Ladies and gentlemen, thank you for standing by and welcome to the Intuitive Surgical Second Quarter 2017 Earnings Release Call. At this time, all lines are in a listen only mode. Later, there'll be an opportunity for your questions and it's and as a reminder this conference is being recorded. I'll now turn the conference over to Senior Director, Finance, Investor Relations, Kelvin Darling. Please go ahead, sir.
Thank you. Good afternoon, and welcome to Intuitive Surgical Second Quarter Earnings Conference Call. With me today, we have Gary Guthart, our President and CEO. Marshall Moore, our Chief Financial Officer and Patrick Clingan, Vice President of Finance And Sales Operations. Before we begin, I would like to inform you that comments mentioned on today's call may be deemed to contain forward looking statements Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties.
These risks and uncertainties are described in detail in the company's Securities And Exchange Commission filings, including our most recent Form 10 K filed on February 6, 201710Q filed on April 19, 2017. These filings can be found through our website or at the SEC's EDGAR database. Prospective 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 intuitivesurgical.com on the audio archive section under our Investor Relations page. In addition, today's press release and supplementary financial data tables have been posted to our website.
Today's format will consist of providing you with highlights of our second quarter results as described in our press release announced earlier today, followed by a question and answer session. Gary will present the quarter's business and operational highlights. Marsha will provide a review of our 2nd quarter financial results Patrick will discuss procedure and clinical highlights, then I will provide our updated financial outlook for 2017. 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. As you know, intuitive is focused on significantly improving surgery and enabling access second quarter of 2017 with solid performance in procedures and strong growth in system placements. Growth in procedures for the quarter was 16% over the second quarter of 2016. Overall trends in the first quarter remain stable into the second. Starting with the United States, both the emerging category of general surgery and more mature categories in urology and gynecology performed well.
Earnier repair continues to stand out in general in the general surgery category with additional contributions coming from colon procedures. As we mentioned last quarter, European performance in Q1 of 2017 benefited from calendar tailwinds that we expected to balance out in the second quarter. Indeed, this occurred with core growth staying roughly steady through the first half of twenty seventeen and European 2nd quarter growth moderating. Procedure performance in Asia was solid with growth in China being a highlight from a constrained installed base. Patrick will take you through these factors in more detail later in the call.
Our capital placement performance in Q2 of 2017 strengthened, with the growth in total placements from 130 in Q2 of 20 16 to 166 this quarter. As we mentioned on these calls, capital placements can be lumpy as evidenced by our performance in the first half of the year. In the United States, placements rebounded from a softer Q1 to a strong Q2, Anchor didn't repeat purchases by existing customers and multi system placements. System placements in Europe grew moderately aided in part by the launch of da Vinci X. In Asia, the placements grew slightly over the prior year period and over last quarter, constrained for the time being by the lack of a new system quota in China and limited reimbursements in Japan.
Marshall and Patrick will take you through system placement dynamics in greater detail. Turning to profitability for the quarter, strong system placements led to gross margins that These margins are at the top Our fixed cost growth met our expectations with increases in R And D expenses, growth in staff in European and Asian markets, investments in clinical trials, and growth in our corporate computational capabilities. Our 2nd quarter pro form a operating results are as follows. Proceeds grew approximately 16% over the second quarter of last year. We shipped 166 Dimitry Surgical Systems, up from 130 in the second quarter of 2016.
Revenue for the quarter was $156,000,000, up 13% from the prior year. Instrument and accessory revenue increased to $398,000,000, up 17%. Total recurring revenue in the quarter was $540,000,000, representing 71% of total revenue. Pro form a gross profit margin was 71.3% compared to 71.9 percent in the second quarter. Last year, we generated a pro form a operating profit of $313,000,000 in the quarter, up second quarter of last year, and pro form a net income was $228,000,000, up 4% from Q2 of 2016.
Marshall will take you through our finances in greater detail shortly. Turning to our product pipeline, as you know, in the back half of twenty sixteen and the first half 2017, we increased our midterm and long term investments in creating our next generation of products and services. We entered on our belief that substantial opportunity exist enable more minimally invasive surgery, better outcomes and to expand access to our technologies globally. Starting with our multi port portfolio, We developed a system pathway that responds to our customer's desire for choice in clinical capability and choice in total economics. In the quarter, we received our CE Mark and 510 clearance for da Vinci X, our system that brings core XI technology into a highly capable lower entry price surgical system.
We're pleased with the early reception of XBuyer customers and the choice it brings to those around the world who seek to build robotic assisted surgery programs with logical upgrade pathways and affordable access to our leading robot assisted surgery ecosystem. Our SP program continues to progress in its human clinical trial work and pilot production capability. We now have 4 clinical trial sites active, 3 in the United States and 1 in Asia, Cases in Asia have included Transoral urologic and colorectal surgery, while those in the U. S. Are focused on Transoral robotic assisted surgery.
