenter studies for several key procedures, including hernia repair, lobectomy and right colectomy. In hernia repair, we are supporting a prospective multi center comparative study evaluating outcomes associated with open laparoscopic and robotic assisted inguinal and incisional hernia repairs in up to 900 subjects. This study is designed to collect outcomes related to pain, quality of life and recurrence for up to 3 years post procedure, capturing patient reported outcomes through direct electronic or phone follow-up. We are supporting a prospective comparative study for right collectible, comparing outcomes associated with extracorporeal and intra corporeal and asymptomatic technique in up to 300 subjects, collecting information related to patient quality of life parameters, including, but not limited to gastrointestinal quality of life and incidents of incisional hernia rigs.
Intracorporeal and eptimosis by the robotic approach may be amenable to more surgeon skill sets than the laparoscopic counterpart. Indeed, the degree of difficulty of the sutured laparoscopic anastimosis has limited identification of this approach. In this era where lung cancer is the leading cause of cancer death among men and women in the United States, a gradual decline as noted in the percentage of lung cancer surgery performed by an open approach from 43% in 2015 to 31% in 2017. The literature supporting the use of minimally invasive approach, both VAPS and robotic assisted for Levectomy, is incrementally growing with the majority of them attributed to the treatment of early stage lung cancer. Intuitive is conducting a retrospective comparative multicenter lobectomy study evaluating both the short term and long term outcomes across both early stage and locally advanced lung cancer in up to 5000 patients You can find a full description I will now turn to our financial outlook for 2018.
Starting with procedures. On our last call, we forecast full year 2018 procedure growth with an range of 14.5 percent to 16.5 percent. We are now increasing our forecast and estimate full year 2018 procedure growth of 17% to 18%. Consistent with historical patterns, we anticipate 30 plus percent growth in system placements we have realized in recent quarters. Furthermore, we expect that the proportion of systems placed via operating leases in Q4 will increase further from the 25% in Q3.
Turning to gross profit. On our last call, we forecast our 2018 pro form a gross profit margin to be within a range of between 70% 71.5% of net revenue. We are now retiring the lower end of the range and expect pro form a gross profit margin to be between 70 point 5 percent 71.5 percent of net revenue. Our actual gross profit margin will vary quarter to quarter depending largely upon product regional and last quarter, we guided 2018 operating expense growth of between 16% 18%. We are now adjusting this range lower and expect to grow 2018 operating expenses with a range of between 15.5% 17% above 2017 levels.
We are adjusting upwards our estimate for noncash stock compensation expense to a range of between $255,000,000 $260,000,000 in 2018 compared to $245,000,000 to $255,000,000 forecast on our last call. We continue to expect other income, which is comprised mostly of interest income to total between $70,000,000 $75,000,000 in 20.18. With regard to income tax, on our last call, we forecast our 2018 pro form a income tax rates to be between 19.5% 20.5% of pretax income. We are now shifting our estimates slightly lower to a range between 19% 20% of pretax income. That concludes our prepared comments.
Session. Okay. We have a question from the line of Bob Hopkins with Bank of America. Please go ahead.
Thank you, and good afternoon. I actually wanted to start if, okay, with a question on capital allocation. Obviously, the business trends are very strong right now. I think you mentioned that you've got $4,600,000,000 in cash and the authority to buy stock, maybe if okay, if you wouldn't just mind commenting on why you're not buying back stock right now? And does that suggest potential for M and A opportunities out there?
Thank you.
Hi, Bob. It's Marshall. We have not modified our capital deployment priorities. And so they're consistent with what we've said before. First, organic investment and substantial growth opportunities that are available to 2nd, acquiring technologies and talent that will ensure that we can accelerate our growth.
And then 3rd, using efficient and long term focused vehicles to return cash to to shareholders. And in that regard, we have done stock buybacks. You've seen us do them periodically. We do them opportunistically based on our assessment of the market think the market will continue to be volatile as it has been recently and, as it provides opportunities to purchase at the right price, you'll see us do something.
Thank you. And we have a question from the line of David Lewis with Morgan Stanley. Please go ahead.
Good afternoon. Gary, a couple of questions for me. I guess the first is, Marshall touched on this, but obviously leases suppress revenue in the quarter, but net placement numbers in the U. S. With the best we've seen as well as system utilization, both those numbers are the best we've seen in years.
And 20% procedure growth obviously reflects another quarter. I think the 3rd straight quarter of momentum acceleration. So I guess thinking about these U. S. Box and procedure trends, just walk us through, some of the drivers that you're seeing specifically in the U.
