Ladies and gentlemen, thank you for standing by, and welcome to the Intuitive Surgical Third Quarter 20 16 Earnings Release Call. At this time, As a reminder, this conference is being recorded. I would now like to turn the conference over to Senior Director of Finance, Investor Relations. Kelvin Darling, please go ahead.
Thank you. Good afternoon, and welcome to Intuitive Surgical's 3rd 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 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 2, 2016 10 Q filed on July 20, 2016. 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.
Tables have been posted to our website. Today's format will consist of providing you with highlights of our third quarter results as described in our press release announced earlier today followed by a question and answer Patrick will discuss procedure and clinical highlights, then I will provide our updated financial outlook for 2016 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. Our company performance in the quarter was solid, with increasing customer adoption of procedures and growth in system placements. Global procedure growth was over 14% year over year the quarter, drivers of growth centered on U. S.
General Surgery and growth in the use of da Vinci surgical systems outside the United States, In the United States, year over year growth in ventral and inguinal hernia repair continues to be strong. U. S. Colon resection and lung resection also contributed to solid growth. As we've stated in prior calls, we are expecting growth rates in mature procedures in the U.
S. To moderate and U. S. D. V.
P is starting to follow this pattern. Driven by the macroeconomic environment for prostate cancer diagnosis and treatment. In Europe, procedure growth tempered in the quarter, with some countries posting solid performance, while growth softened in others. We're pleased with growth in procedures in Asia, with Korea and China, in particular demonstrating continued strength. Patrick will review procedure trends in greater detail later team.
While we offer a range of models and price points, our most capable model, Dimitji XI, again, represented roughly 3 quarters of new capital placement, As we've said on previous calls, capital placements are lumpy and this quarter was no exception. Healthy placements stood out in the U. S. While placements in our European region soften relative to a year ago. Capital placements in Asia are particularly unpredictable given environmental constraints like reimbursements in Japan, and quotas in China.
Placements in Asia were in line with prior quarters. Turning to revenue and gross margin dynamics, we experienced some one time tailwinds in the quarter that contributed to higher than expected net income. Marsha will take you through these events in our general finances in greater detail later in the call. Turning to highlights of our 3rd quarter operating results. Proceeds grew approximately 14% over the third quarter of last year.
We shipped 134 Dementia Surgical Systems, up from 117 in third quarter of 2015. Revenue for the quarter was 683,000,000 up 16% from the prior year. Pro form a gross profit margin was 73.1% compared to 69.3% in the third quarter of last year. Issuing and accessory revenue increased to $348,000,000, up 17%. Total recurring revenue in the quarter was operating profit of $308,000,000 in the quarter, up 28% from the third quarter of last year.
And pro form a net income was 246,000,000 up 23% from and creating our next generation of products and services. We've been increasing these investments based on our belief that our that substantial opportunity exists to enable better outcomes and to expand accessories and imaging products. In the third quarter, we added the ability to ship XI single site, XI 30 millimeter stapler, and firefly to several countries. In addition, intraoperative table motion uptake and performance is meeting our expectations. We are continuing to invest in expansion and refinement of our base instrument stapling and vessel sealing products for our XI platform.
New system platforms continue to make good progress. Our da Vinci single port is progressing in its in house clinical evaluations and preparations for human clinical trials expected later this quarter. As we've discussed on prior calls, we plan 1st markets to include head and neck surgery, urology and colorectal surgery. SP is a platform technology that allows high dexterity access with great three d vision to confine surgical spaces. Commentary by surgeons after in house evaluations have indicated strong interest in the clinical potential of this platform.
In the quarter, we also announced the creation of a joint venture with Fosun Pharma, owner of our current da Vinci partner in China. The JV's first objectives are to work with science posted to produce products that address an acute need in the diagnosis and cost effective treatment of lung cancer. 1 of the most commonly diagnosed forms of in the world and for which early detection and treatment are important. The technology underpinning the system is based on computer controlled catheters advanced image processing and sophisticated sensing. It incorporates a substantial set of proprietary intellectual property developed, owned or licensed by intuitive over the past several years.
This system is in its early stages of our human clinical experience and final clearance and launch targets are not yet set. That said, the raw capability of the technology is compelling, and it has the potential to perform as a broader diagnostic and treatment platform over time. Bringing new platforms to the market represents a significant investment. We've added approximately 400 employees year to date and expect increased fixed investments and some lumpiness in spending in future quarters as these platforms move through design, validation, data collection and early launch. As we close 2016, we are focused on the following: 1st, expanding the use of da Vinci in general and thoracic surgery, particularly colorectal surgery and hernia repair.
2nd, advancing our ecosystem, including new clearances, additional clinical and economic validation, training centers and the expansion of our product offerings, 3rd, driving our organizational capabilities and markets in Europe and Asia and finally, assisting our customers and their efforts to maximize the comprehensive value of their programs. I'll now turn the call over to Marshall who will review financial highlights.
Thank you, Gary. I'll be describing our results on a non GAAP pro form a basis, which excludes specified legal settlements and claim accruals, stock based compensation 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. I 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.
