Ladies and gentlemen, thank you for standing by. And welcome to the Intuitive Surgical Q1 2016 Earnings Release Call. At this time, everyone joining is in a listen only or muted mode. And later we will have a question and As a reminder, the conference is being recorded. And I'll now turn the meeting over to our host, Senior Director of Finance, Investor Relations, Calvin Darling.
Please go ahead.
Thank you. Good afternoon, and welcome to Intuitive Surgical's 1st quarter earnings conference call. With me today, we have Gary Goodhart, our President and CEO Marshall Moore, our Chief Financial Officer and Patrick Clingan, Senior Director of Finance. Before we begin, I would 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.
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 Marshall will provide a review 16. 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 first quarter company performance was strong with excellent global procedure growth, solid capital placements, improving product margins, and important new product launches. Turning first to procedures. Global procedure growth for the quarter was nearly 17% led by growth in general surgery, growth in the use of da Vinci surgical systems outside the United States, continued growth in U. S.
Urology and modest growth in U. S. Gynecology. Trends in U. S.
General surgery growth continued with strong growth in inguinal hernia repair and ventral hernia repair, followed by continued growth in colorectal surgery. Customer feedback and commitment to the use of da Vinci in performing a renal hernia repair for complex conditions has been encouraging in the quarter, increasing our confidence in its long term acceptance. Procedure growth was variable by country in Europe, with solid performance in the United Kingdom and Germany offsetting slower growth in the Nordic countries. Performance in the quarter was helped by an extra procedure day in some regions relative Q1 of 2015. Patrick will review procedure trends in greater detail later in the and 10 da Vinci systems in the quarter, up from 99 in Q1 of 2015.
Customers continue to purchase our ai systems over less expensive and less capable SI models by a factor of approximately 3:one. Capital performance was strong in the United States, offsetting capital softness in Europe and the expiration of our quota in China. Lastly, customer leasing and lease to own a range are making up a greater percentage of new system placements. Marshall will take you through our Our operations teams remain focused on optimizing our manufacturing design and supply chains for our newer products. Our teams continue to execute against their goals, with steady improvements in reducing product costs for our new systems advanced instruments in the quarter.
Product cost reductions exceeded our expectations, and we expect them to continue to improve in 2016 2017. Our offerings make up an ecosystem designed to meet customers' needs in building and running outstanding robotic surgery programs. This ecosystem includes systems and instruments and accessories, training technologies and peer to peer coursework, service offerings and program optimization and analytic support. As a result of the set of products and services that surround our systems recurring revenue in the quarter comprised 75% of total company revenue. Highlights of the first quarter operating results are as follows.
Procedures grew nearly 17% over the first quarter of last year. We 110 Da Vinci Surgical Systems, up from 99 in the first quarter of 2015. Revenue for the quarter was $595,000,000, up 12% over the prior year. Pro form a gross profit margin was 70% compared to 65.6% in the first quarter of last year. Instrument and accessory revenue increased to $322,000,000, up 16%.
Total recurring revenue in the quarter was 447,000,000 representing 75% of total revenue. We generated a pro form a operating profit of $229,000,000 in the quarter, up 24% from the first quarter of last year and pro form a net income was $170,000,000, up 27% from Q1 of 2015. We continue to enable our XI platform with new product launches. Our launch of intraoperative table motion is proceeding well with order flow that has met our expectations, with strong eye stapler designed to facilitate stapling and thoracic procedures and our XI single site instrument and accessory kit. Both our 30 millimeter stapler and our XI single site instruments have started clinical use with positive feedback on their utility.
Our SP program remains on track. As our business has strengthened, we have increased our mid- and long term investments in research and development, We have been increasing our investments in imaging, analytics and new product architectures based on our belief that substantial opportunity exists to enable better outcomes and to expand our access to our technologies globally. Kevin will take you through our projected spending later in the call. As we move forward in 2016, we're 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 expanding our X I line and taking our SP product into initial clinical use.
3rd, driving our organizational capabilities end 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 or pro form a basis. Which excludes legal settlements and claim accruals, stock based compensation and amortization of purchased IP. We provide pro form a information because we believe the business trends and operating results are easier to understand on a pro form a basis. I will also summarize our We have posted reconciliations of our pro form a results to our GAAP results on our website so that there is no confusion.
1st quarter revenue was $595,000,000, an increase of 12% compared with $532,000,000 for the first quarter of 2015, and a decrease of 12% compared with a seasonally stronger 4th quarter of $677,000,000. First quarter 2016 procedures of approximately $176,000 increased nearly 17% compared with the first quarter of 2015 and decreased slightly compared with the 4th quarter procedure approximately 177,000. Year over year procedure growth was driven by general surgery procedures in the U. S, in urology worldwide, and otherwise likely benefited from an additional calendar day associated with leap year. Revenue highlights are as follows: Instrument and accessory revenue of $322,000,000 increased 16% compared with last year and decreased 1% compared with the fourth quarter of 2015.
