Ladies and gentlemen, thank you for standing by, and welcome to the Intuitive Surgical Q1 2017 earnings release call. At this And as a reminder, this conference is being recorded. I'll now turn the conference over to Senior Director of Finance And Investor Relations, Calvin Darling. Please go ahead, sir.
Thank you. Good afternoon, and welcome to Intuitive Surgical's 1st quarter earnings conference call. With me today, we have Gary Guthardt, 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.
In the company's Securities And Exchange Commission filings, including our most recent Form 10 K filed on February 6, 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 first quarter results as described in our press release announced earlier today, followed by a question and answer Patrick is rejoining us to 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'll turn it over to Gary. Good afternoon and thank you for joining us on
the call today. This first quarter of 2017 was a dynamic one for Intuitive, with strong performance in procedures and solid growth in system placements. We are making good progress in developing deeper connections to our customers worldwide and advancing technologies and offerings that fundamentally improve surgery. Procedure growth accelerated in the quarter, rounding up to 18% over the first quarter of 2016. The growth was broad based by procedure category as well as global region.
Starting with the United States, procedure growth in both the emerging category of general surgery and more mature categories in urology and gynecology exceeded our expectations. General Surgery growth continues to be encouraging with supportive early clinical reports, surgeon interest, and utilization. Procedure growth in Europe, Korea and China were strong in the quarter. While reasons for a quarter to quarter fluctuations can be hard to assess, we estimate that Q1 benefited from some tailwinds that will balance out through the remainder of the year. Patrick will take you through these factors in more detail later in the call.
Our capital placement performance in Q1 2017 strengthened over Q1 of 2016, resulting in a growth total placements from 110 to 133 this quarter. As we mentioned on these calls, capital placements can be lumpy and after a strong 2016, U. S. Capital placements settled into moderate growth relative to Q1 of last year. Outside the U.
S. Placement growth in the quarter was a highlight with 56 systems sold in the quarter versus 36 in Q1 of 2016. The lack of a new system quota in China and limited reimbursements in Japan constrained placement growth in these regions. Marshall will take you through system placement dynamics in greater detail. Turning to profitability for the quarter, strong procedure growth and solid system placements combined with favorable product mix and improvements in product cost, to lead to gross margins at the top of our expected range and solid operating margin performance.
Our fixed cost growth was as expected, with significant increases in R And D spending that reflect investments and bringing new products through clinical trials on the path to market. A summary of our first quarter pro form a operating results is as follows. Procedures grew approximately 18% over the first quarter of last year. We shipped 133 Dementi Surgical Systems, up from 110 in the first quarter of 2016. Revenue for the quarter was $674,000,000, up 13% from the prior year.
Instrument and accessory revenue increased to 381,000,000 up 18%. Total recurring revenue in the quarter was $521,000,000, representing 77% of total revenue. Gross profit margin was 72% compared to 70% in the first quarter of last year. We generated a pro form a operating profit of 264,000,000 in the quarter, up 15% from the first quarter of last year, and pro form a net income was $196,000,000, up 15% from Q1 of 2016. In the quarter, we also entered into a stock repurchase agreement Turning to our product pipeline, as you know, we've increased our mid and long term investments in creating our next generation of products and services.
Based on our belief that substantial opportunity exists to enable more minimally invasive surgery, better outcomes and to expand access to our technologies globally. To bring these investments to market, we have developed a product pathway that responds to our customer's desire in clinical capability and choice in total economics. Over the next several quarters, we plan to launch a new technology upgrade to SI, named da Vinci X that enables a compelling entry point to our advanced technologies. Davinci XI will remain our flagship and we will provide customers with logical upgrade paths from more affordable entry level systems like SI and X, to SI and SP. We have submitted our documents for CE Mark review for X and anticipate it will be available in Europe in the second quarter.
With clearances in other regions following over time. We'll provide you with additional information on X as it launches. The upcoming availability of da Vinci X has some accounting implications, which Marshall will describe in greater detail later in the call. Our SP program continues to progress in its clinical trial trial site in Asia have included trends oral, urologic and colorectal surgery. We're also on track in initiating our U.
S. IDE sites to gather clinical data in transoral surgery. In reviewing feedback from surgeons in Asia and the latest standards for human factors validations, we have elected to forward a software release for SP ahead of our urology 510. This will push back our urology 510 submission into the back half of 2017 and is likely to delay launch of SP in the U. S.
By 1 or 2 quarters. While I'm disappointed by the delay, we believe it simplifies our submission and our ultimate path to market. In our flexible robotics program, we completed our first clinical experience in Australia in the quarter. Surgeon commentary on its performance has been enthusiastic. They are finishing patient follow-up and preparing their manuscript for publication.
The overall program is now in its design for a pilot production phase. In closing, the first quarter of 2017 has been a busy one for Intuitive. We remain focused on the following for the balance of the year: 1st, continued adoption of da Vinci and general surgery second, continued development of European markets and access to customers in Asia 3rd, advancing our new platform, imaging advanced instruments, Davinci SP and diagnostic platform progress 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.