As we mentioned in our last on our call last quarter, we anticipate filing our 510 for SP and urology in the back half of 2017. Surgeon feedback from our trial sites is very encouraging. Our teams continue to work on product validations and manufacturing capability to support submission and launch. Lastly, our flexible robotics program is meeting our expectations and making good progress in its product design phases and definition of regulatory pathways. In closing, the second quarter of 2017 has carried forward momentum built in prior quarters, and we remain focused on the following for the balance of the year.
1st, continued adoption of da Vinci in general surgery 2nd, continued development of European markets and access to customers in Asia 3rd, advancing our new platforms, imaging, advanced instruments, da Vinci SP and flexible robotics progress. And finally, support for additional clinical and economic validation by region. I'll now turn the call over to Marshall, who'll review financial highlights.
Thank you, Gary. I will describe our results on a non GAAP or pro form a basis, which excludes specified legal and claim accruals, excess tax benefits associated with employee stock awards and charges associated with stock based compensation and purchased IP. We provide pro form a information because we believe the business trends and operating results are easier to understand on pro form a basis. I will also summarize our GAAP results later in my script. We've posted reconciliations of our pro form a results to our GAAP results on our website so that there is no confusion.
2nd quarter 2017 revenue was 756,000,000 an increase of 13% compared with $670,000,000 for the second quarter of 2016 and an increase 12% compared with the 1st quarter revenue of $674,000,000. We launched the da Vinci X system during the second quarter in the U. S. And European countries covered by CE Mark. In conjunction with the launch, we offered certain customers who purchased systems in the first quarter the opportunity to upgrade or trade out their systems for the X system.
As a result, we deferred 23,000,000 first quarter revenue, which we recognize when customers either trade out their systems or when the offers expire, whichever comes first. None of the deferred revenue was recognized in the 2nd quarter. We expect substantially all of the deferred revenue to be recognized by year end. Second quarter 2017 procedures increased approximately 16% compared with the second quarter of 2016, and increased 5% compared with last quarter. Procedure growth relative to last year and the first quarter has been driven by general surgery in the U.
S. And urology worldwide. Patrick will provide more detail concerning procedure adoptions. Revenue highlights are as follows: Instrument and accessory revenue of $398,000,000 increased 17% compared with last year and increased 4% compared with the first quarter of $2,035.30 per procedure compared with $1810 last year and $18.40 last quarter. The increase relative to the second quarter of 2016 primarily reflects increased sales of our stapling and vessel sealing products, partially offset by customer buying patterns.
The decrease compared with the previous quarter primarily reflects customer buying patterns. System revenue of $216,000,000 increased 7% compared with the second quarter of 2016 and increased 41% compared with last quarter. The year over year increase reflects higher system placements and operating lease revenue, partially offset by lower average selling prices and lower lease buyout revenue. System revenue for the first quarter of 2017 excluded the $23,000,000 of deferred revenue. Had the first quarter included net revenue, quarter over quarter increase would have been 23%, reflecting a higher number of system placements, partially offset by lower lease buyout revenue.
166 systems replaced in the second quarter of 2017, compared with 130 systems in the second quarter of 2016 and 133 systems last quarter. 27 systems were placed under operating lease transactions in the current quarter compared with 15 systems in the 2nd quarter 201621 last quarter. As a reminder, revenue on operating lease transactions is recognized ratably over the life of the lease. Of the 166 17, there were 120 systems out in the field under operating leases. We generated approximately $6,000,000 of revenue associated with operating leases in the quarter, compared with $4,000,000 in the second quarter of 2016 and approximately $5,000,000 last quarter.
We generated approximately $5,000,000 of revenue during the quarter from lease buyouts. Compared with $13,000,000 in the second quarter of 2016 $10,000,000 last quarter. Globally, our average selling price which excludes the impact of operating leases and lease buyouts and revenue deferrals, was $1,460,000 compared with $1,560,000 last year, $1,460,000 last quarter. The decrease in ASP compared to the second quarter of 2016 primarily reflects lower priced systems sold cost sensitive market segments and lower pricing offered to customers purchasing multiple to positively impacted our ability to grow our installed base. We expect the proportion of these types of arrangements will increase over time.
Service revenue of $142,000,000 increased 11% year over year and increased approximately 1% compared with the first quarter of 2017. The year over year and quarter over quarter increases reflect growth in our installed base of da Vinci systems. Outside of the U. S, results were as follows. 2nd quarter revenue outside of the U.
S. Of $205,000,000 increased 11% compared with $185,000,000 for the second quarter of 2016 and increased 12% compared with $183,000,000 for the first quarter. The increase relative to the prior year primarily reflects increased system placements, net of leases, and increased instruments and accessories reflecting procedure growth, partially offset by lower system ASPs. Patrick will provide procedure growth information. The year over year decline in system ASPs reflects increased sales of lower cost systems to cost sensitive markets.
The increase in revenue relative to the last quarter reflects increased system placements and increased instrument and accessory growth. Outside of the U. S, we placed 63 systems in the second quarter compared with 51 in the second quarter of 2016, in 56 last quarter. 5 of the system placements in the current quarter were operating leases compared with 2 last quarter, last year 6 last quarter. Current quarter system placements, including 29 into Europe, 14 in Japan, 5 in India, 5 into Australia, and 3 in the China.
