Ladies and gentlemen, thank you for standing by, and welcome to the Intuitive Surgical q33 2015 earnings release call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that and operator will assist you offline. And also as a reminder, today's teleconference is being recorded.
And at this time, I will turn the conference call over to your host, Senior Director of Finance, Investor Relations or Intuitive Surgical, Mr. Calvin Darling. Please go ahead, sir.
Thank you. Good afternoon, and welcome to Intuitive Surgical's 3rd 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 And Sales Operations. Before we begin, I would like to inform you that comments mentioned on today's call may be deemed to contain forward looking statements Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties.
These risks and uncertainties are described in detail the company's Securities And Exchange Commission filings, including our most recent Form 10 K filed on February 5, 201510Q filed on July 22 2015. 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 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 third quarter results as described in our press release announced earlier today, followed by a question and answer session. Gary will present the quarter's business and operational highlights. Marshall will provide a review of our third quarter financial results Patrick will discuss marketing and clinical highlights, then I will provide our updated financial outlook for 2015. And finally, we'll host a question and answer session. With that, I'll turn it over to Gary.
Overall, company performance in the quarter was solid with robust procedure growth, solid capital performance, and improved operating margins. So starting with procedures year over year growth in the third quarter accelerated to 15% compared with Q3 2014. Procedure performance mirrored our experience in the first half of the year with strength in hernia repair, colon and rectal resections, solid growth in prostatectomy and stable trends in hysterectomy. Internationally, growth trends in the first half of the year continued in the third quarter. Growth in Europe, China and Korea was multidisciplinary, with particular strength in urology.
Patrick will review procedure trends in greater detail compared to 111 in third quarter of 2014. Capital placements in the United States accounted for most of the growth in system placements year over year. Customers are preferring our most capable products and XI systems and dual console configurations represented a larger proportion of placements in the quarter relative to a year ago. In Japan, procedure growth was solid and driven by growth in urology, As we've said on prior calls, the growth of the market in Japan will be paced by continued progress on reimbursement. Clinical investigators are submitting their data to MHLW for review, and ISI continues to work with key stakeholders in the reimbursement for additional procedures.
While we have no assurance of additional me for inclusion in 2016 national coverage. Conversations regarding reimbursement for other procedures are ongoing. However, inclusion of other procedures and full reimbursement guidelines in 2016 are unlikely. Turning to operating performance, our product operations teams have been focused on reducing costs for direction on gross margins helped by product mix and some costs coming in at the lower end of their expected ranges. We will continue to focus on improvements in direct product costs over the next several quarters.
As we look at the long term financial position of our products, we anticipate making targeted capital investments over the next few quarters and programs that we believe will facilitate better long term product and operating margins. Marshall will take you through this and other financial performance in greater detail later in the call. In summary, our operating performance for the third quarter is as follows: procedures grew approximately 15% over the third quarter of last year. We placed 117 Da Vinci surgical systems, up from 111 in third quarter of 2014. Total pro form a revenue for the quarter was $590,000,000, up 10% from prior year and up 14% year over year on a constant currency basis.
Total pro form a instrument and accessory revenue increased to $298,000,000, up just up 10% over prior year. We generated pro form a operating profit of $240,000,000 in the quarter compared with 190 and pro form a net income was $199,000,000 compared to $145,000,000 in Q3 of 2014. We are deeply committed to advancing our technologies and offerings launched integrated Table Motion for Xi in Europe this October and have submitted our U. S. 510 application.
Table Motion allows surgeons to interactively use gravity for retraction and Eases patient management during da Vinci XI surgical cases. As many instrument kit for XI in the third quarter with the intent of bringing our single incision tools to the XI platform. In addition, we submitted a 510 application our 30 millimeter stapler for XI in the third quarter. This instrument has particular utility and thoracic surgery, includes multiple sample sizes, including green, blue, white, and gray reloads. Regarding our next generation single port technology, our technical teams continue to meet their development milestones for DaVinci SP, having completed the build of our first 10 XI compatible systems 5 of which are slated for human clinical use.
We anticipate increased clinical evaluations of da Vinci SP in 2016, particularly in trans oral and trans abdominal applications. Lastly, da Vinci systems are sophisticated network computing systems. The availability of these computational resources allows for both real time analytics that can provide surgeons relevant information example, the smart plant feature implemented in our stapler, as well as anonymized utilization data that administration can use to help optimize the robotic surgery programs. Are developing increased computational capability in both real time and program level applications, along with the field force of workflow experts This analytic capability allows us to aid our customers both during surgery and in optimizing their robotic surgery programs. As we've discussed on prior calls, for 2015, we remain focused on expanding the application of da Vinci in general surgery, particularly colorectal surgery, hernia repair.