Thank you, Gary. I will describe our results on a non GAAP or pro form a basis, which excludes specified legal settlements and claim accruals, stock based compensation, excess tax benefits related to employee stock awards and amortization of purchased IP. We provide pro form a information because we believe that business trends and operating results are easier to understand on a pro form a basis. Who will also summarize our GAAP results later in my script. We have posted reconciliations of our pro form a results to our GAAP results on our website so that there is no confusion.
First quarter 2017 revenue was 674,000,000 an increase of 13% compared with $595,000,000 for the first quarter of 2016, and a decrease of 11% compared with 4th quarter revenue of $757,000,000. As Gary outlined, we'll be launching the da Vinci X system in certain markets pending appropriate regulatory clearances. In conjunction with the launch, we will offer customers who purchase 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 of 1st quarter revenue and consistent with prior deferrals, this revenue will be recognized when customers either trade out their systems or when the offers expire, whichever comes first. First quarter 2017 procedures increased nearly 18% compared with the first quarter of 2016 and increased 2% compared with last quarter.
Procedure growth relative to last year fourth quarter has been driven by general surgery in the U. S. In urology worldwide and reflects the benefit of Easter holiday being in the second quarter of 2017 rather than the first quarter of 2016. Patrick will provide more detailed concerning procedure adoption. Revenue highlights are as follows: Instrument and accessory revenue of $381,000,000 increased 18% compared with last year and decreased 1% compared with the fourth quarter of 2016, which closely reflects procedure growth.
Instrument and accessory revenue realized per procedure including initial stocking orders was approximately $18.40 per procedure compared with $18.30 last year and $1900 last quarter. The increase relative to the first quarter of 2016 primarily reflects increased sales of our stapling and vessel sealing products, mostly offset by customer buying patterns. The decrease compared with the fourth quarter of 2016 primarily reflects the impact of customer the customer trade out program increased 4% compared with the first quarter of 2016 and decreased 35% compared with last quarter. The year over year increase reflects set by the revenue deferral and lower average selling prices. The quarter over quarter decrease reflects seasonally lower number of systems, the revenue deferral and lower average selling prices, partially offset by higher lease related revenue.
133 systems replaced in the first quarter of 2017 compared with 110 systems in the first quarter of 2016 and 163 systems last quarter. 21 systems replaced under operating lease transactions in the current quarter, compared with 19 systems in of the lease. As of the end of the first quarter, there were 95 systems up in the field under operating leases. We generated approximately $5,000,000 of revenue associated with operating leases in the quarter compared with $4,000,000 in the first quarter of 2016, approximately $5,000,000 last quarter. We generated approximately $10,000,000 of revenue during the quarter from lease buyouts compared with $6,000,000 in the first quarter of 2016 $7,000,000 last quarter.
Globally, our average selling price which excludes the impact of compared with 1 geographic mix. The decrease compared to last year primarily reflects a higher proportion of SI refurbished systems sold to cost sensitive market segments. We expect lower priced systems to cost sensitive market segments to represent an increasing increased 13% year over year and increased approximately 4% compared with the fourth quarter of 2016. The year over year in quarter over quarter increases reflect growth in our installed base of da Vinci systems. Outside of the U.
S, results were as follows: 1st quarter revenue outside the U. S. $183,000,000 increased 12% compared with $164,000,000 for the first quarter of 2016, a decrease 14% compared with $212,000,000 for the 4th quarter. Recurring revenue increased 23% compared the previous year and 5% compared with the 4th quarter, reflecting procedure growth, partially offset by customer buying patterns. Systems revenue decreased 9% compared with the first quarter of 2016 and decreased 39% compared with the previous quarter.
The decrease in OUS Systems revenue relative to both the prior year and the prior quarter reflects lower system ASPs, reflecting sales of SI refurbished product to cost sensitive market segments, revenue deferrals, operating leases, 6 in the current quarter, versus none in the prior year and 2 in the prior quarter geographic mix and changes in the number of systems placed. Outside the U. S, we placed 56 systems in the quarter compared with 36 in the first quarter of 2016, and 63 systems last quarter. The decrease in system placements relative to the prior quarter primarily reflects seasonality. The increase in system placements relative to the prior year reflects higher sales into Europe, Korea and India.
Current quarter system placements included 21 into Europe, 7 into Korea, 6 into India, 6 into Japan, and 2 into China. System placements outside of the U. S. Will continue to be lumpy as some of the OUS markets are in the early stages of adoption. Some markets are highly seasonal reflecting budget cycles or vacation patterns, and sales into some markets are constrained by government regulations.