System 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 in the submarkets are constrained by government regulations. Moving on to the remainder of the P and L.
The pro form a gross margin for the 2nd quarter of 2017 was 71% compared with 72% for the second quarter of 2016 and 72% for the first quarter of 2017. The decrease compared with the second quarter of 2016 primarily reflects decreased service margins associated with higher scope repair costs. The decrease compared with the first quarter reflects a higher proportion of system revenue relative to total revenue. Since we deferred costs associated with the $23,000,000 revenue deferral, the trade off program had little impact on our margins. Future margins will fluctuate based on the mix of our newer products, the mix of systems and instrument and accessory revenue, our ability to further reduce product costs and improve manufacturing efficiency, and in the long term, the potential reinstatement of the medical device tax.
Pro form a operating expenses increased 23% compared with the second quarter of 2016 and increased 2% compared with last quarter. The increases are consistent with our planned investments in product development, specifically da Vinci SP, flexible robotics, imaging and advanced instrumentation and the expansion of our OUS markets. The year over year growth rates will subside over the remainder of the year with total year growth still expected to be around 18%. Our pro form a effective tax rate for the the second quarter of 2016 28.1 percent last quarter. The increase in our tax rate reflects an increased proportion of U.
S. Income relative to total income. Our tax rate will fluctuate with changes in the mix of U. S. And OUS income and with the impact of one time items.
Our second quarter 2017 pro form a net income was $228,000,000 or $5.95 per share, compared with $220,000,000 or $5.62 per share for the second quarter of 2016 196000000 or $5.09 per share for the first quarter of 2017. The 23,000,000 including the associated deferral of cost of sales and the income tax effects reduced GAAP and pro form a net income per share in the first quarter of 2017 by approximately $0.28 per share. Earnings per share benefited from the full impact of our 2,000,000,000 stock buyback as we retired approximately 2,400,000 shares on January 27, 2017. At this point, given the increase in the share price since the start of the ASR, the ultimate number of shares delivered under the ASR, may not change materially from of our or $5.77 per share for the second quarter of 2017 compared with $185,000,000 or $4.71 per share for the second quarter of 2016 $180,000,000 or $4.67 per share for the first quarter of 2017. GAAP net income for the second quarter included a net benefit of $5,000,000 associated with litigation settlements, net of charges compared with 4,000,000 quarter of 2017 also included a charge of approximately $6,000,000 associated with purchased IP.
Beginning in 2017, we are required under GAAP to report the excess tax benefits or deficiencies associated with employee stock awards in our tax provision rather than as an adjustment to paid in capital as in prior periods. The excess tax benefit included in our GAAP results for the 2nd quarter was $31,000,000, contributing $0.80 per share compared with $33,000,000, contributing $0.85 per share in the first quarter of 2017. We have excluded these benefits from our pro form a results. This amount will fluctuate quarter to quarter based on the volume of employee stock option exercises in a number of RSUs vesting and the value of our stock. We ended the quarter with cash and investments of $3,400,000,000, up from $3,100,000,000 as of March 31, 2017.
The increase reflects cash generated from operations and proceeds from stock option exercises. And with that, I'd like to turn it over to Patrick will go over our procedure and clinical highlights.
Thanks, Marshall. Of our 2nd quarter procedure growth of 16%. U. S. Procedures grew approximately 14% outside of the United States, procedures grew approximately 22%.
Procedure trends were consistent with the first quarter with growth led by U. S. General surgery and global urology. In the United States, both mature and growth procedures such as general and thoracic surgery outperformed our plan. The majority of the outperformance was driven by continued growth
We believe that our U.
S. Prostatectomy volumes have been tracking to the broader prostate surgery market in U. S. Gynecology. 2nd quarter procedure growth sustained trends observed during the first quarter.
Procedure growth in USGYN appears to be driven by consolidation of surgeries towards physicians that specialize in complex and cancer surgery, who tend to be users of the da Vinci system. 1st quarter U. S. General and thoracic surgery procedure adoption remains strong, led by solid growth in hernia repair and continued adoption of colorectal procedures. Earnie Repair continues to contribute the largest volume of new procedures in the United States, and existing surgeon retention and utilization remains strong sound.
Growth trends in lebectomy and other thoracic procedures continue to show strength off of a small base. To second quarter was another quarter with a large number of clinical publications evaluating da Vinci surgery, one that we'd like to highlight from Doctor. Rashidi from the University of Texas and colleagues from Providence Health And Services, who published a study of more than 3500 colorectal patients treated by 58 high volume surgeons within the Providence Health And Services network in the American Journal of Surgery The authors found that in exchange for a longer operative time, patients treated on a da Vinci system experienced a threefold and conversion rate and nearly a day shorter length of hospital stay aired to laparoscopy. In addition, the authors found that there was no difference in total direct costs between the two cohorts. Turning abroad, procedure growth outside of the United States was approximately 22% in the 2nd quarter, led by the global adoption of da Vinci prostatectomy with solid contributions from kidney procedures, general surgery and gynecology, As we discussed last quarter, the timing of the Easter holidays from Q1 into Q2, which provided a tailwind to our first quarter result, served as a headwind in the quarter, likely reducing our outside of the United States procedure growth by an estimated 3%.