3rd quarter 2016 revenue was $683,000,000, an increase of 16% compared with $590,000,000 for the third quarter of 2015, and an increase of 2% compared with the 2nd quarter revenue of $670,000,000. 3rd quarter 2016 procedures increased 14% compared with the third quarter of 2015 and decreased 1% compared with last quarter. Procedure growth relative to last year has been driven by general surgery in the U. S. And urology worldwide.
The decrease relative to the prior quarter primarily reflects seasonality. Revenue highlights are as follows: Instrument and accessory revenue of $348,000,000 increased 17% compared with last year, and increased 3% compared with the second quarter of 2016. Growth in instruments and accessory revenue generally reflects procedure growth and increased sales of stapling and vessel sealing products. Instrument and accessory revenue realized per procedure including initial stocking orders was approximately $18.70 per procedure compared with $18.40 last year and $1810 last quarter. The increases relative to the third quarter of 2015 last quarter reflect increased sales for our stapling and vessel sealing products.
The increase compared to the second quarter of 2016 also reflects the impact of customer buying patterns. System revenue of $205,000,000 increased 18% compared with the third quarter of 2015, and increased 1% compared with last quarter. The year over year and quarter over quarter increases reflect higher system placements and higher revenue associated with lease buyouts, partially offset by lower average system selling prices. We generated approximately $13,000,000 of revenue during the quarter from lease buyouts compared with $3,000,000 in the third quarter of 2015 $13,000,000 last quarter. While lease buyouts are difficult to predict, we expect the level of 4th quarter lease buyouts to be below those of the 3rd quarter.
134 systems replaced in the third quarter of 2016 compared with 117 systems in the third quarter of 2015, 130 systems last quarter. 15 systems replaced under operating lease transactions in the current quarter, compared with 15 last quarter and 13 systems in the third quarter of 2015. As a reminder, revenue on operating lease transactions over the life of the lease. As of the end of the third quarter, there were 74 systems out in the field under operating leases, we generated approximately $4,000,000 of revenue associated with operating leases in the quarter compared with $2,000,000 in the third quarter of 2015. Approximately 4,000,000 last quarter.
We exclude the impact of operating leases and lease buyouts from our system ASP calculations. Globally, our average system price was $1,530,000 compared with $1,610,000 last year and $1,560,000 last quarter. The decrease is compared with prior periods primarily reflect a lower mix of dual console systems, partially offset by a lower mix of trading systems, in the third quarter of 2016. Service revenue $130,000,000 increased 10% year over year and increased approximately 1% compared with the second quarter of 2016. The year over year and quarter over quarter increases reflects growth in 3rd quarter revenue outside of the U.
S. Of $189,000,000 increased 25% compared with $151,000,000 for the third quarter of 2015. And increased 2% compared with $185,000,000 for the 2nd quarter. The increase compared with the previous year is comprised of 26% growth in recurring revenue, which is driven by procedure growth of 25% and increased systems revenue of 24%. The increase compared to the 2nd quarter reflects systems revenue growth 2% and recurring revenue growth of 2% in a seasonally slower quarter.
Outside the U. S, we placed 49 systems in the 3rd quarter compared with 37 in third quarter of 2015 51 systems last quarter. Current quarter system sales included 18 in the Europe, 2 into China, 11 ended Japan and 18 in the rest of world markets. System placements outside of the U. S, 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 regulation. Moving on to the remainder of the P and L. Pro form a gross margin for the third quarter 3% for the third quarter of 2015 71.9% for the second quarter of 2016. The pro form a gross margin for the third quarter of 2016 included $7,100,000 of medical device tax refund Without the medical device tax refunds, our pro form a gross margin would have been the same as the 2nd quarter or 72%. Compared with the third quarter of 2015, the higher gross margin reflects reduced product costs, the medical device tax refunds, and manufacturing efficiencies.
Future markets margins will fluctuate based on the mix of our newer products, the mix of system and instrument and accessory revenue, costs associated with our scope exchange program, 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 14% compared with the third quarter of 20 15, and increased approximately $6,000,000 compared with last quarter. The increases reflect increased headcount, increased product development activities and investments in our OUS commercial organization. We added over 400 employees primarily into product operations area over the past year. The increase compared with the prior quarter primarily reflects increased head costs.
Our pro form a effective tax rate for the 3rd quarter was 22.7% compared with an effective rate of 18.4% for the third quarter of 2015 27.8 percent last quarter. The pro form a 3rd quarter 2016 tax rate reflected $16,000,000 of tax benefits or $0.40 per share realized as a result of the statute of limitation expirations in various jurisdictions. The third quarter of 2015 tax rate reflected $29,000,000 or $0.77 per share related to a favorable tax court ruling involving an independent third party. Our tax rate will fluctuate with changes in the mix of OUS and U S. Income and with the impact of one time item.
Our third quarter 2016 pro form a net income was $246,000,000 or $6.19 per share compared with $199,000,000 or $5.24 per share for the third quarter of 2015 $220,000,000 or $5.62 per share for the second quarter of 2016. Excluding one time income tax and medical device tax benefits, Pro form a net income would have been $225,000,000 or $5.65 per share. 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 $211,000,000 or $5.31 per share for the third quarter of 2016, compared with $167,000,000 or $4.40 per share for the third quarter of 2015.