Moving on to the remainder of the P and L. The pro form a gross margin for the first quarter of 2017 was 72%. Compared with 70% for the first The increase compared to the prior 2016, the higher gross margin reflects a higher mix of instrument and accessory revenue relative to systems revenue, Since we deferred costs associated with the $23,000,000 revenue deferral, the trade out 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 19% compared with the first quarter of 2016 and increased 1% 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. Our pro form a effective tax rate for the first quarter was 28.1 percent compared with an effective tax rate of 27.4 percent for the first quarter of 2016 26.9 percent last quarter. 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 first quarter 2017 pro form a net income, which excludes income associated with the revenue deferral, was $196,000,000 or $5.09 per share compared with $170,000,000 or $4.42 per share for the first quarter of 2016 $242,000,000 or $6.09 per share for the fourth quarter of 2016. The $23,000,000 revenue deferral, including the associated deferral of cost of sales and income tax effect, reduced GAAP and pro form a net income per diluted share by approximately $0.28 per share. Earnings per share benefited from our 2,000,000,000 stock buyback as our average shares outstanding were reduced by 1,700,000 shares as we retired 2,400,000 shares on January 27, 2017. A final delivery of shares under the ASR, if any, will be delivered at the end of the contract period. As I indicated earlier, pro form a income provides an easier comparison of our financial results and business trends.
I will now summarize our GAAP results. GAAP net income was $180,000,000 or $4.67 per share for the first quarter of 2017. Compared with $136,000,000 or $3.54 per share for the first quarter of 2016, and $204,000,000 or $5.13 per share for the fourth quarter of 2016. GAAP net income for the first quarter included $21,000,000 of litigation charges compared with $2,000,000 in the first quarter of 2016 $6,000,000 last quarter. The first quarter charges included approximately $14,000,000 for the estimated cost of settling product liability claims covered by tolling agreements.
We've made substantive progress, resolving over 90% of the told cases. The remainder of the first quarter charges is related to a settlement of the dispute over license and supply agreement. Beginning in 2017, we were required under GAAP to report the excess tax benefits or deficiencies associated with employee stock awards in our tax provision rather than in as an adjustment to paid in capital in prior periods. The excess tax benefit included in our GAAP results for the first quarter was 33,000,000 contributing $0.85 per share. We have excluded this benefit from our pro form a results.
This amount will fluctuate quarter to quarter based on the volume of employee stock option exercises and the number of RSUs vesting. We ended the quarter with cash and investments of $3,100,000,000, down from $4,800,000,000 as of December 31, 2016. The decrease reflects our 2,000,000,000 stock buyback, partially offset by cash generated from operations and proceeds from And with that, I'd like to turn it over to Patrick who will go over our procedure and clinical highlights. Thanks, Marshall. Of our first quarter procedure growth of
nearly 18% U. S. Procedures grew approximately 14% and outside of the United States, procedures grew approximately 28% Procedure growth benefited from tailwinds from the shift of the timing of the Easter holidays from Q1 into Q2, which had the greatest impact on our European business. Excluding the benefit from these tailwinds, our procedure performance exceeded our expectations during the quarter. The United States both mature and growth procedures such as general and thoracic surgery outperformed our plan, though difficult to assess, strength in the U.
S. May have been due to a short term uptick in patients seeking care ahead of any potential healthcare reform. In U. S. Urology, the first quarter growth rate for da Vinci prostatectomy was similar to 2016.
Earlier this month, the United States preventative services task force or US PSTF proposed to change to its 2012 guidance around screening from recommending against screening at any age to encouraging individual patients and physicians to consider PSA screening for men aged fifty five to sixty nine. We are pleased to see In U. S. Gynecology, 1st quarter procedure growth sustained trends observed during 2016. Procedure growth in U.
S. GYN appears to be driven by consolidation of surgeries towards physicians that specialize in complex cancer care who tend to be users of a da Vinci system. 1st quarter U. S. General and thoracic surgery procedure adoption remained strong, led by solid growth in hernia repair and continued adoption of colorectal procedures.
Earning Repair continues to contribute the largest volume of new procedures in the United States, and existing surgeon retention and utilization remains encouraging. Trends in lubectomies and other thoracic procedures continue to show early stage adoption. Turning abroad, procedures outside of the United States Procedure growth outside of the United States was approximately 28% in the first quarter, led by the global adoption of da Vinci prostatectomy with solid contributions from kidney procedures, general surgery and gynecology. As I mentioned earlier, the shift to the timing of the Easter holidays from Q1 as a tailwind in the quarter, likely contributing an estimated 3% to our 28% procedure growth outside of the United States. Procedure growth was led by Europe, China and South Korea.
In Europe, procedure growth benefited from the Q1 calendar tailwind, but also showed strength on an organic basis. 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. In South Korea, procedure growth is driven by a mix of specialties and procedures in addition to a recent uptick in system placements over the past several quarters. Recently procedure growth in Japan has slowed as DBP penetration has grown above 80%. During the quarter, The clinical study being conducted to support a reimbursement submission for gastrectomy completed enrollment.