Filling out our product line for da Vinci XI and launching in key markets globally, developing our organizational capabilities in Europe and Asia, advancing our technologies to improve surgery and lowering our direct product costs. I'll now turn the call over to Marshall, who'll review our financial results.
Thank you, Gary. I'll be describing our results on a non GAAP or pro form a basis, which excludes the impact of our prior year Xi trade in programs, legal claim accruals, stock based compensation, amortization of purchased IP and investment impairments, 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 Pro form a 3rd quarter revenue was $590,000,000, an increase of 10% compared with $534,000,000 for the third quarter of 2014, an increase of 1 with the than 2014. 3rd quarter 2015 procedures of approximately 162,000 grew approximately 15% compared with the third quarter of 2014 and were approximately equal to the second quarter of 2015.
Revenue highlights are as follows: pro form a instrument and accessory revenue grew 10% compared with the third quarter of 2014 was approximately equal to second quarter of 2015. Partially offset by foreign exchange and customer buying patterns. Instrument and accessory revenue realized per procedure, including stocking orders was approximately $14,840 per procedure. This metric has now been trending in a tight range between $18.30 and $1840 per procedure over the past 4 quarters, with recent quarters, reflecting higher sales of new instruments and the impact of foreign exchange. Pro form a system revenue of $174,000,000 increased 13% compared with last year and decreased 1% compared with last quarter.
The increase relative to the prior year reflects increased unit sales in higher average system selling prices. The decrease relative to the 2nd quarter reflects a higher number of operating leases partially offset by higher quarter compared with 111 systems in the third quarter of 2014 118 systems last quarter. 77% systems placed this quarter were X Size compared with 53% in the third quarter of 2014 64% in the second quarter of 2015. We expect the mix of the XI to SI product to fluctuate quarter to quarter. Globally, our average system price of $1,600,000 increased compared with $1,450,000 in the third quarter of 2014, and $1,500,000 last quarter.
Our third quarter 2015 ASP was our highest to date, reflecting an unusually high mix of dual consoles, including a high 15 compared with 13 last year in 'eighteen last quarter. We expect to return to our historical mix of dual consoles and therefore expect our future to be lower than this quarter. ASPs fluctuate quarter to quarter based on geographic and product mix, trade in volume, and changes in foreign exchange rates. Hospitals financed approximately 25% of the systems placed in the 3rd quarter, up from 21% last quarter. We directly financed 20 systems, including placing the most operating leases, 13, since we began our direct leasing program in the second quarter of 2014.
As of the end of from operating leases was less than $2,000,000 in third quarter. We expect the impacts of operating leases from our system we exclude the impacts of operating leases from our system ASP calculations. The number of systems placed under operating leases will vary 4% compared with the second quarter of 2015. The year over year and quarter over quarter increases reflect the increase in our installed base of da Vinci systems. Outside of the U S, results were as follows: 3rd quarter pro form a revenue outside of the U S, of $150,000,000, $51,000,000 decreased 1% compared with $153,000,000 for the third quarter of 2014 and decreased 10% compared with 168,000,000 last quarter.
The decrease compared with the previous year reflects lower system sales into China and the impact of foreign exchange partially offset procedure volume. The decrease compared with the last quarter was driven by lower system unit sales and timing of customer instrument and accessory sales. Outside the U. S, we placed 37 systems in the third quarter compared with 50 in third quarter of 2014 and 46 systems last quarter. OUS system placements included 9 systems into Japan compared with 7 last year 13 last quarter 19 systems in Europe compared with 25 last year and 22 last quarter and no systems into China this quarter compared with 10 last year and none last quarter.
System placements will continue to fluctuate quarter to quarter. Moving on to the remainder of the P and L. The pro form a gross margin for the third quarter of 2015 was 69.3 for the third quarter of 2014 68 percent for the second quarter of 2015 compared with both the second quarter of 2015 3rd quarter of 2014, the higher third quarter 2015 gross margin reflects higher system ASPs, improved efficiencies, lower inventory charges, among other factors. The increase in gross margins relative to the third quarter of 2014 also reflects charges to cost of sales related charges of approximately $82,000,000, representing the estimated costs of settling a number of product liability legal claims under a tolling agreement. During 2015, we have refined our estimate of the overall cost of settling claims and recorded additional charges of approximately $14,000,000 in the first half of the year.