$185,000,000 or $4.71 per share for the second quarter of 2016. We ended the quarter with cash and investments of $4,600,000,000, up from $4,200,000,000 as of June 30 2016. The increase was primarily driven by cash generated from operations and proceeds from stock option exercises. As our cash builds, we will continue to evaluate our approach to capital allocation. 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 3rd quarter procedure growth of 14%, U. S. Procedures grew approximately 11% and outside of the United States procedures grew approximately 25%.
During the 1st 3 quarters of 2016, global procedure growth was nearly 16%. In the United States taken together, growth in our mature procedures slowed in the third quarter compared to the first half of the year. General and thoracic procedure growth remained healthy. In U. S.
Urology, 3rd quarter growth in da Vinci prostatectomy slowed to low single digit growth, a level that we believe to be similar to the overall rate of diagnoses of new prostate cancers. We believe that our US prostatectomy volumes have been tracking to the broader prostate surgery market. U. S. Gynecology, 3rd quarter procedures grew modestly year over year, with growth led by malignant and complex benign hysterectomy.
Continuing the recent trend, we estimate a larger proportion of da Vinci hysterectomy procedures were performed by gynecologic oncologists during the third quarter. Procedures for benign gynecologic conditions grew modestly during the third quarter, continuing a trend from the first half of the year. 3rd 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 general surgery, and existing surgeon retention and utilization remains encouraging. COLus'ectomy procedures declined in the quarter, with growth in multi port procedures being offset by declines in single site procedures. Early stage adoption of lubectomy and other thoracic procedures is encouraging. Last month, that the global symposium on robotic assisted and minimally invasive hernia repair several new datasets comparing da Vinci to open and laparoscopic hernia repair were presented. Among the most notable presentation, Doctor.
Rosen from the Cleveland Clinic presented new data on retro muscular ventral hernia repair from the American hernia Society's Quality Collaborative. Or the AHS QC. In a prospective cohort of more than 400 patients, case matched between da Vinci and open surgery, Davinci Surgery was shown to reduce the length of hospitalization by 2.5 days compared to open surgery with similar levels of wound outcomes, readmissions and re operations. Intuitive is a founding partner of AHSQC, and we are supporting its expansion to include data for ingotinal hernia repair. Turning abroad, procedure growth outside of the United States was approximately 25% in the 3rd quarter, led by the global adoption of da Vinci prostatectomy.
With solid contributions from kidney procedures. Total procedure growth in Europe and Asia was similar to the first half of the year, though procedure performance varied by country. Strong growth continued in China, South Korea, Japan and Germany. While adoption of DaVinci and Urology is the primary driver procedure growth outside of the United States, we are seeing multi specialty adoption in certain countries. In China, roughly half of the year to date procedure growth has come from categories side of urology.
In South Korea, approximately 60% of the year to date procedure coming from categories outside of urology. We are investing in the development clinical evidence to support the adoption of da Vinci surgery in markets around the world. Globally, we support several evidence initiatives and registries, including AHS QC, gynecologic oncology societal registries in the U. S. And Europe, Nicole rectal registry in Europe.
In the U. S, we are also supporting several comparative perspective and retrospective multicenter studies on hernia repair, colorectal surgery and thoracic surgery. Outside of the United States, we are sponsoring clinical studies in Japan to support reimbursement submissions for malignant hysterectomy and gastrectomy. In Europe, we provide support for studies in colorectal thoracic and gynecologic oncology. We are committed to developing in key markets to support the adoption of da Vinci surgery, where our technology can bring value to hospitals, surgeons, patients.
Third quarter was another quarter with a large number of clinical publications evaluating da Vinci surgery. Of these, I've selected a few studies that you may find interesting. Doctor. Dolesh and colleagues from Indiana University published a study in surgical endoscopy comparing da Vinci to laparoscopic colorectal procedures captured in the American College of Surgeons National Surgical Quality Improvement Project or NSCIP database from 2011 through 2014, including over 27,000 procedures across a range of colon and rectal resections in exchange for an approximate 45 minute longer operative time, da Vinci low anterior resections and right collecting these showed a reduction in conversion rates. Left collecting is trended towards a reduction in conversion rates without statistical significance.
Low anterior resection also showed a lower rate of sepsis, with a higher rate of diverting ostomy across all cohorts, da Vinci surgery generated a reduction in length of hospital stay. The next study was published by Doctor. Osben and colleagues from the Aspen M University in Istanbul, Turkey, in the journal of Surgical laposcopy and doc Phe and Percutaneous technology. In a small case series, the authors compared their experience in performing rectal resections on da Vinci XI to da Vinci They found that da Vinci XI was associated with an approximate 40 minutes of reduced operative time. The reduction in operative time was attributable to an elimination double docking and hybrid surgeries in the da Vinci XI cohort.