Over the past several months, new clinical evidence has highlighted the role of Davinci in treatment of gastric cancers in Asia. Case series comparing da Vinci to open or laparoscopic procedures have emerged from both South Korea and Japan. Doctor. Yang and colleagues from Yonsei University Health System compared all three modalities of surgery across nearly 1000 patients in an article published in the annals of surgical oncology. The authors found that the da Vinci patient cohort had the highest rate of surgical success compared to open or laparoscopic procedures, while experiencing a reduction in major in hospital complications, reduction in positive resection margins and improved lymph node yield.
Doctor. Uyama and colleagues from Fujida Health University published a letter in the annals of laparoscopic and endoscopic surgery, highlighting prior work on over 500 radical gastrectomies for gastric cancer. The authors found that in exchange for greater blood loss and operative time DaVinci Gastrechtomy was associated with a reduction in complications and length of hospitalization compared to laparoscopic gastrectomy. In addition, the authors found the da Vinci patient cohort included a larger proportion of advanced gastric cancers proposing that da Vinci technology was best for these patients. Looking forward, during the second quarter, we expect our procedure growth rate outside of the United States to slow, as the calendar tailwind becomes a calendar headwind of similar magnitude during Q2.
We also expect and obtain additional procedure reimbursements in Japan. The first quarter was another quarter with a large number of clinical publications evaluating da Vinci surgery, Of these, I wanted to highlight 2 additional publications: Doctor. Luan from Baptist Hospital of Miami, colleagues published results from nearly 300 right collecting patients in the Journal of Surgical laparoscopy, endoscopy, and percutaneous techniques. Comparing da Vinci surgery with intra corporeal anastomosis to laparoscopic surgery with extracorporeal anastomosis, The authors found that while patients in the da Vinci cohort had longer operating times, they experienced less blood loss, shorter incision lengths and longer specimen lengths. Other clinical endpoints that trended towards improvements in the da Vinci patient cohort include readmissions, postoperative complications, lymph node yield and 0 incisional hernia repairs compared to 7% in the laparoscopic cohort.
The next publication is from Doctor. Liang and colleagues from the McGill University in Montreal, Canada, published an article in the Journal of Gynecology Oncology, on the impact to their hospital from adopting da Vinci surgery for Gynecologic Oncology. The authors reported that the introduction of da Vinci increased the use of minimally invasive surgery from 15% to 76%, increasing the volume of patients treated by 27%. And decreasing inpatient ward costs by approximately $5000 per patient, despite a higher proportion of patients with complex comorbidities The authors concluded, organizations are beginning to recognize that the economic implications of introducing a robotics program extend beyond the operating room. It is timely to evaluate the broader ripple effects robotics has on hospital departments This concludes my remarks.
I will now turn the call over to Calvin.
Thank you, Patrick. I will be providing you with our updated financial outlook for 2017. Starting with procedures. On our last call, we estimated full year 2017 procedure growth of percent above the approximately 752,000 procedures performed in 2016. Now based upon favorable trends in key markets, outside of the U.
S, U. S. General surgery growth and solid results in mature U. S. Procedure categories, we are increasing our estimate for 2017.
We now anticipate We expect that Q2 procedure growth rates, procedure growth rates, particularly in Europe, will reflect fewer operating days than in the previous year. In regards to system placements, 21 of our 133 first quarter system placements were structured as operating leases, Going forward in 2017, we expect an increasing proportion of system placements to be under operating leases. We have recently expanded our leasing programs in Germany and Korea, and in the U. S, more customers are considering operating lease arrangements to acquire da Vinci capacity. The average selling price for systems sold outright will vary quarter to quarter based upon factors, including product, regional and trade in mix.
With the upcoming expansion of our value oriented system offering and increasing placements into cost sensitive market segments we expect that product revenue expect to defer additional revenue related to da Vinci X trade out offers that we will make to customers in the U. S. And other ahead of the availability of the product. Turning to gross profit. On our last call, we forecast 2017 pro form a gross profit margin to be within a range of between 69% 71% of net revenue.
We now expect our full year 2017 gross profit margin to be in the upper half we have accelerated our investments in several strategic areas that will benefit the company over the long run. Accordingly, we have ramped our operating expenses as we focus on execution. Above 2016 levels. We now anticipate coming in at the higher end of that range. Consistent with our last call, we expect non cash stock compensation expense to range between $190,000,000 compared to $178,000,000 in 2016.
We expect 2017 other income to be between $30,000,000 $35,000,000 compared to the $25,000,000 to $30,000,000 Consistent with previous guidance, we expect our 2017 pro form a income tax rate to be between 26.5 and 28.5 percent of pre tax income, depending primarily on the mix of U. S. And international profits. During Q1, we had 38,500,000 diluted shares outstanding for EPS calculations. As Marshall described, in connection with our accelerated share buyback program, on January 27, we took delivery and retired approximately 2,400,000 share representing the initial delivery from Goldman Sachs.