These changes generally reflect changes in procedures. Instrument and accessory revenue realized per procedure, including initial stocking orders, was approximately $1830 per procedure. This metric continues to fluctuate in a tight range of approximately 100 $1830 $1840 per procedure. Relative to the first quarter of 2015, the current quarter reflects higher sales of advanced instruments, offset by the impact of customer buying patterns in foreign exchange. System revenue of $148,000,000 increased 5% compared with last year and decreased 36% compared with last quarter.
The increase relative to the prior year primarily reflects increased revenue associated with operating lease activities and slightly higher average system selling price The decrease relative to the 4th quarter primarily reflects seasonally lower unit sales and slightly lower ASPs, partially offset by increased revenue associated with operating lease activities. 110 systems replaced in the first quarter compared with 99 systems in the first quarter of 2015, and 158 systems last quarter. Approximately 77% of the systems shipped in the quarter were XIs, which is comparable to prior quarters. Hospitals financed approximately 37% of the systems placed in the 1st quarter up from 17% last quarter. We directly financed 31 systems, including 19 operating leases.
As of the end of the first quarter, there were 62 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 $1,000,000 in the first quarter of 2015 $3,000,000 in the fourth quarter. We also generated approximately $6,000,000 of revenue during the quarter from lease buyouts compared with $2,000,000 of revenue in the 4th quarter and no lease buyout revenue in the first quarter of last year. We exclude the impact of operating leases from our system ASP calculations. Globally, our average system price of $1,500,000 was approximately $30,000 higher than the first quarter of 2015 ASP.
And approximately $50,000 lower than the ASP last quarter. Relative to the prior year, the increase reflects a proportionally lower trade in volume and favorable geographic mix, partially offset by an unfavorable product mix, The decrease relative to the fourth quarter reflects proportionally higher trade in volume and lower mix of XI dual consoles partially offset by favorable geographic mix. Service revenue of $125,000,000 increased 4% compared with the fourth quarter of 2015. The year over year and quarter over quarter increases reflect growth in our installed base of da Vinci systems. Outside of the U.
S. Results were as follows 1st quarter revenue outside of the U. S. Of 164,000,000 increased 9% compared with $150,000,000 for the first quarter of 2015 and decreased 25% compared with seasonally stronger 4th quarter up to $219,000,000. The increase compared with the previous year is comprised of a 14% growth in recurring revenue which is driven by procedure growth of 22% and increased systems revenue of 2%.
The decrease compared to the 4th quarter reflects seasonally strong 4th quarter systems placements, partially offset by a 5% growth in recurring revenue. Outside the U. S, we placed 36 systems in the first quarter compared with 36 in the first quarter of 2015 75 last quarter. Current quarter system sales included 5 into China and 8 into Japan. System placements outside of the U.
S. Will continue to be lumpy as some of these markets are in their 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 was 70% compared with 65.6% for the first quarter of 2015 and 69.6% for the fourth quarter of 2015.
Compared with the first quarter of 2015, the higher gross margin reflection reduction of product and product repair costs, improved manufacturing operations efficiencies, the elimination of the medical device tax, lower costs associated with product field actions and related inventory charges. And a higher and 15 gross margin by approximately 70 basis points. Future margins will fluctuate based on the mix of our newer products, our ability to further reduce product costs, manufacturing efficiency, costs associated with product field action and in the long term, the potential reinstatement of the medical device tax. Pro form a operating expenses, which exclude legal settlements and accruals for legal claims, stock compensation expense and amortization of purchase IP increased 14% compared with the first quarter of 2015 and increased advanced imaging, advanced instrumentation and next generation robotics, increased headcount, and higher payroll taxes associated with stock option exercises. Our pro form a effective for the first quarter of 2015 24.9 percent last quarter.
In late December 2015, Congress retroactively approved the 2015 federal research and development credit and made the R and D tax credit permanent going forward The entire 2015 R and D tax credit was included in the 4th quarter, while no benefit was reflected in the first quarter of 2015, and a proportional benefit is reflected in the first quarter of 2016 other than the impact of the R and D credit, fluctuations in our tax rate between this quarter 1st 4th quarters of 2015 primarily reflect changes in the mix of U. S. And OUS income. Our first quarter 2016 pro form a net income was $170,000,000 or $4.42 per share, compared with $135,000,000 or $3.57 per share for the first quarter of 2015. And $224,000,000 or $5.89 per share for the fourth quarter of 2015.
Note that fully diluted shares outstanding increased by approximately 400,000 shares relative to the fourth quarter, resulting primarily from the increase in our share price. 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 revenue was $595,000,000 for the first quarter of 2016 compared with $532,000,000 for the first quarter of 2015, and $677,000,000 for the fourth quarter of 2015. GAAP net income was $136,000,000 or $3.54 per share for the first quarter of 2016 compared with $97,000,000 or $2.57 per share for the first quarter of 2015 $190,000,000 or $4.99 per share for the fourth quarter of 2015.
We ended the year with cash and investments of $3,800,000,000, up from $3,300,000,000 as of December 31, 2015. The increase primarily was primarily driven by proceeds from stock option exercises and cash generated from operation. 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 highlights. Thanks, Marshall. Of our first quarter procedure growth of nearly 17%, U. S. Procedures grew approximately 15%.