S. For these dynamics?
I think the procedure demand is, of course, the top line. And as we called out in the script, sustained strength in some of the mature categories in urology and gynecology and as well as general surgery really rising has been strong. And I think the box placements then are in response to that, increased procedure demand. From our perspective, we're happy to see utilization go up. We really view our capital placements in mature markets as a way to enable the the procedure market.
And so you're seeing that. Leases are then kind of a fall, a fall out of that philosophy for hospitals that have good positions in their markets and are well run, then we think giving them access where and when they need it at at terms that work for them and work for us, helps facilitate the market and we've been going to do that.
Yeah. And our next question will come from the line, from Amit Hazan with Citi. Please go ahead.
Thanks. Well, I was looking like we're getting about one question each year. So I'm going
to Yes, we'll give David a chance to jump back in queue a little later. Go ahead. Sorry about that.
No problem. I'll ask mine on Japan. That was obviously some improved numbers in Japan, the drop seizures and installations. And so I'm just curious if that's surprising to you, this is best after reimbursement. And if you could just give us some more color on how you're seeing that market react and develop post the new reimbursement and whether sustainability of that growth that we're seeing outlook more realistic to after this quarter?
Thanks.
We're pleased with progress in Japan. The, the, the, the kind of a subtle down growth rates are going to be a little bit hard to predict. Right now, demand looks really good and I think truly the pipeline of activities from demand to, clinical cases and up and running programs. That's the right limiting step. Some of that is, training capacity and logistics.
Some of it is field support on our side. Some of it is the depth of the surgeon proctoring network. Not all of the procedures that were reimbursed will adopt at the same rates nor will we pursue them all at the same rate. So there's a little bit of shakeout here as the priorities firm up. So far so good, but I really think there's a few quarters to go before this settles into, a kind of a more predictable cadence.
And if you have a follow-up, go ahead.
Oh, sure. Yes, so I'm going to ask, maybe ask about hiring pace. So from the numbers that you guys reported, it's obviously really strong. It's up to 5200 headcount now. It's about 700 increase so far this year.
So maybe just some color on where the heavy areas are in those heads are being allocated and then how you're thinking about that headcount growth as we think about the next year or 2?
Good question. There's some of the headcount growth is roughly tracks to the procedure momentum that we're seeing. So, There's field support that's required. There's the production side of instruments and accessories, and there's training resources that go in to our product training. And so those things are kind of ratable and we get a little leverage out of them, but we want to make sure that we support our customer really well.
So that's where you see the bulk of the hiring in. As procedure growth goes, we expect a little leverage there, but not a ton. There are also new platforms coming. We talked about in the script, SP and ION, and those are deep technology efforts. Supply chain efforts.
And so some of the heads have gone into support of that set of activities as we go. It may well be the rate limiting step for growth of the company is really the onboarding capability of really good people. So we watch it really carefully and care about it.
Okay. Thank you. And our next question will come from Tycho Peterson with JP Morgan. Please go ahead.
Hey, thanks. I'm going to ask a couple on some of the emerging procedures on bariatric. I'm just wondering comment on some of the market development efforts now that you've got the SureForm Stapler out there? And how should we think about sleeve gastrectomies versus bypass versus maybe other procedures? And then separately, I noticed you both, Calvin and Gary talked about COLI.
I'm just wondering if that's coming back a little bit relative to what we've seen in the past.
Yes, on the bariatric front, long term, we're really enthusiastic about it. And in the near term, We're optimizing a few things. We are optimizing the product portfolio in terms of some of the instruments that I mentioned in the script. So the vessel seal extend and the sure form 60. We're still in our 1st phase launch, which is, building capacity in the supply side as well as working through a customer preference feedback.
That will start to spend into 2019. And it'll be a measured, a measured launch, in part to make sure that our supply capabilities match demand and part to make sure that our sales force is well balanced in terms of supporting general surgery customers in hernia, which is growing nicely in colorectal, which is growing nicely so that we have a balanced approach to the general surgery market. So I wouldn't overbuilt the near term audit, I think in the long term, it looks quite good. With regard to resolution on the quite the kind of the clinical approach question you asked underneath sleeves versus bypass, a little too soon for us to work through it. Clearly, there's a mix in the market.