From our Q1 share count. The remaining $700,000 of the $2,400,000 share reduction will be realized in Q2, reflecting the full quarter impact A final delivery of shares under the program if any will be delivered at the end of the contract period in November. Beyond the accelerated buyback, our actual Q2 shares outstanding will also be affected by the impacts of employee option grants, share price and other diluted share calculation inputs as well as any other buybacks.
Thank
you. You. And our first question will come from Bob Hopkins with Bank of America. Go ahead please.
Yes, good afternoon. Can you hear me okay?
We can. We can.
Great, good afternoon. So I guess the first thing I'd like to ask about is, your announcement on da Vinci X, it sounds like if you're deferring revenue now that the timing of this is fairly imminent, so is it safe to assume that X will be launching this calendar year?
We plan to launch in Europe first and, we are in the process of the CE Mark review. We expect that will pass through that review in the next quarter or so.
And then there are a couple other follow ups. In terms of U. S. Timing and then Gary, can you just describe this a little bit more? I think you said it was an add on to SI.
I'm just curious, is this technology primarily a lower priced offering? Or is it going to be positioned as a tool for new settings or new surgical markets? I just wanted to try to get a better understanding of what the kind of new market opportunity that this is addressing.
Sure. So let me describe a little bit of what it is, first. It really combines our latest instrument, accessory, robotic and computing and imaging technology with an SI patient carte chassis. This brings to market advanced upgrade package for SI Technology. That slots between the SI and the XI in terms of its breadth of clinical reach.
And it creates an attractive entry point for either an upgrade or a new install. I think that it will do well in places that SI does well today and adds to it some of the XI Technologies at an attractive economic place, where that goes in terms of treatment, locations, you know, we'll see. I think it will be well received.
And then lastly, I guess, on da Vinci X, can you just talk about what what sort of difference in price point are we talking about here and what sort of difference in functionality, if it's primarily addressing similar kind of surgical opportunities. I'm just curious as to any sense for what's the ASP difference and the functionality difference, that would be very helpful.
Yes, you'll have to wait on ASPs. We aren't announcing it at this time. Just directionally, it'll be between SIs and XIs. And in terms of, capability, again, we'll, as we launch, we'll give you additional information in terms of future benefit It isn't foundational in terms of the types of procedures it can do. It will make SI is more capable to more comfortably do more procedures.
Next slide will remain the top of the line. XI has, interactive table motion. It has automated help and set up an optimization and multi quadrant functions that X will not have.
It could launch in the U. S. This year? That's my last question.
It is possible, but we haven't yet called the end date in terms of launch time.
Our next question will come from Amit Hazan with Citi. Go ahead please.
Thanks. Hey, good afternoon guys. Let me just start maybe with the Da Vinci SP delay and just ask for a little bit more color, just specifically what happened to get you to drive that delay? And then also, other than the software upgrade, are you pretty much ready for that 510 filing in terms of the clinical results you wanted to have?
Yes, the clinical side has been really good. We're feeling great about our clinical experience and overall product performance. We do. We did learn some things in our trial that we want to make a little easier. It has to do with making it a little bit easier to set up and a little bit smoother and optimized workflow.
We decided that given the extensive HF, human factors validations that are required by regulators these days that we would rather do that sooner ahead of the submission than later. And so we made the decision to go ahead and pull that software release forward and do those validations on newly released software. So I'm not foundationally upset about where we are with regard to SP. You get out and you learn, I'd like to take those learnings and put them back into the product and get on with it.
Okay. And just two quick questions on guidance. First on the gross margin side, I think I want to try to understand you had another really good gross margin quarter. And your guidance is still kind of a little bit below where we were last year, but it seems like the same drivers are in place lower cost of new products. Managing fixed costs well.
So I'm just trying to understand if this is conservatism by you or if you're actually starting to think about some of the maybe DaVinci X product coming through and that's why the guidance is lower. What else is the offset versus what you've been able to achieve over the last five quarters?
Hey, Amit. This is Calvin. And we're definitely pleased with our Q1 gross profit results and our continued progress to reduce costs and improve efficiency as Marshall took you through. And as such, we did in Q1, the gross margin came from lower margin capital. Also during the quarter, again, we had very few charges associated with field actions, excess obsolete inventory, So as we look forward sales comprising a higher proportion of the revenue and that mix factor, there will be some cost to start to build up that to support the manufacturer of some of the new products We are assuming a higher field action and charges more aligned with historic ratios.
And then as I talked about in the prepared comments, some directionally lower system ASPs as we expand our value oriented system offering and increased placements into cost sensitive market segments. And of course, the margin will vary quarter to quarter.
Okay. And then just lastly for me on is on the procedure guidance. If I'm kind of hearing you correctly putting all the pieces together, you had some selling day impact that you're calling out for the first time really I'm assuming you kind of knew that ahead of time. So I don't know how much that has an impact on your new higher guidance, but maybe a comment on that. And then, in addition, to that, you talked about strong kind of legacy growth, but your legacy growth was right in line with where it's been more recently.
I'm just wondering, is the net effect of this that the higher guidance for you comes really from general surgery in the U. S? Is that what's driving the higher number?