There were no charges
excluded from our pro form
a results and are included in our GAAP results. At the end of the 3rd quarter, $30,000,000 remained accrued on our balance as a significant portion of the estimated costs have been paid. Pro form a operating costs, which exclude the reserves for legal claims, stock compensation expense, and the amortization of purchased IP increased 4% compared with the third quarter of 2014 and were less 1% less than last quarter. The year over year increase in pro form a operating expenses primarily reflects headcount additions and higher incentive compensation. Our pro form a effective tax rate for the 3rd quarter 1425.6 percent last quarter.
The effective tax rate for the third quarter of 2015 included tax benefits of 29,000,000 or $0.77 per share related to a recent favorable tax court ruling involving an independent third party. Our tax rate will fluctuate such credit is reinstated. Our third quarter 2015 pro form a income was $199,000,000 or $5.24 per share compared with 2014 $173,000,000 or $4.57 per share for the second quarter of 2015. Excluding the prior period tax benefits, our 3rd quarter 2015 pro form a net income was $170,000,000 or $4.47 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 compared with $550,000,000 for was $167,000,000 $124,000,000 or $3.35 per share for the third quarter of $2,014,135,000,003.56 per share for the second quarter of 2015. We ended the quarter with cash and investments $3,100,000,000, up from $2,900,000,000 as of June 30, 2015. The increase was primarily driven by cash generated from operations and proceeds from stock option exercises, partially offset by stock buybacks. During the quarter, we repurchased approximately 70,000 shares for $36,000,000 repurchases to approximately $100,000,000 for the year. And with that, I'd like to turn it over to Patrick, who will go over our procedure and clinical highlights.
Thanks, Marshall.
As mentioned earlier, total third quarter year over year procedures grew approximately 15% with U. S. Procedures growing approximately 12% and international procedures growing approximately accelerated modestly from first half growth of approximately 10%, driven by an uptick in the with solid contribution sustainable, the year to date growth in these mature procedures will be in future periods. In urology, trends observed during the first half of the year continued through the third quarter. Growth in da Vinci prostatectomy and kidney cancer procedures continued at similar rates as the first half of twenty fifteen with da Vinci prostatectomy growth again exceeding our patients, we continue to believe that our U.
S. Prostatectomy volumes have been tracking to the broader prostate surgery market. In gynecology, 3rd quarter procedures grew modestly year over year with growth in malignant and complex hysterectomy partially offset by declines in benign procedures. Similar to the first half of the year, increased proportion of total hysterectomy procedures have been performed by gynecologic oncologists. 3rd quarter growth in general surgery increased compared to the first half of the year with robust growth in hernia repair and an uptick colorectal procedures being partially offset by continued to drive the majority of Several presentations highlighted the emerging role of DaVinci Surgery in ventral and inguinal hernia repair.
Surgeons commented on the advantages of DaVinci Surgery, included precise dissection, improved visualization, secure closure of the primary defect, glycation of the abdominal wall, suture fixation of mesh, and a reduction in post operative pain network compared 180 DaVinci hernia repairs to over 60,000 LAP and open hernia repairs from the ACS National Surgical Quality Improvement Program database and found that a reduction in hospital length of stay and complications saved approximately $5.50 per case compared laparoscopy and over $700 per case compared to open surgery. We are encouraged by these early clinical and economic validation around the use of da Vinci surgery and hernia repair. Regarding our single site colisticectomy business, as we've stated over the past four quarters, Our total cholecystectomy procedures have declined through the rate though the rate of decline moderated in the 3rd quarter as growth in multiple cholecystectomies offset of the decline in single site cholecystectomy. It is our belief that customers are finding added value in a more complex patient population therefore gravitating to the traditional da Vinci multi port approach. Fireflies technology was used in approximately 40% of da Vinci colossecectames in the quarter.
Looking abroad during the third of da Vinci prostatectomy with solid contributions from kidney procedures, malignant hysterectomies and colorectal resection. Procedure growth in Europe remained steady through the 1st 9 months of the year, while the acceleration in procedure growth in Asia that began during the first half of the year continued into the third quarter. During the quarter, the global evidence supporting the cost effectiveness recent economic analysis from the Peter McCallum Cancer Center in Australia, published in BJU International, reviewed nearly 1000 prostatectomies from the Victorian admitted episode data set. Their analysis found da Vinci prostatectomy to be Techomy, where 140 da Vinci procedures per year were performed on the system, well below the global 3rd quarter annualized average of approximately 190 procedures per system. During the study period from 2010 to 2013, the rate of open prostate decline from approximately 73% to 47% among public hospitals in Victoria due to an increase in the adoption of da Vinci prostatectomy.