And OUS procedures grew approximately 22%. In the US, even though growth benefited from favorable operating days in the quarter, procedure growth outpaced our expectations. 1st quarter growth in our mature procedures continued at levels similar to the second half of twenty fifteen, generating the majority of the procedure outperformance relative to our expectation. General surgery procedure growth also exceeded our expectations. In U.
S. Urology, 1st quarter growth in da Vinci prostatectomy and kidney procedures continued at similar rates as the second half of twenty fifteen. We continue to believe that our U. S. Prostatectomy volumes have been tracking to the broader prostate surgery market and we expect prostatectomy growth to return to levels of similar to prostate cancer incidence rates over time.
In U. S. Gynecology, 1st quarter procedures grew modestly year over year. With growth led by malignant and complex hysterectomy. Continuing the trend from 2015, we estimate a larger proportion of da Vinci hysterectomy procedures were performed by Gynecologic oncologists during the first quarter.
Similar to the 4th quarter, U. S. Single site gynecology procedure growth declined compared to the first quarter of 2015. 1st quarter growth in U. S.
General surgery procedure adoption remained strong, led by robust growth in hernia repair and continued adoption of colorectal procedures. Colorectomy procedures were roughly flat in the quarter, with growth in multiple procedures, offsetting declines in single site procedures. Q1 was another quarter with a large number clinical publications evaluating da Vinci's surgery. Of these, I have selected a couple of studies that you may find interesting. With the launch of our 30 millimeter stapler, surgeon interest in the use of da Vinci for thoracic surgery is growing.
A new study comparing open video assisted thoracic surgery or VADs and da Vinci Surgery for pulmonary lobectomy was published by Doctor. Yang and colleagues from Memorial Sloan Kettering Cancer Center in the Annals of Surgery. Using a prospective database, including 2400 surgeries to treat stage 1 non small cell lung cancer patients the officer's propensity matched 470 patients across da Vinci Vats at open surgery. The study found that da Vinci and minimally invasive Vats approaches enabled a shorter chest to duration and length of hospital stay compared to open surgery. Da Vinci surgery was also credited with improved lymph node yields as compared to both open surgery and VAS, an important clinical outcome for determining next steps in the patient's treatment pathway.
As it related to the expansion of DaVinci Lungwear sections, the authors highlighted that nearly 57% of pulmonary lofectomies in the U. S. Are treated with open surgery and they see promising expanding patient access to minimally invasive surgery through da Vinci technology. Turning abroad. Procedure growth outside of the United States was approximately 22% in the first quarter, led by the global adoption of da Vinci prostatectomy.
With solid contributions from kidney procedures and colorectal resection compared to the second half of twenty fifteen. Procedure growth slowed in both Europe and Asia during the quarter, in part due to the timing of the Easter holiday. Procedure growth rates have been lumpy and less predictable in the short term. We are focused on improving our OUS procedure performance. In Japan, there were positive developments relating to reimbursement in the quarter.
The MHLW approved for reimbursement of partial nephrectomy at a premium rate relative to open surgery and also approved clinical trial enrollment to begin supporting a Centenary OB submission for da Vinci malignant hysterectomy. A recent study funded by Intuitive and published in BJU International by Professor Hughes and colleagues from the University of Chester Collected data from the United Kingdom health episode statistics database, including more than 20,000 prostatectomy patients in 2000 partial nephrectomy patients, to assess health resource utilization and cost following da Vinci, open and laparoscopic procedures. The database showed that from 2008 to 20 13, the use of da Vinci surgery increased from 15% to 50% of prostatectomies and 1% to 22% of partial nephrectomies by displacing open surgery. During the first year after the operation, DaVinci Surgery was shown to reduce inpatient admissions, hospital bed days, and total costs for both prostatectomy and partial nephrectomy compared to open surgery. At 3 years post operation, The study showed similar outcomes for prostatectomy and was insufficient to draw conclusions for partial nephrectomy.
Lifroscopic surgery outcomes were at the approximate midpoint Davinci and Open Surgery on resource utilization and cost for both procedures. The authors concluded, our analysis suggests that there are substantial savings associated with robotic assisted surgery when compared with open and laparoscopic interventions. This concludes my remarks. I'll now turn the call over to Calvin.
Thank you, Patrick. I will be providing you with our updated financial outlook for 2016. Starting with procedures. On our last call, we estimated full year 2016 procedure growth of 9% to 12% above the approximately 652,000 procedures performed in 2015. Pro trends and U.
S. General surgery growth, we are increasing our estimate for 2016. We now anticipate full year 2016 procedure growth within a range of 12 2016 pro form a gross profit margin to be within a range of between 68% 69.5% of net revenue. We are now increasing our estimate. We now expect full year 2016 pro form a gross profit to be within a range of between 69 and 70% of net increasing our investments in expenses between 9% 13% above 2015 levels.