Yes, you know, there's a lot of factors. Again, overall, we're, again, very pleased with our Q1 procedure results and growth trends. And we do expect 2017 procedure growth to continue to be driven by U. S. General surgery and international procedures.
We're still very early stages of adoption in these categories. And again, we raised our guidance in the quarter from 9 to 12 to 14. So it's reflecting our increased confidence overall. At the end, we feel like our Q1 results were exceptional, in the quarter. And going forward, we would expect some moderation in growth in Asia as Patrick took you through as we await additional da Vinci procedure reimbursement in Japan and sales quote in China.
We'd expect moderation in the European growth rates due to the timing of the Easter holiday, slight moderation in U. S. Mature procedures half continued trends, as you mentioned, but, DBP and GYN, we'd assume some moderation there. And then just, overriding uncertainty and policy direction in the United States and what impact that may have?
Fair enough. Thanks guys. Thanks.
Thank you. We'll go next to David Lewis with Morgan Stanley. Go ahead please.
Good afternoon. Just a few quick ones. Gary, just starting off with the da Vinci X for a second here, wonder what the upgrade electronics package in Tower on da Vinci X, is it going to be possible to upgrade the X with SP, meaning will that tower work with SP potential you can bring SP to a broader marketplace than we initially thought, which we thought maybe was limited to just XI?
Yes. So, it's a good point is the, the answer to that is ultimately, yes, that the computational hardware platform and the basics are shared across all three X, XI and ultimately SP. So in addition to giving people, lower entry point, on advanced technologies, it gives them logical upgrade pathways to advanced technologies.
Perfect. Very, very clear.
And then, Gary, just 2 more quick ones. One on SP, does this software upgrade or software pull forward, I should say, does that impact the timing of the second and third filings you were forecasting, out of head and neck and others?
It does not appear to.
Okay. And then, Gary, the one procedure, we talk a lot about prostate, we talk a lot about hernia lately, but this thoracic procedure or segment has really come into the dialogue the last 6 months. Can you just talk more about what's happening at Thoracic? How much of it is longer section? How much of it is this broad category of VAD surgery?
And anything you can share with us in terms of market size, stage of inflection, because it sort of merged from a nice place to a definitive driver. It would be helpful to get some clarity. Thanks so much.
Sure. I think just painting in broad strokes, the opportunity for us in thoracic surgery over time is real. There's a lot of open surgery in that space. These are complex procedures, and, and delicate surgeries. Is we think that sets up well for a da Vinci kind of platform as we've brought, X side of the market with its longer reach, its narrower arms, and it's set of exercise staplers that has helped.
So we're seeing, what would amount to early interest in the early growth in that that category. In terms of market sizes and rate of penetration, I'll let Patrick speak to that a little bit. We still think we're early I would also say that we've got our sales force and commercial team really focused primarily on general surgery. I think we want to support that market very well, but Patrick, But I'll take it away.
If you look at the United States market, there's probably around 100,000 patients who receive surgery today, split evenly between lubectomies and other types of thoracic procedures for which we think our products can bring value to patients and surgeons. When you look outside of the United States, the markets are much, much larger particularly when you look to Asia and in China in particular. So we're optimistic about the future, but we're still in very early days and you're seeing some of the early evidence set come out comparing robotics to open and even VAPS surgeries where they're improving outcomes. And if that evidence holds up over time, we think there's a runway for us here.
Great.
Thank you very much.
Thanks, David.
Thank you. Our next question is from Tycho Peterson with JP Morgan. Go ahead, please.
Hey, thanks. I'll start off with just a couple of clarifications on procedure expectations. Are you factoring in any impact from the USPS TF guidelines? And then Can you comment on hernia Vental versus in Gwenal? Are you still seeing relatively balanced growth rates between the two?
Hey, Tycho, it's Patrick. From a USPS perspective, in 2012, when the original announcement came out, you saw DBP volumes decline over a couple of year period. However, since then you've seen our volumes really return to nearly the level they were in 2011, I think a lot of it has played through. So we're pleased to see the, the statement become more aligned to what the AUA society guidelines are. From a ventral and ingle and Harrier perspective, we remain encouraged by the trends we're seeing.
You continue to see growth in our existing surgeon populations, doing more and more procedures, new surgeons coming along. And there's a lot of positive energy coming out of society meetings, like the American Harnier Society Sage's meetings. So we continue to be pleased by the adoption that we're seeing.
And then on SP, I know you suggested the software release necessarily impact the timing for follow on procedures beyond urology. Can you maybe just help us think of when you may have those filings for the follow on procedures? And also when can we get a readout from the first clinical experience in Australia? Is that something that would be published?
Okay. So 2 different things there. 1 is SP and 1 is our flexible robotics program, but just going to SP to start, we have not yet settled, on submission timelines for the additional indications on SP beyond urology. We are imminently initiating the Translural Surgery trials and then we'll open, colorectal trials thereafter, but we have not yet set dates publicly for when we expect those submissions. That said, the software update we're doing vis a vis the urology filing should not disrupt the timeline of those 2.