Taken together, 1st half procedure growth 25% provides a better representation of procedure performance outside of the United States and either quarter's result. Procedure growth was led by China, Germany and Japan. Procedure growth in China was driven by a strong expansion in system utilization as system placements remain constrained pending the issuance of a new quota for civilian hospitals. Procedure growth in China is broad based with a number of specialties contributing to the strong performance. In Germany, procedure growth is supported by installed base expansion that is driving strong adoption in urology, with contributions from general surgery.
In Japan, DBP and DBPN continued to grow, though year to year comparators have begun to slow as DBP adoption has crossed 80%. During the quarter, the first clinical experience on da Vinci X occurred in Germany, Initial procedures include urology and gynecology with strong early utilization, commenting on the experience, Doctor. Vid from San Antonio's hospital Cornell stated, da Vinci X is ideal add on to our existing da Vinci XIs, same feeling on the console. Hopefully, evidence continues to build in support of the clinical and economic validation of da Vinci surgery. During the quarter, an economic analysis studying the impact of the VINCI partial nephrectomy in England was published in European Urology.
The work was completed by HCD Economics And Affiliate of the University of Chester. Comparing more than 4200 partial nephrectomy patients between open and da Vinci surgery. The authors found that da Vinci surgery lowered the total cost to treat during the first year after the procedure by an average of £900, primarily by reducing postoperative inpatient utilization from length of stay, cancer and other readmissions and 90 day complications. This concludes my remarks. I'll now turn
the call over to Calvin.
Thank you, Patrick. I will be providing you with full year 2017 procedure growth of 12% to 14% above the approximately 752,000 procedures performed in 2016. Now based largely upon continued strong results in U. S. Growth and mature procedure categories in China, we are increasing our estimate for 2017.
To 15%. During the second half of the year, we expect our procedure growth rate to moderate in part to one fewer operating day during the third quarter. As we move into the second half of the year, we also expect contributions from China and Japan to temper until we obtain a new quota and place additional systems in China and obtain additional procedural reimbursements in Japan. With regards to system placements, a record high of 27 of the 166 second quarter system placements were structured as operating leases. In the second half of twenty seventeen, we expect the proportion of systems placed under operating leases will continue to increase The average selling price for systems sold outright will vary quarter to quarter based upon factors, including product, regional and trade and mix.
With increasing placements into cost sensitive markets, we expect that our average system selling price will continue to trend gradually lower in the back half trade in program. Going forward, we expect to defer no further revenue related to this program and expect to release and recognize substantially all of the 23,000,000 accrued during the first quarter by the end of this year. Turning to gross profit. On our last call, we forecast 2017 pro form a gross profit margin to be within a range of between 70% and 71% of net revenue. We are now modestly raising the top end of the range and expect pro form a gross profit margin to be between 70 and 71.5 percent of net revenue.
Turning to operating expenses. As we have described previously, We have accelerated our investments in several strategic areas that will benefit the company over the long term. Accordingly, we have ramped our Cushion. On our last call, we forecast pro form a 2017 operating expenses to grow at the higher end of a range between 15% 18% above 2016 levels. We continue to expect results at the high end of the range between 17% 18% for the year.
On our last call, we Now based upon updated Black Scholes valuation estimates, we expect our non cash stock compensation expense to range between 200 and $210,000,000. We expect 2017 other income to be between $35,000,000 $40,000,000 compared to the 30 to 30 1,000,000 rate to be between 28 percent 29.5 percent of pretax income, higher than our previous guidance of 26.5 to 28.5 percent based upon a higher anticipated mix of U. S. Pretax profits. During Q2, we had 38,400,000 diluted shares outstanding for EPS calculations, roughly equal to the 1st quarter as the share reduction related to the full quarter impact As a result of our higher stock price, we don't expect the ultimate number very significantly versus the 2,400,000 shares already retired in January.
That concludes our prepared comments.
You. And our first question will come from Tycho Peterson with JP Morgan. Go ahead please. Hey,
thanks. First on X, I know it's early days obviously, but any color you can provide on the funnel in terms of new versus existing customers and maybe the types of customers that are emerging?
I don't think we did I tackle. I don't think we'd call out anything as surprising here. We had indicated to you in prior quarters that we think cost sensitive customers, particularly in Europe, are going to be interested in that remains so, it may have broader remit than that over time.
Okay. And then, urology continues to do well here. It hasn't reverted to lower growth rates. I think you previously expected and you talked about that sequential pickup. Can you maybe just talk to the sustainability of those trends in the U.
S. LJWP market?
Hey, Tycho. I think we continue to believe that our prostatectomy volumes are following broader surgery trends. As you know, prostate surgery really only represents about a third of all men diagnosed in the U. S. With prostate cancer.
So time to time, you'll see movements between watchful waiting radiation and surgery. We think mostly you've seen the procedures recover from the prior U. PSTF decision in 2012 where we worked through patients who had the disease progressed. We think at this stage, you're just seeing general small movements populations period to period.
Okay. I'll leave it at that. Thanks.