We are now increasing our estimate for operating expenses to a range of between stock compensation expense to range between $170,000,000 $180,000,000 in 2016 compared to $168,000,000 in 20 15. We expect our 2016 other income, which is comprised mostly of interest income to be in the upper end of the $20,000,000 to $25,000,000 range forecast on our last call. With regard to income tax, we continue to expect to be between 26.5 percent 28.5 percent of pretax income, depending primarily on the mix of U. S. And OUS profits.
That concludes our prepared comments.
You. We have a question from Bob Hopkins with Bank of America. Please go ahead.
Okay. Thank you. Two questions. But first of all, congrats on the great momentum in the business. I have a question on U.
S. Procedure volume growth. And then on your comments on OpEx spend. 1st on procedure volume growth. 1, can you give us a sense of what you think you grew in the quarter on a same day selling basis?
But then much more importantly, just give us a sense as to specifically which surgery types accelerated in the U. S. And what drove the growth? What caused the acceleration? Why did things get better?
Bob, thanks for the question. From a same day selling perspective, estimating the impact of operating days is anything but an exact science From a tailwinds, you had leap year that benefited the quarter and some modest benefit from the timing of the years being on a Friday rather than a Thursday. And from a headwind perspective, you had the timing of Easter, which moved from the second quarter into 1st quarter, but that had more of an impact on the OUS geographies. From what accelerated, the mature procedure sustained pretty strong growth in the quarter, but as a softer of 2015, was a little bit of a surprise to us relative to our initial expectations. And general surgery continues to be strong and growing off of a larger base, which which has more impact
on
on OpEx spend, because I think it's an important, comment from you guys. Your spending in the quarter was high exactly as you said it would be and now you're raising that spend level even further. So can you just talk about where the incremental spend is going What kind of new incremental technology announcements could that lead to? You mentioned a couple on the call, but I'm just really curious as to where the spending is going and when we could expect to get more visibility on the output from that spending.
Sure. So on the spend, I think the acceleration is really board of confidence, confidence in the long term viability of some of the markets and some of the things we're pursuing. You'll see it really cut into a couple of buckets. Some of it is investments in OUS markets where we think that we can do more by investing more. And we've been talking to you about that.
The other side is on R&D. And in terms of categories, we've talked about it before, but we believe in them deeply, advanced imaging, the ability to see beyond what you can just see with your naked eye, new robotic architectures that allow surgeons to get into and out of the body in different ways into different places that they could reach prior, as well as, analytics and over the shoulder guidance, all things that we have been investing in, some things that we're accelerating. So as we won't do product announcements on this call as we get deeper into those things and are ready to to share them more broadly with you. Of course, we will.
And then lastly, just to get a sense, I thought I heard something about positive about hysterectomy in Japan. It went by pretty quickly. Is there some positive momentum on his direct mean in Japan from a reimbursement perspective?
Yes, Bob, the MHLW approved clinical trial to begin enrollment, supporting malignant hysterectomy under this Centenary OV process.
Perfect. Thank you.
Thank you. And we'll take additional questions as time permits. Our next question from Tycho Peterson, JP Morgan. Please go ahead.
Hey, thanks. I just wondering if you could talk a little bit about table motion. How many systems are installed that are capable what percentage of systems, I guess, have the option included? And if you could just talk a little bit about how it flows through to gross margins as well. Mainly a software upgrade from your perspective, right?
Yes. We're pretty pleased with the level of adoption for table motion, where the information we're getting back from surgeons is they're pleased with its usage and its performance. We're not going to be disclosing every quarter just how many tables we've delivered. So I won't go there. I'll just tell you that, again, we're pretty pleased with the level of adoption.
Obviously,
the revenue on the margin side Yes.
The margins, so what we're providing is a software update to the XI that enables table motion, the table itself is being purchased from Trump. And the, and so our our billing is 100% margin.
And I guess maybe what I was getting at is the degree to which this is going to drive a bolus of demand for XI now that you have that plus the full instrument set. Could you maybe just talk a little bit about how you see that flowing through the XI demand?
Yes, I think that it Each one of these steps, the 30 millimeter X I stapler, the integrated table motion, now the X I instrument kit is rounding out that XI platform. And we have some more to do, it's not all complete, but it's definitely becoming a much fuller and richer ecosystem. We think that helps. It's very hard to forecast how much it is, how many people sit and wait until the next step. But we think those things add clinical value.
For sure, 30 millimeter stapler and thoracic procedures is a big win. Likewise table motion for a lot of the, more complex procedures. So we think that's strong. And there are a group of of, hospitals that use SI with single site that if they're a single system hospital, they only only own just one and they have a robust single site program. This allows them to consider exercise and upgrade.
So it's hard to quantify, but we think directionally it's really strong.
Okay. And then follow-up, can you just comment on Europe? It looked like that was a little soft. Maybe just talk about the outlook there for the year.
Yes, Europe was Definitely variable, both in procedures and in systems. On the procedure side, we had some strength in some countries where They're moving along and we think there's opportunity to do that and better. There are some other countries where it's going a little slower. Sometimes it's a local economy issue. Sometimes it's more where we are maturity.