With regard to the work that was done in Australia, that was on the flexible robotics platform. They're in patient follow-up now, so they're following patients after their treatment for the prescribed amount of time in their protocol, I'd expect them to be presenting publicly in the fall.
Okay. Thank you.
Thank you. We now have a question from Tawell Levy with Wedbush. Go ahead please.
Great. Thanks. Good afternoon.
So I had a question on the X on the da Vinci X. Are the instruments similar to the XR or is it still going to be a different core set of instruments?
Good question. The instruments on X are the same family as the XI. So there are generation 2 advanced instrument kits So things like stapling and vessel sealing our Gen 2, they are the same exact instrument, same part numbers as the XI likewise with the imaging system. So if you're an account that has multiple systems, you have excise and SIs, then moving to X can standardize your SI base and have one set of instruments and accessories.
Got
you. And the pricing pathway for an upgrade from an SI to an X outside of, obviously, the deferral?
So not we haven't published yet what the list price steps are going to be.
Got you.
Okay. And just lastly, I asked this question last quarter. I'm just wondering if there's any update on the quota from China. Is that still something you expect, over the near term? Thanks.
There really isn't Marshall. There really isn't much of an update. As we previously communicated. We're still waiting for, quota, which would cover the civilian hospitals in China. And We'll keep you informed as we hear.
Thank you.
Thank you. Our next question is from Brandon Henry with RBC Capital Markets. Please go ahead.
Yes, thanks for taking my question. First, can you talk about the dynamic? You mentioned that patients coming in for surgery ahead of a potential health reform changes and what you heard from surgeons regarding that dynamic given should we expect this similar dynamic to occur in the second quarter? Then I have a couple of follow ups.
This is Gary. I don't think we have a deep insight there. There's been a little bit of speculation that there's been some pull forward We have seen, just in the numbers, a little more buoyant kind of broadly across our procedure base, not just in a single category, but kind of across each category, which leads us to believe there's something environmental going on. I would not say that we have special insight. I think a little bit of speculation.
We'll know on the future quarters. I cannot predict what will happen in Q2, Q3 with regard to how HCA dynamics will occur.
Okay. And then separately on the international side, I think the company breaks out international procedures by prostatectomy, hysterectomy, any time in other bucket. The other bucket has become the larger portion of the international procedures, but we don't really have a lot of visibility into the underlying trends there. So Can you just spend some time discussing what specific countries or procedures are driving the continued 30% plus growth in the other bucket and your confidence of kind of that rate of growth continuing, for the other category going forward? Thanks.
Yes, sure, Brandon. This is Patrick. We continue to see most of our outside of the United States procedure growth being driven by urology, mostly prostatectomy and DVP, but also in kidney repairs mainly through partial nephrectomies to which the system tends to be an enabler for population of patients to access partial nephrectomy for kidney cancers. We also do see encouraging signs in general surgery and gynecology, stronger in Asia and in certain markets in Europe where we've already deeply penetrated urology.
Okay. Thank you.
Thank you. Our next question is from Larry Biegelsen with Wells Fargo. Go ahead please.
Good afternoon guys. Thanks for taking the questions. First, if I focus on the pipeline, any updates new technologies that you're working on, the imaging agent and additional instruments. And I had one follow-up.
Imaging trial on the, your imaging agent has initiated so far so good. We're still early in that trial, but we're pleased. Otherwise, our imaging programs are progressing against our plan. Your second question was on sorry, Vance. Additional instruments?
Instrumentation, we have a portfolio of instruments we're working on. Nothing to to really call out in terms of dates for you. We are making progress on expanding our stapler line, to be a full line stapling system. But nothing I'd call out for you on this call.
Gary, let me ask one on the competition. So Medtronic, has talked about bundling their surgical portfolio to drive sales of their robot. Assuming they have a competitive offering, Can you talk about things you could do such as partnering to negate that advantage that they could have? Thank you.
We think the way we think about it in terms of servicing our customer is to allow them to have a minimally invasive surgery program that that get the outcomes they want across a broad population of patients and surgeons. We think that our technologies are outstanding and and will continue to be market leading. To the extent that they need to augment a robotics system with other products, there are a plethora of other companies that are happy to sell into surgical suites. And I think as long as, those are at an economically attractive price point and the products are well accepted. I think we're going to be in good shape.
All right. Thanks for taking the questions.
Thank you. And our next question will come from Richard Noweder with Leerink Partners. Please go ahead.
Squeezing me in here. I am just the first one, coming out of SAGES, we noticed just a palpable kind of a acceptance, increased acceptance of hernia procedures in general, multiple kind of podium sessions devoted to it. So I was just wondering Is there that acceptance that you're seeing that we saw? Do you guys feel that kind of there's been a notable inflection in the acceptance of kind of hernia robotic hernia surgery? And would you be willing to kind of give us an updated kind of sense of where we are on the market opportunities within ventral and hernia, Inguinil, how big they are and kind of where you think that could go from your addressable market?