The surgeons also found that the da Vinci XI patient population experienced an increase in lymph nodes harvested and quicker return of bowel function with a
one day longer length of
hospital stay. The authors concluded the XI generation appeared to allow shorter console time and its broader capabilities promised to make it a lot easier for surgeons to perform this complex robotic procedure. While the study highlights the enhanced workflow capabilities of da Vinci XI for multi quadrant surgeries such as rectal resection, our da Vinci XI installed base has remained stable in 20 16 as customers continue to find value in its utilization. Taken together, procedures performed on da Vinci Si and XI platforms represented over 95 percent of our third quarter procedures. This concludes my remarks.
I'll now turn the call over to Calvin.
Thank you, Patrick. Team. Starting with procedures on our last call, we estimated full year 2016 procedure growth of 4 15% to 15% above the approximately 652,000 procedures performed in 2015. Now as we enter the 4th quarter, we continue to forecast full year procedure growth of 14% to 15% likely towards the higher end of the range. With regard to Q4 2016 system placements, we directionally expect system placements for the quarter to follow recent seasonal trends, However, we anticipate system placements outside of the U.
S. Will continue to be lumpy as some of our U. S. OUS markets are in early stages of adoption and sales in the submarkets are constrained by government regulations. Recall, we placed 13 systems into China and 7 systems into Brazil in the fourth quarter of 2015.
As the quota in China expired, in 2015 and a new quota has expect comparables and placements into these markets in the fourth quarter of 2016. Also, we believe that the flexibility we customers in the form higher proportion of Q4 2016 placements to be under operating leases with revenue recognized in future periods. Finally, we expect to see a lower that are outstanding at this time. To be within 16 pro form a gross profit margin to be approximately 71.5 percent of net revenue As Marshall indicated, the 3rd quarter benefited from a $7,100,000 medical device tax refund Excluding that benefit, our gross profit margin would have been 72%. We expect our 4th quarter margin to be directionally lower than the 3rd quarter primarily due to product mix.
Turning to operating expenses based upon investments we are making in key areas of the business, we expect expense growth will continue to accelerate. On our last call, we forecast pro form a 2016 operating expenses to grow between 12% 15% above 2015 levels, we are now refining this range to 13% to 14%. Consistent with our last call, we compared to $168,000,000 in 20 15. We expect other income to total approximately $33,000,000 in 20 16 higher than the $30,000,000 forecast on our last call due primarily to higher interest income. With regard to income tax, consistent with previous guidance, We expect our Q4 2016 pro form a income tax rate to be between 26.5 percent and 28.5 percent of pre tax income depending primarily on the mix of U.
S. And international profits. That concludes our prepared comments.
You.
You.
For our first question. That will come from the line of Bob Hopkins from Bank of America. Please go ahead.
Two questions. First for Marshall, just to clarify a couple of things that were mentioned relating to the fourth quarter. And then a question for Gary on the Fosun agreement. But Marshall, I'll start with you. Just 2 quick clarifications.
1, on the medical device tax that's in the $7,000,000. Could you explain why that is one time And then on the, on the system sales guidance that you're providing, is that essentially suggesting that systems will be globally roughly flat in Q4?
Yes, sure. So the medical device stack is the result refund is the result of a, when you originally compute the tax, there's some subjective areas and we modified what we had previously filed. So we get a one time refund, and it's over. And they have, we've received the money and there's been an audit, so we're all done with that. Second question had to do with the level of systems.
Now I think that what Colin said was that the systems are seasonally stronger in Q4. What he was trying to set up, however, was that, relative to the prior year, there's some hard comparables given that we had, some markets that are rather lumpy like China and Brazil.
All right.
Our next question comes from the line of
David I think Bob had a question on Fosun before he got to it. If you still have him, if not, we'll come back around in queue.
Here, can you hear me? I can. Go.
Okay, great. Thank you. Thank you very much for that. So I just, I was wondering if you could give us some perspective on the biopsy platform and the joint venture, because it seems to me like this is an entirely new platform that you're announcing here. So I was wondering if you could just give us a little more color on what this is?
Like is this a new is this a new totally new system or just an add on to XI? Is this should we think about it as being a couple of years away from commercialization or is it really a longer term project? I was just sort of wondering
if you could provide some perspective.
Yes, I'll give you a little bit of an overview. We'll, of course, give you additional detail in coming quarters. It is, not currently designed as an add on The technology is based, as I said, in the, in the prepared remarks on, computer controlled catheters, along with some special sensing technologies and some image analysis. Currently, the current configuration it's in, it's a standalone Those types of technologies in the future could be integrated into other things, and we won't preclude ourselves from doing that. We do conceive of it as a way to access the body through natural orifices and other means where you want to follow-up a prescribed pathway to get to some deep place in the body and do something.
Our, our first, clinical interest is in biopsying lung cancers or biopsying suspicious lesions in the lung. We think that, that is important globally in particularly important in China. And, as a result, the partnership with those who we've known through their their Tindex company for many years, made a lot of sense to us and we're excited about it. We're not ready to give you commercial timelines yet. The technology is mature enough that we're in our initial human clinical experience.
That's really the very beginnings for us. And as we get greater clarity on our launch timelines and thoughts, we'll share them with you.
Thank you.
We'll go to the line of David Lewis with Morgan Stanley.