Thank you. Our next question is from Bob Hopkins with Bank of America.
Yes.
Great. Good afternoon. So the first thing I want to touch on just kind of looking through the results, which, were obviously strong pretty much across the board, but the U. S. Capital number really stuck out as a strong number.
And you mentioned more kind of multi system sales and repeat customers. Is this really a function of the increase in procedure volume growth and higher utilization, or was there something else going on this quarter?
I think it's the former. We're seeing, 1st of all, I think the consolidation of, U. S. Customers into, IDNs means that the negotiations are often happening one layer up. And I think they're looking across their portfolio of MIS opportunities and making decisions in, in broader settings.
I think it's a continuation of a trend we've been seeing for the past several quarters.
Great. And the other thing I
just want to follow-up is a couple of quick checks on the pipeline timelines. You mentioned China and Japan as constraining you in the back half. Was there any update at all on the China quota from a timing perspective or even your sense as to whether or not it could happen this year. And also wanted to just get a quick update on the timelines for SP beyond urology the filings we could expect, either later this year or into 2018? Thank you.
Sure. Marshall, I'll let you take China quota and I'll take the SP.
Okay. China quota, there is no new news here. It is, as we've stated before, the quota system involves 1st, the government is tied up in the overall government, the government's overall planning process. They did approve their budgeted in December. We, after that, it then rolls through a series of decisions about pro province spending as well as hospital spending.
And then eventually, we'll hear something about a quota We don't know when that will be. And what we would caution is that you put anything in the models for this year, frankly, because last time when the quota was approved, it took some time before the tender offers that the hospitals have to go through to get them done.
On the, on the SP regulatory question, we are targeting 510 K prerology in the back half of the year. There's data collection going on at the IDE sites for transoral robotic surgery and some, lab based clinical development for other procedures as well as the the trial site in Asia. We haven't yet publicly projected our timelines for submissions after the urology 510. There will be a set that come. It'll be months, not years after the 510 submission, what that looks like will depend on the speed of closure of the, of the clinical trial data and some of the conversations with FDA about what kind of submissions they'd like and we're not ready yet to anchor down those dates.
Great, that's helpful. Thank you.
Thank you. We'll go next to David Lewis with Morgan Stanley.
Just maybe a few quick questions here. Gary, just for you, just SP timing, I know it came up in the pipeline, but on FC, and I know it's pretty early. Can you give us any sense of of the major markets, U. S, China, Europe, which one? Our census, U.
S. And China are kind of ahead of Europe, but that's not based on a whole bunch Which region do you think proceeds the other? And is 2019 a reasonable estimate for a launch in some geographic locale?
So first to the question of, which regions matter? We think it will have a global appeal, but I think, you're right. That United States and China and then Europe will be interesting. In terms of timing, a lot of it will be predicated on regulatory pathways and what kind of data requirements there are. We think there are real opportunities in China.
We're going to make sure that we do that right with our joint venture partner. We've likewise think there is in the U. S. I'm not ready yet to call when the launch dates are for both sets. Because of negotiations with clinical trial results.
Europe, likewise, I think there's a little bit of uncertainty right now as to what kind of submission package will be required. And that's one of the things we're in the midst of working out, both internally and with conversations with regulatory authorities. Over time. We will do a controlled launch when we're ready. So we've told you, don't model any revenue into 2018.
We have not yet published and are not ready to publish when the final launch will be we'll let you know as we get closer to some of the certainty on regulatory timelines.
Okay, very helpful. And Marshall, two quick kind of margin related questions for you. The first is on gross margin, given the greater systems mix, I guess I was surprised to see gross margins as strong as as they were. And I wonder, we would have thought that X, which wasn't very material in the quarter, would have also pressured margins. So what's driving the margin strength and as it relates to just because a lot of the components of X, frankly, are already at scale in other places of the business.
And the second related is you're looking at hiring. We typically don't ask about hiring, but I think your hiring level this quarter is 25% above the next highest level. That's pretty remarkable. I wonder if you could just share with us where you're hiring and where those people are being deployed. Thank you.
Sure. On the, on the X margins, X margins, we had communicated before. Typically, when we introduced you see a little bit of a decrease in the margin and then we work to improve it over time. You should we did not expect as much of a decrease in margins due to as you said, really, is the result of putting together parts that are already manufactured for other systems. And so we have worked out most of the cost effectiveness of that.
As far as total margins, yeah, the total margin came down a little bit due to the mix of systems. I think it exceeded our expectations just because of the overall strength procedures and the drive of and it's driving, instrument and accessory revenue above our original expectations.
As far as the headcount goes, David, we ended the quarter with 4108 employees that was up little over 100 from the last quarter end. And it was 19% year over year, and it really does marry up with the the strategic investments that we're making in the business, on that side. The majority of the investments were in our our product operations group in the quarter.
Thank you very much.
Thank you. Our next question comes from Tayo Levy with Wedbush. Go ahead, please.
Great, thanks. Good afternoon. Mary, I wanted to ask on the SP platform. So the pathway forward, we'll be filing later on towards the end of this year and then assuming approval sometime next year. How is the launch going to proceed?