Concludes my remarks and I thank you for your time. I will now turn the call over to Calvin. Thank you, Patrick. I will be providing you with our updated financial outlook 2015. Starting with procedures.
On our last call, we estimated full year 2015 procedure growth of between 11% 13% above the approximately 570,000 procedures performed in 2014. We are now increasing 13% 14%. Turning to gross profit. Our outlook for gross profit has again modestly improved compared to to be between Note that this range is a bit lower than which we expect to return to more typical patterns in Q4. Systems production volume and foreign exchange rates.
Turning to operating expenses, consistent with our last call, we continue to back to grow pro form a 2015 operating expenses towards the lower end of a range of between 7% 10% above 2014 levels. Also consistent with to come in towards in $18,000,000 in 20 15. With regard to income tax, for Q4, We expect our pro form a income tax This forecast does not assume the reinstatement of the R and D tax credit in 2015. That concludes our prepared remarks. We will now open the call to your questions.
Thank you very
you.
We'll take our first question from Ben Andrew with William Blair. Please go ahead.
Good afternoon guys. Thank you for taking the questions. I guess 2 things for us. If you look at the legacy U. S.
Procedures, Gary, we talked in August about some of the hospital systems looking more carefully at cost benefit analysis. Do you think that that's supporting the complex DVH and DBP? And are you getting more evidence that that's the case?
Yes, we've seen, I can speak to anecdotes, anecdotally, the, TVPs and some of the more complex procedures we've seen have been supported by, analysis done at the IDN level. They're getting more sophisticated in those analyses and I think they're getting more confident in them.
Okay. And then as far as the kind of international procedure growth, that was an exceptional acceleration. How durable is that as we look at 26 teen, with Europe kind of steady growth, U. S. Obviously, it's a little bit about plan, but that Asian piece, it really sort of sticks out
Yes, it depends on the country. So, if you go country by country in Asia, I think, Korea has been building nicely I don't see radical changes one way or the other. Japan, we've talked about, I think that there's a lot of interest and a lot of organic activity, but major penetration is going to require reimbursement. China, we saw a lot of acceleration and The pacing there will be in part driven by capital placements. And as you know, well, there's a quota system in China there are some systems remaining on the quota that can be placed.
There's a point at which you need a new quota to keep going. So we can get some growth in the existing installed base, although to really accelerate quickly, you need additional systems and that's something that Calvin can take you through a little later in the Q And A.
Sure. And just last thing is the China 0 last quarter 0 this quarter. Anything to read there? Is it kind of a bolus effect in the year end and obviously the quarter being the quarter, but how do we think about that from a kind of consistency perspective over time?
Yes, it's Marshall. There's a process behind it. The quota is provide was provided a year and a half ago, 2 years ago. And there are 18 systems that remain on the quota, but there's a tender process that each of the hospitals have to undertake and the tender process is unpredictable in terms of when it will complete. It turns out that they've been completing in boluses, as you suggested.
But, the fact that none were completed in the last or no systems were shipped in the last two quarters, I don't necessarily believe is indicative of whether we'll ship more or less in the next couple of quarters. So we'll see how the tenders play out and we'll see what we wind up with.
Great. Thank you very much.
Thank you. Our next question in queue that will come from David Roman with Goldman Sachs. Please go ahead.
Thank you and good afternoon everybody. I wanted just to start with the overall procedure volume environment and understandably some of your comments, Patrick, regarding the sustainability of some of the mature procedures make sense, but if I look at the overall procedure volumes in the quarter, they were I can't remember when in third quarter you did not see a sequential decline whether that was related to seasonality or some of the other factors that are influencing your business. Could you maybe just talk about what's going on in the overall environment and whether what we're seeing now is the impact of sunsetting some of the concerns that serviced a couple of years ago and maybe what will what may be materialized in the third quarter that might have made for the outsized performance?
I'll speak to a couple of things and Patrick, you can jump in. I at the DVP level in the U. S, we really think that's the flow back into treatment of some folks who had sat out and watchful waiting and then had disease progression. How long that persists is a little bit hard to predict based on kind of the changes in PSA diagnostics. On the hysterectomy market, we're seeing a rotation of patients away from some of the lower volume surgeons in general and into higher volume and dedicated surgeon.