Good afternoon. Gary, I want to start with a strategic question and maybe have 2 follow-up boring questions. But it was occurring to me on this call that actually the Intuitive story
is sort of poised for
a pretty significant change. I mean, I really think Intuitive has always really been about one system. I know you have multiple configurations, but in this quarter alone XI was still 75% of new placements. But if I think about the next 2 years, right? You're still going to have XI and all those multitude of prior systems, you'll have XSP and you're also now going to have this catheter based sensing system.
So if you could help us understand, are we right to think about this company as morphing these next 2 years? And how does supporting sort of multiple platforms now impact the addressable markets you can serve, your ability to accelerate growth and obviously just flat out R and D spending across these platforms. I know it's a big question, but I think it's an important one.
Yes, fair enough. I think, as you think about SP, SP shares a lot in architecture and in kind of underlying technology with the XI platform. We do think it branches us into, places that are hard to reach otherwise, literally hard to reach with commissional technologies, open surgery, conventional laparoscopy or with XI. So we think SP can broaden clinically what surgeons can do. I think that will start in niches and then we'll move out into broader applications as we gain clinical experience it does increase our support load a little bit in terms of complexity with regard to the SP just because it's a new set of instruments and add on accessories.
But it's not an entirely new set of computational platform and things like that. As you start thinking about the catheter base, technologies. Again, that's a new set of technologies. So you had kind of framed it in a 2 year horizon. I would stretch that horizon out a little bit.
Wouldn't address there. I do think that takes us to different places. I think it, allows access to parts of the body that you may not think of surgically, it may be more around the diagnostics. And, and, I think it will open up to practitioners ways of approaching tissue that they just haven't thought about before. And that's why we're doing it.
That you've seen us increase our R and D spend and We've been both talking about it and doing it. And part of it has been investing in these technologies. And I think it matters. I think as people look As we look from the bottom of your feet to the top of your head and look for opportunities to get better outcomes, we think there are a variety of technologies from access technologies to imaging technologies to computational technologies that can really make a difference. And that's where we're putting our money where our mouth is.
Okay. Thanks, Gary. And then Marshall, the company has always been hesitant to talk about margins on a go forward basis. Obviously, margins this year is a huge part of the story and they've frankly kind of extraordinary. So as you head into 'seventeen, just a lot of the spending comments you've made, I don't think it's realistic for investors to expect 200 basis points of margin expansion in 2017.
Based on your comments on spending in which you're going to have to do support these platforms, I mean, how should we sort of calibrate our thinking next year between sort of an extraordinary 2016 expansion and a more moderate 2015 margin expansion. Should we think about something between those two poles as more appropriate than what we're seeing this year, which seems very outsized?
Further, we'll give you guidance in January on what 2017 is going to look some of the variables that can occur, obviously, has to do with product mix. And as you introduce new products, new products have, by their nature, lower margins than existing products. And so if there were, as we introduced stapling, for example, we saw a decline in margin initially as we improve the manufacturer ability and efficiency of the manufacturing processes, we see improvements in margins. So I'm not going to predict what we're going to do next year. I would just say that there are a lot of moving parts mix, J.
Geographically also has an impact. Mix between systems and instruments and accessories has an impact. There's just a lot of variables that go into it. I think what you've seen this last year though is, outstanding performance by our manufacturing group to reduce the cost of newer products that were, lower margin a year ago.
Okay. And then just Gary, just really quickly, lastly, on the ex U. Business on systems. I think the commentary in Brazil and in China, this seemed kind of very short term in nature, eventually those tenders will get raised. But in terms of the European business, did you see any impact from Brexit or do you just think this is lumpiness, that always occurs generally in your business?
Thank you.
Yes. I think, the dynamics in the UK in particular, I, it's hard for us to segregate, what's Brexit and what isn't, the capital acquisition pipelines are pretty long relative to these things. It's been clear that in the UK, that there, NHS anyway, that NHS England has been looking at how to spend their money and trying to cover budget shortfall. So there's been pressure there for some time. Brexit likely doesn't help.
With regard to, Europe more broadly, it really is varying country by country. Some places we see reasonable growth and support other countries have been a little bit more of a struggle. And a response to that really has been to, increase local presence, increase local data generation and be in close contact with government payers and private payers.
Okay. Thank you very much.
Next we'll go to the line of Tycho Peterson from JP Morgan.
Hey, thanks. I actually want to follow-up on Dave's question early on margins. If we think about the Xi experience and the impact that had on gross margins, since we think forward to SP Is that a fair proxy in terms of the magnitude of the impact on gross margins when that does roll out?
We're not stage where, where we've introduced the product and we're manufacturing them in bulk. But I think it's fair to say that SP margins will be lower than our existing product portfolio. And we work on it as we come out over time to try to reduce those costs.
But in terms of magnitude, Tycho, when you look at the XI, that was our next generation multi port system and quickly took off to a very high proportion of the sales. What we're talking about with SP is a more controlled type of launch, lower overall quantity. So just based on magnitude, it's probably not going to have as big an impact on the overall margin.
Understood. And then can you comment on trade ins? I know you called it out in notes, you've had 58 new, highest number ever. Was this kind of a one time thing where you kind of went back and scrubbed the systems in the field?