How that mix applies to robotics, I think that's a question for future quarters. On, on cholecystectomy, just touching that, we have seen strength in multiport COLI, a decline in single site cholecystectomy made up for more than made up for by strength in multiport For us, it's hard to know how much of that is a part of new general surgeons coming in. Versus how much of it is, is, surgeons adopting or changing their practice pattern for patients that they think are, well suited to robotics. There's clearly a mix of both and separating those 2 in terms of intent is very hard. So we mentioned it because the growth numbers have been, substantive, the sustainability of that growth, we're not ready to call you.
Okay. And then if I could just ask one more clarification. Can you comment on the difference between the usage based model and an operating lease for those systems that are kind of undertaking
Sure, Marshall.
Sure. Operating leases, you know, frankly, we structure these things to meet customer needs and operating leases come in various flavors, including that we will do your traditional 4 year lease with a, bargain buyout at the end. We also do short term rentals to get them over budget cycles. And, and again, so we're ultimately pretty flexible on the leasing programs. The usage based programs really are based on time and usage over a period.
And we've done that with a few hospitals, as we said, that are well positioned in market and are serious robotic users.
And in terms of our reporting Tycho, we are including these alternative structures in with the operating leases, right? So they're all included in the overall operating lease number. They're just think of it as another form of operating lease.
You. And our next question will come from the line of Larry Biegelsen with Wells Fargo. Please go ahead.
Good afternoon. Thanks for taking the question. 2 for me. I'll just ask them upfront. Gary, on the Q2 call, you said hernia is moving to a different phase.
And it's worth thinking through that phase. Can you elaborate that, maybe talk about some, themes you're seeing in hernia? And then separately, Obviously, you know, with the chess meeting at AATS, the 2, you know, robotic bronchoscopy plap forms got more Wall Street attention. Gary, the differences seem to be, between the two systems, the camera capability and the size of the working channel. How would you compare and contrast the 2 systems with respect to those difference Thanks for taking the questions.
It was a kind of a question of what inning are we in in hernia. And I think we're still in the first half of the game. But out of the first couple of innings. And why do I say that? I think you're starting to see a fair amount of data that's being collected in things like registries that's able to show clinical benefit.
And we're seeing a fair amount of, reorders from existing customers that does not appear that, a lot of it is just trialing. It looks like it. It's for those who have adopted their commitment to it appears to be pretty good. How deeply that goes into the total market in terms of what the total number hernias out there is. We still are struggling a little bit to understand what fraction of the total available market of Ernie is.
Will settle into a robotic assisted surgery in terms of size of the herniation and bilateral versus unilateral Inguinal hernia repair and so on some of the segments of the underlying market are not yet resolved. And so that's uncertain. We'll see as we go forward. But the data so far and the surgeons taking us has been good. So, that's what we were seeing last quarter.
I think that, that holds up this quarter. Turning to our ION platform, and as it relates to other products in the market, We made some decisions early on, that were really driven around, what we viewed as the clinical problem in pulmonology, which was early detection of distal, meaning on the periphery of the lung, on the further distant branches within the lung of suspicious lean that are give or take a centimeter in size. And to do that, you needed really good sensing, which we did. That was through our shape sensing technology and some of the 1st, partnering then acquisition and development of the Luna sensor. And then it was, dependent strongly on the size of the catheters.
So we made that decision based on understanding the physiology of the lung, understanding where those nodules were and and hoping to understand what, interventional pulmonologists and thoracic surgeons really needed. That's what drove our architecture. We feel good about it. It's possible technologically feasible to make a bigger catheter, making a bigger one easier than making a smaller one. Putting a permanent camera in, if we needed to do that, was all something that could be done.
And we chose not to. We chose to make it small. And time will tell, whether that was the right decision. I feel good about it. Last point I'd make about the lung space is that this is a space that has been looking at, early diagnosis of lung cancer for some time, and for which several commercial teams have gone in and promoted, products, several of which have disappointed.
So I don't think it's a market that will move on what's said. I think it's a market that will move based on true capability and clinical evidence. And that's where our focus is. We feel good about where we are. And if we show what we think we can, then I think that will, will determine success for us.
Thanks for taking the questions. Thank you.
Okay. Our next question will come from Brandon Henry with RBC Capital Markets. Please go ahead.
Can you discuss any challenges you expect to face with the ion allowed and who will be selling these systems to pulmonologist? Will it be a separate sales force or the existing intuitive sales force? And then just have a follow-up.
I would anticipate, the kinds of challenges that are related to the sort of complex product launches that we specialize in. So I think the early launches will be a couple things that will be engaging with sites that have a long term commitment, to clinical progress data collection that's associated with that clinical progress. Stabilizing supply chains for these kinds of technologies is non trivial. It's hard and it's important. And so we will do that for ION for sure.