Is this a what is an experienced Davinci surgeon going to be able to sit in front of the SP, in front of a console and use the SP right off the bat or are they going to have to go through a proctoring of different types of cases. Just any color there would be great.
Yes, just, and broad brush is It's a family member in the da Vinci family and a lot of the we believe a lot of the learning and skills will be portable from one of the family members to the other. They're not identical. So there'll be some learning that goes through that transition. We think experience DeVinci Surgeons, we'll find that transition to be pretty manageable. What that looks like and how it's finally framed will evolve as we finish our clinical trials and our validations.
But I'd expect a lot of that to be portable. I think in terms of rollout, we'll be at a controlled rollout when we come out. In part, that controlled rollout will be for data generation at the first sites and also will have some constraints due to what our labeling will be at the first launch given the regulatory sequencing pathway. Feedback from the clinical trial sites has been really good about usability of the system and it meeting the expectations they had for what they believe they could do with it clinically. So so far so good there.
And we also get pretty good insight into, the characteristics of the system vis a vis what they're used to on SI and Xi and kind of in response to your initial question.
Got you. Perfect. And then just lastly, what's anything special going on in Japan? They've got way more systems than they have, than they need at this point. And then keep on buying more.
And I don't know if there is there a government incentive or any credit there that they're using? Thanks.
Yes, Tycho. Sorry, Tayo. Japan has a very diffuse healthcare system and hospital network system. So they're not very concentrated in terms of where the patients are. So While we are at a high level of penetration in DVP, you still have a lot of pockets of patients who are treated in fairly remote areas in local hospitals.
Continued to buy system, even to be able to access some of the remaining urology patients that are up there.
We've also been in, in Japan for some number years here. And I think there's a little bit of building capacity in hopes of broader reimbursements over time.
Thank you. And we'll go next to Amit Hazan with Citi. Go ahead, please.
Just one on the quarter and then a couple longer term ones. So on the quarter, obviously going just going back to the U. S. System number, a really strong number. I wanted to ask about trade ins though.
They were weak again in the U. S. As a second quarter in a row. Trying to kind of better understand why on one hand you've got this obvious growing pool of systems that need to be replaced, so you should in theory be replacing more systems every year. On the other hand, there seems to be a relationship between quarters where you had really strong de novo units like this year so far, both quarters.
And then tradins kind of tend to be inversely weaker in those quarters. What's kind of the correct way to be thinking about modeling trade ins in the U. S?
Let me speak to our intent a little bit and then I'll ask Calvin to jump in on the modeling side. For us, our thought process really has been to enable accounts with technologies and support that help them get to their political goals and in support of MR MIS and MIS program goals. And if they can do that effectively with an SI, we're happy to support them in that regard. If they want to add capacity or grow their system capability in some way that, is benefited by our advanced technologies, that helps us and drives a new system placement or new system sales. So our incentives aren't strongly built on trade outs.
Much more interested in aligning with how they want to build their programs and giving them access to technologies that make a difference in their procedures. That leads to lumpiness in trade outs. And that's okay with us, Calvin, to the modeling. I just gave you a little time to think about it. Go ahead.
What I'd
say, Amit, is that you have such strong procedure growth and such demand for access to among the surgeon population that in a lot of cases when hospitals are seeking to acquire new systems, they look at the procedures and the surgeons that they want to be able to do within their robotics program and SI can still serve a broad range of patients and can help them facilitate that. So they tend to be buying more incremental systems than trading in.
As X matures in the market, X may be an opportunity for some folks who are happy with their capacity but want to upgrade up to additional capabilities and that may provide an opportunity for us in future quarters.
And just quickly from the modeling perspective that you asked, be aware of using our past experience with our XI and previous system launches as the model for what's going to happen now because it's a different world where you have again consolidated hospital networks that can align certain procedure characteristics with sets of procedures with a lot more ability to do so now than in the past. So it could very well follow a different pattern this go around, than it has in the past.
Okay. So that maybe possibly leads me into the next question, which is on reimbursement. It looks like prostate is is getting a new Medicare outpatient reimbursement code for the first time, I believe. And I realize most of the procedures can't be done in one day just yet, but it just got me thinking about the question of what the trigger might be for hospitals to start. Equipping their outpatient settings with da Vinci.
I have to imagine that between hysterectomy is moving that way and things like hernia now, there's already enough volume to justify it nowadays. So it's something like prostate reimbursement, any kind of an anchor that can maybe drive boxes in to outpatient setting? And if not, then what could be the trigger to do that?
Two important thoughts, Jeremy. One is in order to be able to do a surgery like a DBP in an outpatient setting, first off,
it has to be done
in minimally invasive fashion so that you can have the patient, be able to recover quick enough to get out of that setting. The second thing is you, outpatient is really a billing setting not necessarily a site of care differentiator. What we see over time is that as programs mature, their robotics capacity. And they have a array of systems that can both serve really complex in patient surgeries like thoracic colorectal. And they have a sufficient volume of outpatient procedures like the ones you mentioned in hernia and benign gynecology, and even potentially DVP where you have a technique and a surgeon capable of getting a result that can get the patient out the same day, you'll see them actually put systems into multiple different types of setting.