Some, in some of these countries, we're pretty well adopted in the mature procedures and they're really at the beginnings of emerging procedures. So it depends country by country. On the capital side, I think there's 2 things going on. A little bit of environment is 1. And and a little bit of wait and see on, on, competitive offerings as they come out.
And we're navigating that pretty well. In terms of head to head comparisons with our technology, our systems are coming out great, but it can put a delay in the pipeline and we're seeing a little bit of that in Europe.
The only other thing I'd add is that there's, Europe has become very seasonal. And so if you look at Q4, it was extremely strong relative them to the previous couple of quarters, and Q1 is more comparable to the previous year, Q1.
Okay. Thank you.
Our next question from David Lewis with Morgan Stanley. Please go ahead.
Good afternoon. Just two quick ones here. Marshall, just coming back to gross margin guidance, so GMs have been stronger for 5 consecutive quarters. And the guidance certainly implies no improvement throughout the year, which seems, I guess less likely to us, just given the cost improvements you've already discussed. So Can we just talk to gross margin progress throughout the balance of the year and why you think 70% here in the first quarter is the high water
Sure. So one of the biggest factors we see going forward is product mix. So know that we have higher higher margins on instruments and accessories than we do on systems. And Q1 tends to be seasonally a lower quarter for capital. And also, we see growth in the new product, particularly energy products stapling and vessel sealing going forward.
And those also have lower margins than the base. So I think just based on product mix alone, we don't expect to sustain 70%.
Okay. And then, Gary, I, obviously, people have asked about spending already. And I know that the R and D spend is the highest we've seen in 4 years. So clear, you're obviously clearly going to continue to invest. I have no expectations you're going to talk to us about future instrumentation and system announcements, but I think the enigma for most shareholders actually is advanced imaging, because that's sort of more future looking.
Is there any chance we get incremental updates or at least even any update on the strategy for Advanced Imaging, this year? Thank you.
Yes, it's a fair question. In general, we have been making early investments in Advanced Imaging. And what tell you there is that it's not one thing. As you know, we have Fireflies, which is a molecular imaging based product We also have invested in raw imaging hardware capabilities, which we'll continue to do. As what we like to do is is, as we have milestones, that makes sense, whether it's talking to regulatory bodies or engaging in clinical work, those tend to be good anchors to discuss with you.
And as those arrived and then we'll share with you what we're thinking.
And could those arrive potentially in 2016 for advanced imaging or unlikely?
I think when we get there, we'll let you know.
Okay, sir. Thank you.
And we'll go next to David Roman with Goldman Sachs. Please go ahead.
Thank you and good afternoon everyone. I wanted Gary just to come back to some of the early part prepared remarks where you discussed the continued momentum that you're seeing in hernia. And it seemed like at SAGES this year, there was sort of a positive I would say tipping point, but just incremental enthusiasm from the physician community around this procedure. Can you just sort of talk about what you think specifically is stimulating that demand and why you're confident in that continuing on a go forward basis?
There's two ways to that our confidence has been building. One of them is around, the clinical outcomes and anecdotes that we hear and And that comes to, as we've talked about before in Guinal Hernia, particularly as a segmented market, not all patients are suffering from the same level of disease. And in the more complex cases, if it's bilateral or prior abdominal surgery, obese patients, a large herniated sac, the raw clinical capability of our products is being touted as and supported by surgeons as being important to them, better quality of intervention, consumable costs in line with what their expectations are. So there, I think that we're feeling pretty good. Well, the second thing we can do is analyze, kind of the reorder rates from surgeons as they go forward.
So as you get through the trial periods, seeing kind of where as they learn it and get deeper and deeper into it, where do they apply it and how often do they keep buying our products. And that has been supportive as well. So as those 2 things come together, we start feeling better about it. And that's what's behind that set of comments.
That's helpful. Thank you. And then just for my follow-up on the operating lease side. It looks like this is sort of a higher quarter for percentage of total coming from operating leases. So I guess say the A, can you just talk sort of the through some of the dynamics underpinning that?
And then B, on your disclosures, it looks like people are buying out these operating leases relatively quickly. And so it's maybe help us understand Is that true and why that's the case?
Sure. So the operating leases is our way of being able to be flexible with the customer and meet the customer's needs in terms of financing. Some of the leases are shorter term and basically bridge their ability to get to capital approval. Process. And those are a couple of the ones you've seen bought out in this quarter.
Most of the cap most of the leases of the operating leases are longer term being 4 5 year terms. And, and will drive a recurring revenue going forward, like said this quarter was around $4,000,000.
Thanks. Our next question from Ben Andrew with William Blair. Please go ahead.
Gary, a question on the ecosystem. One of the most material competitive advantages you guys have is kind of the embedding of the technology and your training and all the other things throughout the healthcare system. What investments can you guys make? And are you planning to make that are different than what you've done before to try to lever that because you did specifically call that out?