And your stable supply chain allows you to support a larger customer base and also get your costs in line. And so that is routinely an exercise we need to do. And then building your technology training pipelines and the Proctoring Networks that are required to really expand launch. So those things are all in front of us in terms of ion. That's the challenge.
The good news is that we have a history of engaging those challenges. And I think we'll work it through Can I miss the second part of the question? Salesforce.
And then who's the salesforce? Will it be the existing salesforce or we have to build out a completely new sales force and just how will that look?
Yes, we have a small specialty team within our existing force right now that's deeply trained in this space. And linked to our other key where they need to be.
Okay. And then as a follow-up separately, could you provide an update on some of the opportunities to enhance Intuit's vision and informatics portfolio? And specifically, could you touch on the recent Intouch Health agreement and where the company is at with its augmented reality technology? Thanks.
Sure. On, as we've said before, for the last several years, we've increased our investments in imaging. I think imaging is important. Think it can really help change outcomes. And we do that routinely.
We do it in the image sensors in the endoscopes. We do it in the software that we use to process those images and the way we tune images. We do it in our displays and our user interface. We are investing in molecules to expand our firefly platform. As you know, molecules are just a way to increase the signal to noise for, surgeons to detect structures they care about, whether the things they want to take out or things they want to leave in and not disturb.
Informatics works hand in hand with that, certainly in OR informatics. So, we have built cloud capabilities over the years. As you know, we've been internet of things for surgical robots for a decade now. Over 90% of our systems are internet connected. So we have big data capabilities that we've built and we'll continue to build that allows us to do offline informatic processing.
And increasingly, we could use machine learning techniques and other things to do real time. Capabilities. And of course, over time, that will give us the opportunity to do mixed reality or augmented reality features. How fast they come and where are the first markets are? We're not prepared to discuss yet.
I think it's interesting in a long term pathway. And so that's a step in that direction. We've known in touch and have worked with them together for many years. And this was just a deepening of that relationship and the ability for us to build some real strength internally to intuitive as we accelerate our cloud capability.
All right. Thank you.
And our next question will come from Bob Hopkins with Bank of America. Please go ahead.
Oh, thanks for letting me sneak back in. I just wanted to ask a question on ION and FlexPath for long. Gary, how long will it take following the approval of the product to generate the kind of efficacy data that you need to really drive broad adoption of the therapy?
Good question. I don't really know the answer right now. I think we'll get some, early data that won't be out of a few sites that that'll be quarters, not years. You know, multi center studies that integrate that up go through peer review cycle, of course, will be years not quarters. So, I think you'll see as we have in the past, increasing cadence of publication, just depending a little bit on what the complexity of the clinical trials is.
And then if demand for SP is really high, do you have the capacity to meet that demand? I mean, I know you want to go slow and focus on the long term, but if demand is high, can you meet it?
Yes. I think the focus upfront is, 2 things. 1, it's to work on expanded indications. As you know, SP is a platform technology for our point of view. We have the 1st set of indications in urology we've submitted for the 2nd set in Transoral.
Robotics surgery, we think there are other indications that'll be important. So, the first thing is to really make sure that we're putting systems out that will help develop those indications over time. So that is important to us. Second thing is that SP is amongst the most sophisticated products I've ever been personally associated with, certainly that Intuitive has brought to market and making sure that we really understand and well characterized what our technologies are. And we have a really good stable supply chain before we go abroad is really important to us.
My enthusiasm over the long term the customer enthusiasm for its capabilities is very good. But I think we'll be, measured in this next set of quarters. As indications come and as our confidence builds, then of course, we can always accelerate. Supply chain capacity, but we're going to take it in steps.
Great. Thank you very much.
And our next question will come from David Lewis with Morgan Stanley.
Hi, David. Welcome back.
Good afternoon. The suspense was killing me. So I don't know that my question will live up to this extent, but, this is terrible. But Calvin had mentioned in the prepared remarks, the systems moderation in the fourth quarter, just is there anything fundamental behind that other than harder comps and obviously the increased implications of higher leases?
Yes, I think it's really mentioned comparisons in the prepared remarks. We actually kind of crossed over that 30% growth in placements threshold last Q4. And so now this is the 1st quarter we're comparing against that kind of comparison. And so just as a little tougher, but like I said, we still expect a seasonally strong 4th quarter.