So, Giovanni oncologist, that appears to be pretty durable. I think that that trend makes sense. And I think that pivot is likely to continue We're a large part of the DVH market. And so I think the macro trend will go as the macro DVH market goes in the United States.
Ariel, I'll be putting on a preview tomorrow. Can you send it to me?
Patrick. The one thing to bear in mind is that for the past handful of years, the number of benign hysterectomies in total has been declining so that will continue to counterbalance the history of the market.
So on the upside, I think we're in the of our experience in a lot of our markets. In Europe, we're still in the meaty part of adoption. In many of the countries that we're in. We're really excited about what can happen in Asia and in the various markets that we've talked about general surgery. I think we're also more at the beginnings of some of the adoption that we see in colon rectal and hernia.
So I think as you think the future, it's a little bit of the puts and takes thereof, how fast do mature markets moderate and how quickly do our emerging markets grow.
Okay. That's helpful. And then I just want to make sure I understand what you're saying explicitly about Japan for next year. Obviously, you have the DBP reimbursing about the society submitting on partial nephrectomy. What are the next steps in gaining additional imbursements in Japan?
And how will we how will that be disseminated?
Yes. So there are multiple conversations from multiple stakeholders in Japan. Surgical societies play a role as well as government societies in deciding what data is required kind of in what sequence they want to address those different procedures. So from thoracic surgery to general surgery, things in in the colon and others are in gynecology or of interest to Japanese surgeons and are in active discussion. To get into the national reimbursement, there are a couple of different pathways.
We're in one of them called Centeneuro B for the process that we're in for partial nephrectomy, the government has asked to see that data and is going to review it. And So we're not guaranteed what and when, but it's part of the formal process. Other ones are not yet in that formal process. The government can choose to it down a different reimbursement process. If that happens, then, and we have some assurance that is likely, then we'll report that out to you.
So I think, in terms of the near term and national coverage, partial and nephrectomy is the one to keep your eye on. I am not generally upset about progress. I think that there's a fair amount of interest. I think the conversations are active and it's just continuing to to push forward.
And then maybe lastly, Gary, as you kind of reflect on the business and look at the progress that you've made over the past call 18 months, kind of put all the moving parts together where it's macro and one thing you had you had designated as the unintended consequence of the affordable Care Act for economic pressures in Europe or the state of your business. How would you just compare your view of the forward outlook today versus how you might have felt a year ago and your
customers. I am pleased with the response from General Surgeons, the level of engagement they have with the company to interest and satisfaction they have with the products and their interest in demand for new and different things that I think we can provide. In European markets, we've been investing in both capability of our own organization and getting closer to those customers Again, I think customer demand is really strong and that looks that bodes really well for us. I think we can do better in terms of some of our own team and processes and we're working on it. I think that the company is is growing and is focused on those efforts.
And I expect to see greater capability in the next several quarters.
Okay. Thank you for all the detail.
Thanks David.
Thank you. The next question in queue will come from Bob Hopkins with Bank of America.
Hi. Thanks for taking the question and congrats on a really good quarter. So two things. First, I just want to start out for Marshall on the OpEx growth in the quarter. That was one thing that kind of surprised us.
It looks like the operating expense growth in Q3 was lower than we would have thought. So I was just wondering if you could kind of highlight that and it sounds like things will kind of pick back up in Q4, but is 7% to 8% is still the right way to think about OpEx growth longer term? And just again, what happened in Q3 with the lower growth in OpEx
Well, certainly for the rest of this year, Calvin's giving you guidance in the lower end of the 7% to 10% range and more like the 7%. But I think that, we're focused on controlling costs and watching them carefully. There are some costs that, kind of happen when they happen and that includes prototypes in the engineering group. And some of those didn't happen this quarter and will happen next quarter. And so that's why you get some of this fluctuation between quarters.
But overall, I think, we're managing to the bottom line.
Okay. And then just on, Gary, back on Japan, I just want to be clear in the message there, because on the Q2 call, you talked about partial nephrectimally, but then also 4 additional procedures. And it sounds like you're not as optimistic on those 4 additional procedures. So I was wondering if you could just give some color on what's happened there? And can we look to pan as a source of, real incremental procedure volume growth in 2016?
Or is that not the case given what you're articulating there?
Yes. So, I think in terms of partial nephrectomy, that's moving forward with a formal process into a review for the national coverage. The conversations and the work being done on other procedures is ongoing, but has not yet at that level of rigor for the 2016 review. And as a result, I don't think it's likely that they'll be included in the 2016 book. We're not ready yet to give you the 2016 procedure guidance and we're working through that and rolling that up.