Yes, I think the,
making a great robotic surgery program is really the integration of all of those things. And There are multi year efforts to build that set of programs from peer to peer networks that do, advanced coursework and teaching to validated, learning pathways and simulation. Those validations are all multiyear efforts to get right to the full instrument kit, from vessel sealing to stapling and so on. And so, we were pretty thoughtful about balancing that set of investments. The things that have gotten really stronger and interesting in the last couple of years have been our ability to analyze data, look at national benchmarking, look at regional based benchmarking and share that information with our customers.
So they they can make good decisions. Sometimes those decisions are good for them and not great for Intuitive in the near term. If they optimize their program, we may get more revenue per procedure in the near term, but we think long term it's better for everybody. And so we've been making those analytics in those investments and then communicating with hospitals. So we really have been plugging in in each of those settings.
And I do think it makes for, an ecosystem creates a lot of value for the customer and, and, builds our relationship with them.
Thank you. And Patrick, a quick one for you. Can we think about the extra selling day as maybe at 1.5 percentage points of procedure growth I know there's some offsets with Easter, etcetera, but is it in that range of what the bump was net?
Yes, Ben. I'll let you kind of do your math on the specific percentage. But as it relates to, to the benefit, it really is just think of it more as in the U. S. Because the the favorability of, I believe, your New Year's gets mostly washed out by Europe, by, Easter, particularly in Europe.
Got it. Thank you.
And we have a question from Rick Wise with Stifel. Please go ahead.
Good afternoon, Gary. Good afternoon, everybody. I wanted to talk a little bit more about U. S. Urology and U.
S. Gynecology. I was really intrigued with the modest growth in on the gynecology side. I mean, that's a significant turnaround from the headwind you've faced over the last couple of years. Also urology acting better.
Have we worked through some of the challenges in each, and are we actually going to return to more sustainable growth in U. S. Gynecology after a year or more or 2 of training and education, etcetera?
Let me, let me speak to a couple of the factors and then I'll let Patrick take it from there. As we look at, at, urology, you've got it, right, 3 main procedures in urology, prostatectomy, prostal nephrectomy and cystectomy. The biggest one being, prostatectomy, we know that there was a bolus of patients that went into watchful waiting. Some of whom will have disease progression and come back to definitive treatment. How long that bolus lasts is a little bit hard for us predict.
The second thing, are the possibility of share changes between some of the treatment modalities surgery versus radiation versus watchful waiting. That data tends to lag, hard to get it in real time. There may be some share change, although if there is, it's probably modest And then there's just demographics, as demographics changes, you have more folks getting diagnosed with prostate cancer over time. So those are the three things that are rolling through and sort of project how they balance out is what the challenge is. On the gynecology side, the thing that we're seeing in our experience is that you're seeing more surgery being done by high volume gynecologists, in general, just not just robotic surgery, but hyproscopy and others.
We're seeing a consolidation in the marketplace, into folks who are either juvenile oncologists or more routine surgeons We think that's good for the world and we think that's good for intuitive. Those more dedicated surgeons tend to be our customers We see them tackling more procedures in concentrated fashions. And so that's kind of what's happening in gynecology. Likewise, I think, There's a demographic, element here that's likely to find a bottom and then start to drift up the unknown as nonsurgical approaches and in office approaches. And those are kind of the factors at play.
Patrick, I'll let you go from there.
I think you described the urology situation well. The other thing to bear in mind in the GYN market is while single site procedures have been declining, some of the other benign procedures have been stabilizing and are creating less of a headwind to us on a year over year comparison basis. Things like my
And I guess my follow-up question, and it might have been you, Patrick, who mentioned it. I think somebody described OUS procedure growth as as it can be lumpy. And quote, we're working to improve the performance there. Can you talk a little bit about, how you're going about that? What kind of initiatives are underway and what you would hope or we should expect might come from those initiatives?
Thank you.
Yes, I'll take that 1, Rick. The opportunity in Europe tends to be country by country. So where we're looking to do something different or better, it tends to be making sure that we have staff that is supporting local efforts and local needs that they're working in local language, that they understand the health care systems in, in intimate ways that are specific to that country. And so, where we see opportunity, we'll invest there and pull that out, we have been. Where we've made investments, we've seen growth.
And so where we see some areas of opportunity, we think we have a playbook. Now we have to go execute against that playbook. That's been our perspective there.
Thank you.
And we have a question from Matt O'Brien with Piper Jaffray. Please go ahead.
Good afternoon. Thanks so much for taking the questions. I was hoping to start on the general surgery side. And it sounds like again, very good quarter, but I'm just curious if either of, the various eventual or I'm sorry, the various hernia cases are really leading the charge and some of that growth. Are you seeing any kind of divergence or inflection in either ventral or inguinal.
And are those procedures at this point, getting, a sizable enough to start Sway hospital decision making as to adding additional systems in order to meet that demand.
Yes, Matt, thanks for the question. Yes, certainly, both both ventral and inguinal hernia procedures continue to exhibit robust growth. Inguinal hernia is just a bigger overall procedure category. It's just more commonly informed. But the rates of adoption that we're seeing in both procedures is encouraging.