Yes, there was a footnote in our data tables that we referenced in the beginning. During the third quarter, we actually implemented a new system and some processes for tracking our da Vinci systems out in the field as part of the transition process we performed a verification audit of installed base records and which identified 43 system, mostly older standard and S models, which had been retired. So we went and removed those retired systems from our installed base, during the quarter. So I think the trade out number was 33. And then most of the rest here was just kind of this adjustment we made to the base.
So the trade ins were pretty, I think, in line with previous periods.
Okay. Last one, I'll just ask the obligatory capital deployment question over $4,500,000,000 now. Obviously, you're stepping up your own spending, but can you maybe just talk a little bit about capital deployment at this point?
Yes, sure. I think, we think about capital deployment consistent with how we've talked about it before. We, we're in a period where there is now we're facing future competition and we want to have the ability to expand And to deal with competition, we're also going to see additional opportunities, as companies get into this game for acquisition of technologies that may expand our marketplace and enhance our products. And those technologies, it's nice to do tuck ins and small licensing arrangements that we've done in the past. And we'll try to do those, but it may be that we have to buy to pay, a greater dollar to get some of that technology in the future.
So we want to have money for those things. Beyond that, to the extent that we have the right opportunity to buy back stock and return money to shareholders, we'll take that opportunity, but we'll do that opportunistically as we have in the past.
Okay. Thank you.
Next over the line of Ben Andrew with William Blair.
Good afternoon guys. Thanks for taking the questions. Gary, looking at the Fosun relationship, does this give you a demonstrably closer relationship over in China that may influence the tender process. And kind of as a second piece to that, from a regulatory perspective, what sort of time frames would you be looking at to get something through once you've finished development and you've done some human testing to approval? Is it quicker there or is it similar to the U.
S?
Yes. On the first question, I think in the long term, I think it deepens our relationships with customers and regulators in China. I don't, I wouldn't assume that it's a magic switch in the near term. With regard to regulatory approvals, for various products in China. Typically, in our past, it's been a little bit longer process than it has in in the U.
S. What that looks like going forward in particular for the new products we're talking about, I can't speak to at this time. We just don't have enough information on it.
Okay. And then you talked about international procedures being up about 25%, which is a strong number, but I thought I heard you say that parts of Europe were weaker than a year ago. Was there a particular geographic pattern there? Was China demonstrably or that plus the ROW placements sort of got my attention relative to some emerging opportunities overseas.
Hey, Ben, this is Patrick. In certain international markets, we're pretty deeply penetrated in urology where you have seen those penetration rates increase over time. The rate of growth has decelerated. And emerging procedures, things like colorectal and gynecologic cology are still fairly small. So countries like the Nordic countries, places like the UK, where we're pretty deep, you see those growth rates slow.
Okay. And then this may be for Patrick as well, but a competitor this morning talked about seeing some of their general surgery cases and calling out hernia being down something like 10%. Kind of give us your state of the state in terms of where you are in hernia and kind of the trajectory of adoption relative to some of the historical fast adopting procedures, if you would.
Yes. Hernie continues to be encouraging. The rates of both procedure adoption surgeon retention and utilization within the existing surgeon population as they continue to do more procedures has been a strong point. In the way in which the technology has been adopted. Now hernia repair though is not one thing.
So there's a variety of patient subsets within. And variety of different physician perspectives around the value that our technology can bring in the procedure. And so it's probably not quite like DDP in terms of the way you would think of it as being adopted, maybe a little more like benign hysterectomy, given the alternative therapies and the heterogeneous landscape out there in terms of how they address these patients.
Okay. And then last question for me, I guess, is the question is around the I and A, the revenue beat there with the procedures being roughly in line with our target, was quite noticeable. And, Marshall, you did go through some of the math there, but was other than stapling in and vessel sealing. Was there anything in particular in there that caught your attention relative to mix?
Yes. Just kind of given
a little historical perspective, if you look at Prior to Q2 of 2016, our I and A revenue per procedure has been running within a really tight narrow range, $18.30 to $18.40 per seizure. You probably recall last quarter, it actually dropped down to 18.10. And we talked about timing of orders being the main here. And so as expected here in Q3, we saw an orders of rebound to offset Q2. And if you take the average of Q2 and Q3, you're right back at the 1840, kind of in line with those trends over the past couple of years.
As we said though, we continue to see increasing utilization of the instruments including the stapler and vessel sealer and moving forward as we anticipate continued growth in the procedure volumes in colorectal and thoracic surgery areas where these products are more widely used, we would anticipate a slightly higher contribution to revenue per procedure on an organic consumption model, if you will. But it's important to remember that a variety of factors impact revenue per procedure, including the type of procedure reform, the efficiency of use and optimization, use of advanced instruments stocking orders, timing and distributors. There's a lot of factors here. So as a result, I and A, it can be lumpy and future trends can be ultimate forecast in the end.
Thank you very much.
Thanks. Hey, good afternoon guys. Let me maybe start with prostate. Just kind of thinking through the trend this year, just going from low double digit growth in the first quarter for DBC all the way down to low single digits, it sounds like for this quarter, it seems like a pretty fast change in what otherwise would seem to me to be something that would be a slower trend line. Any more color you can add as to what's happening now?