I think in the first part of your question, where are we in Acceptance? I think that you're seeing, some early exploration and enthusiasm, and we're feeling that enthusiasm as well. But as you well know, the surgical population is not of one mind. And I think that we're going to see, procon debates in hernia for some time. And I would expect that.
And I think it'll be challenged and debated and discussed variance by patient population, variance by surgical technique and variance by, total economics to treat. That leads to your second question, which is, are we ready to make any changes to our thoughts on estimated market size? And I think it's really too early to, to try to redraw boundaries there. So the summary for us is so far so good. I think surgeons are finding real value and pursuing that value they're doing what I think they should in terms of assessing it carefully and publishing the results and debating which patient groups and subgroups make sense.
And we will support them in that effort.
That's helpful. And then just to follow-up on the ACA kind of some of the dynamics that might be playing out in the marketplace. I'm just wondering on the capital side and on the decision makers side of the equation at hospitals and institutions. Any updates on what you're hearing from customers on kind of their willingness to invest in innovation like robotics?
I think, on the one hand, in a good way, a lot of people understand the basic value proposition of robot are familiar with, what the kinds of things it can do. So that has led to, I think, meaningful conversations that are, that are data driven and and effective. I think on the margins, right now, the ACA has injected some caution on the part of capital buyers. So on the positive side, I think robotics, the value it can bring is pretty well understood. On the negative side, I think on the margin, the outside, it's been AC uncertainty has been a slight negative.
Thank you. Our next question is from Rick Wise with Stifel. Go ahead please.
Hi, good afternoon, everybody. Hi, Gary. Just a big picture question first. I mean, I would assume you'd think that the opportunity for robotics and surgery is underpenetrated. I'm just sort of fascinated with the, several times, you've mentioned you, Marshall, Calvin had mentioned that average selling prices will trend lower because of new products and mix here.
Just stepping back from those specifics, how do we think about, the opportunity for a lower priced, system perhaps driving increased penetration. I mean, is this the next leg in robotic, market penetration and, and, you know, does the VINJX and SP and should we think about that more specifically as one of the next big opportunities as opposed to just a procedure or a geography if you see what I'm getting at?
I'll answer a little simpler question than you asked. Attack with our customers, particularly those outside the United States, and have been listening carefully to what the kind of procedures they want to do, what the reimbursement environment are in their countries and what kind of capabilities need to match, that procedure set and reimbursement set. And we think X, fits that bill. And as a result, I think that it'll be well received. I don't think it's limited to a single country.
I do think that, we believe, and I think our customers believe that total cost to treat is the right economic measure, that better outcomes followed by economic analysis to look at total cost of the tree. And to the extent that your technology offering can match that so that you get both grade out and lower total cost of treat, that'll drive adoption. How big, how fast X goes, we don't have a crystal ball. But we invested in it based on some, some conversations and research we think was right. I think that it's going to hit the mark for them and and we will be delighted to report to you in future quarters how it's going.
Yes. And Gary, just to follow on to that. So just to be very clear, I mean, this is not, quote, just an upgrade for existing SI installed base. It is that, but it's definitely something much broader, potentially.
You can, you can, if one has an SI, then you can upgrade your side to an X. If you have no system and you want to get started, then you can buy an X to get started.
And you did mention, I know it's small table motion this quarter. Just out of curiosity, where are we with adoption and the uptake there? Is it going as you expect getting planned? Yes.
At the top level, attach rate of Table Motion has exceeded our initial expectations and kind of our original business plan for that product. I think with regard to the last quarter, I would imagine I'll look to Patrick about it.
Yes, very solid attach rates with new ex ISA in sales, we've worked largely through the existing population of customers, so we aren't seeing as much on a year over year basis as we saw in progress launch.
Okay. And just last
for me, on Fosun, any milestones we should expect in, let's say, the next 12 months on the program, And maybe just more broadly, how do we think about this partnership's impact if anything now looking ahead on the broader iSurg Chinese business, and especially given the complex geopolitical situation.
Okay. With regard to Fosun, I think I'd focus, the audience on really 2 things. One is the technical progress of the Flexible Robotics platform because we think that's a major component. And then the other one will be our activities in building that organization, hiring staff. As the organization builds out and we'll announce to you kind of where we are.
I gave you an update on where we are in the Flex Robotics program. We are very bullish on the interest in and the value that robotic surgery can bring to China. We have the right partner in Fosun over time, that partnership exists today in the form of our distribution relationship with 1 of their subsidiaries in Chindex. Grow into the relationship into a full JV. And, we will navigate the international waters as need be.
So, thank you for the question. That was our last one. As we've said previously, while we focus on financial metrics such as revenue, 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 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 surgery and look forward to talking to you again in 3 months.
Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT and T Executive Teleconference. You may now disconnect.