Typically, still under the hospitals umbrella because they're the ones have the capability of treating the range of patients who come in with different complexities that might be either inpatient or outpatient. It's usually a byproduct maturity of a program as opposed to a specific reimbursable event.
Thank you. Our next question comes from Isaac Ro with Goldman Sachs. Please go ahead.
Thanks very much. Good afternoon. Question for you on the X. Just trying to think through the gross margin implications of that product cycle as it plays out, realize it's a little early, but just trying to think through some of the comments you made earlier around how, purchasing is evolving for hospitals and so forth. As that product cycle plays out, If you could give us some sense of what it means for your gross margin profile, based on what you know now, that'd be helpful.
Yes. Initially, the gross margin profile is not substantially different than our other products. So it kind of fits in nicely. Think, what you're asking is over time, could we see that, there's pressure on the ultimate price that we charge for our next I think, we'll see. We don't know.
It's only been out in the market for a quarter. And, but what we've said in the past is that, you know, were about market expansion. And if there's the opportunity to expand the market at the expense of a little bit of price, we'd do that.
That's helpful. And then just a follow-up on the expense side, as you move towards expanding the market, interested in sort of, allocation of resources in the sales force, could talk a little bit about just qualitatively how you're, moving some of your top performers to help drive, X conversion and then at the same time, maybe thinking about, adding new heads, just interested in the interplay on investment in Salesforce? Thank you.
Yes, how we think about Salesforce investments really varies by region and maturity of the market. So how we're building the sales team in Germany, for example, will look kind of qualitatively different than what's happening in the United States. In general, in the United States, we've had a stable structure growth in our key accounts teams, no surprise, and a little bit better stratification of levels in the force itself that gives us the opportunity to, to, provoke and engage high level sales people at the same time bring in people who can support high volume accounts that are premature. So the U. S.
Is a well stratified sales force in Germany, in places like Japan, we're really at the basic building stages. And so the investments there are a little more filling empty slots and making sure territory coverage is right.
Thank you.
Thank you. We now have a question from Richard Newitter with Leerink Partners. Please go ahead.
Hi, thanks for taking the questions. It seems like for the 3rd quarter in a row, China on the procedure growth side is exceeding your expectations And seemingly, you were at capacity, or you thought you were at capacity in the fourth quarter. And yet, this is still kind of your capacity utilization seems to be creeping higher. Anything to explain that? Are there certain types of procedures that are maybe just quicker and that as a percentage of the mix in China is different than the U.
S? Or can you explain what might be driving this?
Right. I think that the top line, what's going on here is a high belief in value of the procedures and the technology and willingness to expand the number of hours that people are able to get procedures. So I think the biggest effect is that, which is a willingness to work on weekends and for them to expand the after hours use of devices. That will dwarf the underlying which procedures are in the mix. But Marshall, as you can clean up that answer if you like.
It's absolutely right. I mean, this is all about it's a theoretical capacity that you're quoting. And that that theoretical capacity is based on just averages that we see around the world. Be careful of averages. And in China, They are operating on Saturdays, Sundays and late at night, and, in order to get things done.
So I think Gary's answer is right.
Think there's also an opportunity for us to learn from their experiences, which is, under capital constraint, what kinds of barriers can they remove. To, to get both good outcomes and high volumes. And I think that's exciting for us. And we have an open mind toward how they're approaching it.
Great. And then maybe just one follow-up on Japan. That's the other area where you're kind of saying capacity constrained until you get additional on the procedure side at least until you get additional approvals. Can you maybe just remind us the key procedures that you're hoping are up for consideration next year And maybe, which ones represent the biggest market opportunities? And do you feel like there's any that might be further along with the approval agencies over there?
In terms of maturity, there are some that have been going through clinical trials and have a lot of data behind and others that are using kind of existing data sources. So the one that has, the most structured data so far is gastrectomy, And that is, is going to be exciting for us over time. It's a real market in Japan. The prevalence is quite high. And so we have, good hopes and optimism that that will go through the process.
Other categories are things like GYN Oncology that is of interest, esophagectomy, Calvin. There are
some others that
Yes. A little bit to me procedures and some of the lower colon LAR procedures are potential?
Yes. So, I think the interest in broad use of da Vinci and Japan is very high. We do not have assurance of that, MHLW will accept it in the next insurance cycle, although so far so good. And we don't have assurance that the reimbursement levels will any particular level. And again, so far, the indicators are pretty good for us, but that's still a work in process from the government's evaluation point of view, and we stand by to support the surgical societies and answer questions for them as they need it.
Thank you.
Thank you. Our next question is from Larry Biegelsen with Wells Fargo. Please go ahead.
Hey, guys. Thanks for taking the question. Let me just start with hernia. You received recently a specific inguinal hernia indication. Which includes a positive data in the label.
Could you talk about the implications of that label and data And are you pursuing other specific indications for other procedures? And I have one follow-up.