And Gary, just you've got a lot of questions call on SP and I. And I wonder just, a lot of investors are focused on these platforms. From a commercial perspective, if I compare SP and I on Which one's going to require greater channel development? And how would you compare the near and long term opportunity for system placements and revenue across these two systems? Thanks so much guys.
As I think about it, SP is more familiar customer base. I think it has really interesting core clinical capability which is the ability to work in small spaces and parallel access. And I have been pleased with a surgeon response, which has been now that I have a raw capability like this, there are some, some different approaches that may be available to us and they're interested in developing the data that helps that. But I think that that's our visibility on that is probably a little better, because we know the customer base quite well. As you look at ion, I think ion First is a diagnostic initial application, that will have a little bit different set of dynamics for us as a company over time.
I think the platform itself will have long legs. If you think about the ability to navigate tortuous pathways, and inspects things using preoperative images, which is kind of the core technology underneath, there are a lot of things that in the body could be interesting there. But it'll take some time to develop it. And given that those are a different set of procedures that are different call points for us, that will take more development. For us and frankly for the competitors in the space as that develops out.
So that's a more nascent market. I think very interesting and long term possibility. You kind of asked how big are the total available markets for these 2 different things? And how do we think about future market capacity? Those are highly uncertain.
We, of course, have models on them. We look at them, but as you know, with us for years here that, capability ultimately determines the total opportunity in the market. And as capability is established with these things, we'll know better and we get a little experience with them, we'll start to share with you our thoughts as the uncertainty starts to come down a little bit.
Great. Thanks so much.
Thank you. Our next question will come from the line of Larry Keusch with Raymond James. Please go ahead.
Gary, just wanted to see if there are any observations or learnings from China over the last 3 months since the 2Q call.
Generally, no big change. As we've said before, we think demand in China for our products is real and, and we're excited about it. And we think the long term opportunity there is great. We think the micro, the macro trade environment is pressured. And, we think that that pressure does not help us.
And, so incrementally a little more headwinds on the micro side, at the on the ground side, we continue to make incremental progress and we keep, we keep working within the environment we have to work.
So I take it, not a whole lot more visibility on just the process and the quota itself?
Correct.
Okay. And then, secondly, I know you obviously choose your words carefully in the prepared comments and I think in the part around the 60 millimeter stapler, you indicated that the, sort of initial feedback was encouraging. And I guess, as I listened to that, I was wondering if that is meaning that, you know, look, this is getting out there. And people are starting to use it. And it'll take some time until you build the capabilities to get it out there to drive more demand.
Or does Encouraging mean that perhaps you're seeing some things where you may actually need to tweak it a little bit before it's really ready for, if you will, prime time in 20 19?
In terms of customer response has been quite good. The, the things that we're pacing, if you ask another way to ask your question is, what's pacing launch? And there are really 2 things that are pacing us. One is, Stapler is our sophisticated devices to make and you want to make sure that as you expand your supply capacity that you're doing at a very high quality level and so we're doing that. The second one is that we don't want to overwhelm our sales force with, enormous amounts of new and different products simultaneously.
We want to give them time to be deep and, and, be able to address customer interest and demand as it happens. Those are really the 2 pacing items.
Okay, perfect. Thanks very much.
We have a question from the line of Richard Newitter with Lee Rank Partners. Please go ahead.
Hi, thank you. I just in light of the operating expense growth coming in a little bit lighter than kind of what you were forecasting is a little more operating leverage this year clearly. I was wondering if you could over some thoughts on maybe some of those projects you said were getting deferred or it's a timing issue and maybe some color on how we should be thinking about operating leverage potential in 2019 with respect to spending?
Sure. My, my preference would have been that we had spent our full allotment now rather than underspent. On the other hand, I'd rather spend it wisely than spend it because I have it. Most of the spending has to do with, human capital, bringing on staff, and we're doing well. But there's kind of a natural rate for bringing on staff.
And We'll do it where we are bringing on outstanding, people and integrating them well. It's not so much a specific product or project that is impacted and it's not so much a prototype dollars just rolled from one spot to another. There's a little bit of that, but that is the dominant effect. The dominant effect is really modulating the growth of headcount, and that has to do with, pipelines for bringing in talent. You asked a little bit of what does that imply for 'nineteen?
And as we said in our prepared remarks, we are seeing a good procedure momentum in the marketplace and good demand and we want to make sure that we're able to meet that demand at high quality. We are not setting ourselves up to try to drive leverage in the 2019 model. Now we haven't finished all of that. And we'll do our spending models for 'nineteen at the end of the next call. But directionally speaking, we want to make sure we can satisfy market demand here.