And the surgeon populations that are performing them continuing to increase the volumes and procedures that they're doing. So it looks promising. And certainly from an overall volume perspective, had some influence because just the numbers are getting to the point where it matters to create access for these surgeons to be able to continue to perform procedures. That they are absorbing systems worth of activity at some of their institutions.
Okay. That's very helpful. And then Gary, your commentary about the delays that we saw in Europe as hospitals are evaluating some competitive systems that are hitting those markets curious to me. Do you think that's something that will linger here throughout 2016 as most systems are fully rolled out? Do you think it'll be a fairly quick process of kind of taking a peek and maybe they're doing that now?
And we could see a snapback in terms of the number of systems placed. I mean, specifically, did you see 10, 15 hospitals kind of delay as they were evaluating both systems? And then out of those 10 hospitals, 9 of them ended up buying Davinci either late last quarter or even early this quarter?
Yes. The, I think that it's a little bit hard to predict how fast it will go through. I guess our anecdotal experience has been some have been quick looks and make an evaluation and come sign up with us and others are going through a little bit longer process. With regard to a quote snapback, I wouldn't, I wouldn't bake that in. I think it will play out a little longer than that.
Having said that, our, our, the response of our customers after they have evaluated the other offerings and come back to talk to us has been fantastic. So our confidence that we have good offerings and we can meet these customers' needs is very high. They'll go through that process. And And I think as new and different technologies come to market, not just the ones that are there today, I think this will be part of the new normal a little bit for Europe is people cross shopping and making decisions. And our goal is to make sure that they find our products to be a very high value.
So far so good.
Got it. Very helpful. Thank you.
And we have a question from Larry Keusch, Raymond James. Please go ahead.
Thanks. Good afternoon. I wondered if we could just, first question, start with the, tradings. I think there were 42 as you mentioned this quarter. And I think the prior quarters has been sort of averaging closer to 30.
So I'm just trying to understand perhaps what is driving the higher trade in? And then what's the ultimate opportunity to drive trade ins in your older system base?
There's nothing specific about this quarter that I would call out as it relates trade in. I think you have the numbers, right, came off of our, the detail we provided with the press release. I wouldn't call anything out specifically. I think at last quarter was around in the high 30s and it's been there for a little while. I don't know that it'll probably fluctuate in that range.
I I don't have any specific comments on it.
Okay. And then for Gary, maybe just, an update on F see, you mentioned some in your prepared comments. But where are we in getting those evaluations going? And is it conceivable that that we could see, commercial units perhaps by the end of the year?
So we are in discussions with, FDA on, trial type and endpoints. And we have clinical sites that are getting perhaps the product from the engineering and design and validation point of view is right on track looks really good. We're not expecting anything of substance in terms of revenue this year. We do expect them in clinical use, in the second half, and that's what we're working towards.
Perfect. Thank you.
And we have a question from Jason Mills with Canaccord Genuity. Please go ahead.
Great. Thanks guys for taking the question. Congrats on a great quarter. My first question has to do with just trying to understand better your dogma relates to managing the P and L. So what it was, obviously, we're getting here is higher procedural volume guidance and higher operating expense guidance.
And what it's what we're seeing what we seem to be seeing is, some leverage to the operating line. But I'm just curious, Gary, if you could talk about Marshall, talk about the your dogma over the next couple of years? And sort of are you looking for operating margin expansion? Is that what your objective is, are you managing the business to top line growth and trying to manage expenses as best you can to get there? Could you just talk about your dog was managing the P and L?
Yes. So, my first statement is kind of a caution of beware of averages. So There are places in the business where, we're seeking, high operational efficiency and leverage. You see that in product cost reductions and some of the things we're doing in manufacturing. There are other places in the operation where we think we can find leverage.
At the same time, we want to turn around and reinvest those savings in opportunity. And we see a lot of opportunity. And I think that, that opportunity should be pursued. So, it'll be a little bit lumpy. We're trying to be balanced.
I wouldn't say that our approach is hard over one or hard over the other. It's not, revenue above all else, and it's not profit above all else. We're trying to be we're trying to be balanced in that approach. And it may be a little bit lumpy. I think opportunities happen when they happen.
You can be overly cautious and missed them. And so we will maintain a fiscal discipline. That's been part of our history and we'll keep it. Having said that, we want to make sure that we reinvest some of the benefits that the company has gained into expanding the opportunity we see in front of us.
That's helpful. My second and final question, having to do with your cash balance and and use of cash. You've been very proficient at buying back stock in the past. Doing where the share price is juxtaposed to, significantly expanding cash balance. Would it be fair to assume that, you'll do modest maybe modest to moderate share repurchases going forward?
Or will we see maybe less over the next 2 years than we saw in the last 2 years?
In terms of, just how we think about capital allocation, we are thoughtful and serious about it as you'd expect. We think buybacks are one leg or one tool in capital allocation. We really start with, can we reinvest in the business and and drive long term growth and opportunity. Buybacks, if there are times, we've been typically patient and opportunistic. And we think because of the volatility of our stock, there are times that, that makes a lot of sense for us.