Sure. On the, on the first one, this, really is something around what gives us a little bit of freedom, a little more freedom about what we can claim in our materials. And so it allows us to be a little bit more specific versus the general. And so for us, we think that that just clarifies what our teams can speak about. So we think it's an incremental positive.
It's a small positive. I think the data underlying it is supportive and the interactions FDA, I think, are ultimately helpful for the whole process. This is one of a set of specific indications that we have pursued over the last couple of years. And we do have a pipeline of the next set of things we want to do. And in a line.
And we have not publicly disclosed what those are and what the order is, but I guess what I'd tell you is I'd expect more to come. And again, I think it's a healthy process between us and the agency to supply data as we get it and that allows us a little more specific capability in terms of what we talked about.
Thanks. And then I think on the you're planning to file and launch a 45 millimeter a stapler which should help with bariatric procedures. Is there any update on the timing there? Thanks for taking the questions.
Sure. Yeah, we are working on additional staplers sides, the ones that are, in the market, we have a 30 and a 45. Remember, staplers are characterized by not only their length, but also the length of staples that go in the jaw. There are a set of things that we're working on beyond that. We do think that there are opportunities to build staplers that can have broader use in general surgery.
We have not yet predicted or publicly disclosed what the expected timelines are. We do have development and those things approach maturity. We'll share with you where we are.
Thank you. We'll go next to Brandon Henry with RBC Capital Markets. Please go ahead.
Yes, thanks for taking my question. Can you provide an update on the Australian clinical trial for the flexible catheter platform? And any lessons you've learned from that trial? And then when and where do you think we can see the data from that trial being published or presented? And a couple of follow ups.
Yes. Thanks Brandon. I think the short answer is no. I can't provide an update. The, the data is being analyzed the clinical teams that are there are preparing their abstracts and they'll decide which meeting they want to show it.
And once they've made that decision, then we're happy to share it with you. As we said last time, the results were very positive for us. We were really happy with what we saw. I think the scientific principle investigators need the chance to write their manuscripts and analyze the data and present it in a way that makes sense to them. So we'll wait for that.
And as we get clarity there, we're sure to share it with you.
Okay. And then just more broadly, can you help me understand some of the differences or the benefits for Intuitive's flexible catheter platform relative to some of the other platforms in the market like Medtronic with its super dimension platform?
Sure. I what we can bring in our concept and our technology here is a couple of things. One is, we have novel sensing technologies that allow us to since, all the way along the catheter length with a high degree of certainty. That helps us in terms of understanding and navigating tortuous pathways That's one. The second thing is the use of robotic assistance gives you, stability and navigation capabilities that are very hard to do annually.
And so those are our technical benefits. What could they result in in terms of, clinical benefits? The hope there is that you can get to more distal locations that are otherwise hard to get to and tortuous pathways and that you're more accurate in terms of tissue sampling because you have high degree of stability and better imaging and targeting. Now those claims have to be backed up. And so that's the hypothesis.
And that's the set of trials and data and analysis that we're going after. And I think people are excited about, flexible technologies in general by some of the technologies that our competitors and other med companies have put out there. I think the excitement is there and the question is, can you go a little further and and get a little more predictability. And we think we have technologies and capabilities that can do that.
Thank you. Our next question is from Travis Steed with Cantor Fitzgerald. Please go ahead.
Travis, she'll be the last questioner, so make it a good one.
Okay. So you placed a decent amount of SSO systems in the quarter. Did those cost have an option to purchase X and just any color on how customers are deciding between the two systems recognizing we're still very early on?
So, I think the question was, there's a fair number of SIs in the system, in the quarter, despite the availability of X. Yes. I think first, while we were pleased with the approval timelines of action in the U. S. And Europe, There are still many markets that, X has not yet approved in.
So some of the SIs are just purchases by folks who's choices were SI or Xi. In the case of China, it's their choice is SI right now, not Xi. So some of it is just that. In other cases, some of the negotiations are multi quarter negotiations and are right at the endpoint and So they will finish the transaction based on where they started. Those are opportunities for us to go back to those customers over time.
One of the reasons that we had the revenue deferral and the offers for people to evaluate whether they want them to make a change. So that's mostly what the dynamics are.
And trust the other part to think about just the lumpy approvals came mid quarter. So I think Europe was in the beginning
of April
and the U. S. Was in the beginning of May. So you didn't really full quarter to get out with the team and communicate to all your customers what X is relative to other products that may have already been in a long sales cycle.
Okay. Just a little color commentary on X. I think, the customer base and our field understood well, what X is, what its benefits are. I think the logic of X is well understood and where it fits in the lines, well understood. And we're pleased with that.
Okay. And just one quick follow-up. I think I know the answer to this, but is it still your view we should be modeling in 2018 expense growth below your revenue growth?
Actually, what we've said is that, expense growth, operating expense growth will grow 18% for the year.
Sorry, in 2018, kind of longer term?
Do we expect to dial back to that? Sorry.
And in 2018, what we've said is we've expect to dial it back so that we are, adding leverage.
Well, 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 organization's 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 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 extraordinary journey to improve the surgery, and we look forward to talking with you again in 3 months.
Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and choosing AT and T Executive teleconference. You may now disconnect.