Okay. And just following up on one comment you made earlier, you said China as expected without increased capacity is moderating the growth in China continues to moderate. I'm just curious if you can characterize the kind of the pace of moderation in growth that you're seeing there. Relative to kind of what you would have expected? Is it not slowing as fast as you would have thought or is it in line with your expectations?
Maybe just a little color there so we can think about how much of a headwind that might present going forward?
No, we continue to make progress on utilization on the systems that are in China. Last quarter, we talked about the China growth rate and procedures being fairly in line with the overall OUS growth rate in the low 20s. We're at a stage now where the moderation is at a moderate pace, if you will. And so you're gradually moving down from there.
Okay, thanks.
Thank you. And our next question will come from the line of Isaac Roel with Goldman Sachs. Please go ahead.
Good afternoon. Thank you. A question 2 questions, one on equipment and one on, investment in the business. On the first one, I was curious with the XI upgrade cycle, if you could maybe qualify where you think we are in that process, you sent to which you have is still a fair amount of opportunity. And then secondly, on the expense side, Gary, you mentioned a little bit about, the opportunities for training and I think that is a bit of a competitive advantage for you guys.
And so if you could maybe contrast how you think training for your platform will evolve, not only for new application, but also globally as you expand to other countries where medical practice is different. I'd be interested in sort of some of the things you're doing, on the training side. Thank you.
Sure. On the, XI upgrade cycle kind of, or the generation 4 upgrade cycle, Just roughly speaking, I don't know how many SIs there are out in the world, but give or take. $2500. So, you know, we, I don't know exactly what I would say is sort of what percentage we're done, but there's an installed base of SIs over 2000 that, that's an opportunity for us as we go forward. I think your the implication behind your training question is exactly right.
Building training capability is heavy lifting. It's a combination of human capital, people who are good at training and what that looks like, a set of processes to, to build that are valid and you have validated. And then Proctering Networks and Proctering Networks are your customers, our customers who are deeply experienced in and have teaching capability and willing to teach others. And so we developed those things. We have built a set of tools internally that allowed us to gain some efficiency in being able to spread that capability into new markets And so that helps us.
And we think that doing that well and doing that efficiently is something that is worth the investment and we have done. So What is its long term competitive advantage? I don't know exactly, but I believe it's important for our customer and therefore important for the company. Perhaps just one last question and then we'll close here.
So our last question will come from Vijay Kumar with Evercore. Please go ahead.
Hey guys, thanks for squeezing me in and congrats on the damp really impressive procedure number. So maybe Gary or Marshall, just starting on the procedure number, The guidance is 18, right? So when you think about next year, number of factors at play, but just how do you think the procedure number is going to look like. Should we be thinking of a really strong number? You made some comments on hernia.
We're still at the very early stages of this hernia pickup. You have a couple of new products coming in. So I'm just curious on how that number should trade in. Just given lease, it looks like leases, the percentage of lease going to increase next year, right? So when we're thinking about modeling revenues for next year, if you could just explain the procedure, how we should think about it.
I think that'll be extremely helpful. Yeah.
Hey, BJ, it's Calvin. Obviously, we'll give our specific procedure guidance on our next call in January, but we do anticipate the drivers of procedure growth in 2019 to be fairly consistent with what we saw this year in 2018 and last year in 2017. Namely, U. S. General surgery, U.
S. Thoracic surgery, and OUS procedures broadly speaking, driving the lion's share of growth. U. S. General Surgery is now our largest specialty yet as we were describing, we're in still fairly early stages for our hernia repair, both ventral and inguinal colorectal procedures as well.
And even earlier stages for some of the broader practice based procedures. On the OUS side, we're investing in growth in the larger European countries, Japan, China, Korea, OUS driving growth. When we talk about what can lead to some of the variability and the potential range of growth, it would be obviously the pace breadth of that U. S. General surgery growth, U.
S. Mature procedure trends, any change in the China systems quota positive or negative, And then, in Japan, the pace of adoption on the 12 new reimbursed procedures.
All right. Well, thanks, Calvin, thanks, VJ. That was our last question. 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 and reduce surgical trauma.
We've built our company to take surgery beyond the limits of the human hand, and I assure you We remain committed to driving to buy a few things that truly make a difference. This concludes today's call. Thank you for your participation and support on this extraordinary journey to improve and we look forward to talking to you
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