And in conversations with shareholders and where we are thoughtful and listened, then we have considered dividends and we will consider them in the future. So we look at those three things and try to trade them off And we think for long term, when we're thinking about capital allocation, we're not trying to do signaling or messaging. We're we're trying to build value for the business and for the shareholders in the long term.
We have a question from Vijay Kumar with Evercore. Please go ahead.
Hey guys, thanks for taking my question. So maybe one on the OUS placements. I know China, I think on the last quarter, you said they had about 8 systems. Can we expect sort of a renewed sort of, I guess, a contract from the government, right? How should we think about OUS from a systems perspective given the China, they're probably at the end of amount of systems that they can import?
Yes. So I'll speak to China first and then to other locations next. As far as China goes, when we left last quarter, there are about 6 systems left on the quota. We sold 5 this quarter. There's still one out there.
I don't know if it'll happen. And again, I have to go through a tender process and that tender process had to already begun. As far as additional quotas, we're it's a part of the overall budget, government budget process in China. And, so when that gets completed and I don't have, Metropolitan tells me when it will be completed, then we'll know whether we're still under the quota system and we'll know whether if we are under the quota system, how many will be awarded? And there's no way to predict that in advance.
As far as the rest of the world goes, as I in my remarks, I mentioned that it's, 4th quarter is a seasonally strong quarter If you look at, where we came out for this quarter, it was pretty comparable to last year for the first quarter. But it's going to be a lumpy market by market depending on circumstances.
Great. And then maybe one follow-up for Gary. I know the clinical trial I mean, R and D expense were up 25% in the Q. Does that number include any clinical trial expenses? Because I'm just trying to get a sense for And as you talk about Japan, starting clinical trials, sort of, any potential impact in that number?
Yes, there's some We're doing we've said before, we're in the middle of, gathering data for our evidence for gastrectomy in Japan. That doesn't go into R&D. That's actually in our SG and A numbers. And if we were doing I mean, as far as other clinical trials, we'll tell you about them when we think it's appropriate.
And our next question from Tayo Levy with Wedbush. Please go ahead.
Yeah, hi, good afternoon. Hi, we've talked a lot about the sort of hernia, colorectal surgery, but you mentioned a couple of times, thoracic surgery and the benefit that particularly XI might bring to that procedure. Can you sort of maybe summarize some of the key opportunities within Thoracic. Should we think of it as a colorectal type opportunity where it's moving in the right direction, but it's a little bit slower or could it potentially be more like a hernia or a hysterectomy opportunity?
Yes. Just, so I'll start and I'll ask to join Anna. Just from the starting place, these are typically, cancer procedures and typically, complex media style cancers, lung cancers, They, the product set that we have, XI moves us in the right direction. Some of the instrumentation we're bringing along moves us in the right direction in terms of providing surgeons with the tools they are looking for for efficient procedures. And I think we're at the beginnings of that.
The way to think about the market is There are some minimally invasive surgery done manually, video assisted thoracic surgery. Some institutions do a lot of it with good results. Others do very little of it. If you look at national averages rather than institutional numbers, you see a lot of open surgery done. And we think that that's the opportunity.
I'll let Patrick characterize it sort of.
Yes, Tayo, it's still pretty early days. We're in the foundation. We've got a small team in the U. S. Focused on it.
But our focus continues to be on driving general surgery growth in hernia and colorectal resection. And internationally, we're still highly focused on driving DBP adoption and some emerging procedures in countries where urology is deeply penetrated. And when you look around internationally, it is a cancer that very common in Asia and other parts. So it's a very big opportunity for us that perhaps a little bit around the corner from what we're currently focused on.
Okay, great. And as my follow-up, you mentioned, focusing on urology internationally. And I understand that it's still relatively under penetrated, but, it is just the same procedure that you keep on going after internationally. Should we be worried that some of the other procedures that are catching on here in the U. S.
Over the last few years aren't, aren't moving the needle yet internationally? Thanks.
Thanks. Tayo, that'll be our last question. I'll answer that and then we'll move on. The, I think it depends by country. So we see, for example, a nice adoption of thoracic surgery in China.
We see a pretty different mix of procedures in Korea than we see in the United States. So, you have to answer it country by country. I don't think there's a systemic worry here that, that somehow we're stuck at prostatectomy and won't be able to move any further. I do think that it's important for folks on the phone to realize that, the profile of procedures in each country is going to differ based on disease state based on how their reimbursement system works and the relative priorities of their healthcare system. So we see that reflected we do see multiple procedure adoptions in different countries just differs on what they're after.
Thank you.
Thanks, Tayo. That was our last question. As we've said previously, while we focus on financial metrics such as revenues, profits and cash flows during these conference calls, our organizational focus remains on increasing value, by enabling surgeons to improve surgical outcomes and reduce surgical trauma. We built our company to take surgery beyond the limits of the human hand, and I assure you and we remain committed to driving the vital few things that truly make a difference. This concludes today's call.
Thank you for your participation and support on this extraordinary journey to improve surgery. And I look forward to speaking with you again in 3 months.
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