Why is that and maybe more importantly, just the confidence you guys have that this quarter kind of marks that bottom and that incidence rate growth is kind of your right rate of growth for prostate?
Yes. Hey, Amit, as you know, predicting how the patient treatment trends across prostate cancer and a mature procedure like DVP is difficult. And we've highlighted for a period of time, the rates of growth that we've seen were not rates of growth that we thought were consistent with the rate of diagnoses. It's hard to say in the quarter or the rate at which we've seen growth change over the course of this year. The specifics behind it, that data typically comes to us years down the road.
But we feel that the what we saw in the quarter is probably more greater diagnoses than perhaps what we've seen over the past handful of quarters.
Okay. Let me kind of, let me move to gynecology. It sounds like, there things are still kind of like to describe in the first half of the year, maybe slightly better than what we've seen in the past. And I wanted to, I don't think we've asked this in a while, so to throw this question out, just as one possible avenue, just thinking about outpatient centers, ambulatory surgery centers, is there, to what extent, or is there kind of any increase in the success that you're having being able to place the VINCI's and outpatient center, is that becoming more of a focus for you at all? And is that at all a part of maybe the slightly better, rate of growth we're seeing in gynecology in the U.
S?
Yes. So it's, I think you're connecting 2 things. I'm not quite sure I connect. So the, the relative health of the gynecology business, seems to me to be driven by a few factors among them concentration of of patients into higher volume surgeons and higher volume centers. Separately, there is a trend toward a more outpatient work We do see, utilization of our systems and outpatient environments that tends to be, more in existing integrated delivery networks, hospital owned outpatient departments as part of an integrated plan.
It's not something I'd call out as a major trend at this point. I'm not sure that I would quite link it to GYN. It's possible, but I think there are a lot of factors there sorting them is, it's not possible yet.
But if you look at GYN overall and you look at the history of benign hysterectomy adoption, the of DaVinci surgery and the benign hysterectomy has enabled the majority of patients to now be treated on an outpatient basis. So when minimally invasive surgery is adopted, with the technology, it will enable hospitals to manage these patients in a more in more outpatient oriented way.
Just one last question for me on the system side. Just thinking through not just the 4th quarter, but just little bit longer term, maybe call 'seventeen, if you want. But, thinking about the installed base, just it's been really consistently growing now at 10% a year, almost every quarter. It seems like it grows about 10% on that 10% rate, on an annual basis. Can you maybe just talk through the key drivers and maybe pressure point as we think about that number and the sustainability of that 10% growth in the installed base growth figure as we think through the next year or 2?
You know, a couple of, the way
I think about it kind of
puts and takes. So the major factor is, anticipated procedure growth by the customer. So customers are making capital placements based on what they think will happen in future procedure trends. So that is the biggest driver and where they see growth, I think, that they move forward. The places where that, that can be a little bit different or disconnected is in a very early market where you're just getting started.
So a new reimbursement clearance or a new quota or a new procedure clearance don't don't doesn't follow the more mature trend. So those are the 2 things that are rolling around. I think the biggest one for us is, is, customer belief and utilization for future procedures is the best predictor of capital.
Next, we'll go to the line of Rick Wise from Stifel Nichols.
Afternoon, everybody. Hi, Gary. Just, maybe just coming back to Fosun briefly, Obviously, you have alluded several times to the, this notion of building out the ecosystem and how important and valuable it is to Intuitive. Are there other similar opportunities to Fosun, whether it be geographic or technology or, I mean, is this a direction we should expect, intuitive to push looking for other technologies to bring into the ecosystem.
Is that the right
way to think about it?
I think the idea that if there are technologies or other assets that we can bring that we think will increase the value of a robotic surgery program or a minimally invasive surgery program based on computation to one of our customers. Is that an opportunity for us? Yes. They tend to develop in time. The underlying catheter based technologies that we're talking about now as you know, having followed us for some time, were really first acquired by us years ago.
So, the answer to that, yes, we're out looking so soon has been a good partner. They have both a relationship with us through Chindex, but they also understand the health care space. Extremely well in multiple dimensions. And so, a short answer to that is we've been doing it and expect to continue to
Thanks. A couple more. Just a general question about the general surgery adoption, particularly in the U. S. Maybe just can you talk a little bit more about where we are just in terms of that adoption process?
I mean, are these still earnings or early innings rather And maybe particularly on colorectal, how do you accelerate colorectal adoption? Do we need more clinical data. Can you talk through some of those issues?
Sure. So I, as we've said in the past, adoption is really a per procedure and per procedure is really segmented. So for example, colorectal is probably really 4 or 5 underlying procedures that are a little bit different. And adoption goes quickly when there's, large valued think value for the procedure relative to alternatives and when the procedure is pretty well concentrated in the hands of well trained surgeons. So take colorectal and separate it a little bit.
And in the case of rectal cancer, that's a complex set of procedures, oncologic, of course, in nature, has been growing steadily, not a super rapid rise relative to some prior adoptions, but a steady adoption for us. And data collection has been occurring. Data publication has been occurring. And we're doing okay there. I think in other parts of colon, sometimes it's rebalanced, sometimes it's oncology.
Those are typically done by different surgeons. And so they adopted a little bit different rates. When you look at hernia, again, it's subsegmented dental hernia versus in Guenal and subsegments within Inguinil. So we look at it, ventral hernia and Inguinil hernia as we define the available markets for procedures for which we bring value have adopting pretty nicely relative to past trends. Rectal has been on a slower adoption, but a steady one.
And, and Colin is in the middle.
And just last for me on the procedure side. I mean, obviously a lot of moving pieces here, urology maybe now a little more slower growth now that rebounded gynecology recovering, gyne, general surgery, continuing to grow dramatically. We roll up that math with what we're seeing internationally. Should we feel reasonably optimistic that something like mid teens procedure growth again, with some variation, is that the right sustainable growth rate from here given the growing installed base given the geographic penetration and giving the continuing evolution of intuitive technology? Thanks, Gary.
Yes. We're not ready to give our 2017 forecast yet. And we'll see how we close here in the fourth quarter and roll up our estimates and answer that very question in our next call in January. Thank you.
Welcome to the line of Larry Biegelsen with Wells Fargo.
Good afternoon. Thanks for taking
the question. So, I'm new to these calls. So, just maybe a couple of basic ones here. So SG and A as a percentage of sales was relatively low. I apologize if I missed it.
Any reason for, SG and A to be relatively low this quarter? And the the R and D spending of about 7% of sales. Is that sounds like, is that a good rate to use, you know, going forward? And I
had a couple of follow ups.
You know, there's going to
be variability quarter to quarter lappiness, if you will, between SG and A and R and D. We've talked a lot about our R and D investments. Gary went through them on on the SG and A side. I think we're investing a little heavier disproportionately for international to support the earlier phase growth there. You look at it overall, we're within our guidance range.
We refined our full year guidance to that 13% to 14%. So Again, there'll be some quarter variability, but I think we're tracking to the overall plan.
And Larry, given the lumpiness in some of our capital revenue from period to period, we typically talk about operating expenses in terms growth rates, which, which Scott will walk you through.
Got it. Thanks. And then when we think about the pipeline and potential launches of new products and functionality, Should we be expecting any meaningful product introductions later either later this year or, in 2017, excluding, SP?
Well, we've been launching a fair number of instruments and accessories, various things in various markets. We tend to tell you when they come out We are we have not tagged a launch date, either for SP or other kind of major systems at this time.
And then lastly for me, Gary, you talked about the, you know, the growth you've seen in hernia and you talked about VENTEL and and Inguinil. Are you seeing anything different in terms of the penetration of ramp in ventral versus Inguinil or both of them, equally strong? Thanks for taking the questions.
It's a good question. I think the dynamics are a little bit different in them, both in terms of kind of procedure complexity and a little bit of practice patterns. So they don't track exactly the same. Having said that, I don't think there's anything about adoption. I'd call out strongly at this time.
I think both of them are moving through that first set of adopters, generating additional data. We're seeing more data now generally supportive. It looks pretty good. I think that that technique refinement and data generation is what the next round of surgeons rely upon to evaluate. And so we're seeing that kind of transition right now, really in both both of those, Rob, hernia domains.
We'll just take one more question for, one more caller, please.
Our final question will come from Brandon Henry with RBC Capital Markets.
Yes, thanks for taking my question. So intuitive, again, it posted strong growth in operating margins this quarter. Can you discuss some of the products cost initiatives that are driving these better margins? And then what inning you're in with some of these cost initiatives? And then separately, the company's headcount has increased meaningfully over the last couple of quarters.
Can you discuss where you're making the investments in headcount And then how much of that increase in headcount can be attributed to the Folsom JV versus some other initiatives? And then I have a follow-up.
That was two questions already, and I gave you 1. I think I'll choose 1. Now I, well, we'll go fast. On the first one, in terms of cost reductions, it's a, a careful and and long list of activity that goes on. So you shouldn't so much think of it as one thing as it is a routine discipline of scanning through bulk operating processes and manufacturing processes and parts costs and working them down as they come.
You do get the first the greatest help on those things in the 1st few years of a platform release. And then after that, it starts getting increasingly hard. I'm not supposed to say that it isn't isn't possible to do it. In terms of headcount growth, it's a mixture of, commercial growth a little bit more weighted outside the U. S.
Than the U. S. Some manufacturing growth to cover volumes of things like instruments and accessories and other things that have been increasing, as well as some design help. The headcount growth as it relates to flow soon and we're not really ready to break out at this time. We have certainly made headcount investments over the last few years into the technologies that have underpin that relationship.
But it's not, I wouldn't call it out
as boats in, just yet.
With that, I'll go ahead and close the call and Brandon will catch your next question on the next conference call. That was our last question. As we've said previously, while we focus on financial metrics, such as revenues, profits and cash flow during these conference calls, Our organizational focus remains on increasing value by enabling surgeons to improve surgical outcomes and reduce surgical trauma. We've built our company to take surgery beyond the limits of the human hand, and I assure you 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 we look forward to talking with you again. 3 months.