And that's something we'll talk about in general in in the next call, you can't anticipate that additional reimbursements accelerates us in Japan and lack of it and we'll put more pressure on procedures. And that'll be part of the conversation as we go through our forecasting.
Then any quick update on SP in terms of timing? I heard the comments you made on the call here, but just what's the year where you think you can start to generate revenues from SP?
We are, we're making good progress in terms of our technology and customer evaluations of the product in the lab are encouraging. Quite exciting. In terms of when we expect real revenue, we're not ready to tell you yet exactly where the revenue launch will be. We're definitely looking forward to human protocol interactions in 2016. And we'll color that up more as we go forward in future calls.
Great. Thanks for taking the questions.
Thank you. Our next question in queue will come from Rick Wise with Stifel. Please go ahead.
Thank you. Good afternoon, everybody. Let me start with hernia. You know, Gary anecdotally talking to general surgeons about XI adoption, It sounds like a lot of the folks we've talked to start with a ventral procedure because of the suturing benefits and then seem to move quickly, to inguinal as they get comfortable. Are you seeing that kind of progression maybe to what extent and Is this kind of process what's driving the solatorne adoption?
We see different pathways actually. As you've talked to different general surgeons, I wouldn't characterize the one that you've described as the most common or the only path that folks take. It's certainly a path. No doubt that, that's a Metro hernia is something that benefits from a precise control, great visualization, featuring the ability to close the primary defect. Directly with Suture as well as supporting the Connect.
So there's some advantages there. As general surgeons comfortable, then they start to explore other things that they can do with the tool. And sometimes it goes virtual to linguine. Sometimes the reverse and from there, it can take them into more complex cases or cases where there's an acute cholstectomy that they might want to try. So are different pathways that can happen.
I wouldn't characterize one as the only.
Okay. And coming back to procedures one more time, I feel like I have to ask, I'm looking at the numbers correctly, if procedures, you had a really strong year, procedure growth through the 9 months, up 14% in the third quarter, up 18% and yet, Marshall, you're guiding us to if I'm understanding all these numbers correctly, 13% to 14% for the year, which suggests a softer 4th quarter against a similar comp to the 3rd quarter. I think 10% or so, in both the 3rd fourth quarter of last year. Can you help us just understand your thinking? And just given that the mature procedures seem to be stable to improving and the growing stuff is still growing.
What do we need to understand about the fourth quarter?
Yes, Rick, this is Calvin. And absolutely overall, we're pleased with our procedure growth trends. And this is actually the 3rd quarter in a row that we've increased our guidance for procedures and the revised procedure growth assumptions generally reflect the continuation of the trends we've seen through the 3 quarters with growth coming from U. S. General surgery and international procedures as I described.
In our updated view, 13% to 14%, it's lower than the 15% in Q3. We're sitting at 14% on a year date basis. And the fact is in Q4, the comps get more difficult for those mature categories, the DBPs in the United States and other categories where as Patrick described, I think maintaining the rates that you saw in the 1st 9 months will become more challenging in the fourth quarter.
Thanks very much.
Thanks, Rick.
Thank you. Our next question in queue will come from Tycho Peterson with JP Morgan. Please go ahead.
Thanks. First one, maybe a bit of a subtlety but Gary, in your comments, you talked more about the network effect and then in the release you commented on the technology ecosystem. Can you maybe just elaborate on that a little bit? Are you directing additional resources to software and informatics? Do you have what you need or customer asking for more?
We have, over the last few years, increased our capabilities in real time software, and kind of guidance tools for the surgeon as well as kind of offline informatics. So that's not an immediate thing. That's actually been a rising trend. When you think about the ecosystem sort of stepping back as a whole, one of these products is the robot itself, the imaging system, sometimes with molecules like Fireflies, Instrumentation, everything from needle drivers to staplers and vessel sealers, training technologies like simulators and dual console. And then this other piece, which is informatics.
The informatics has been powerful for us. At the surgeon level, it's what data can you give me in real time that helps the surgeon make a decision. At the institutional level, it comes down to what kind of instruments you're using, how long do you want system. What does that look like relative to national norms? And they've been interested in that data and we've been supplying that data now for over a year.
In those conversations been really healthy. And I think it will only grow.
And then I guess that's helping them figure out the cost side of the equation as well?
Let's them understand a couple of things. It lets them model their costs really carefully and really get the value, right? The big thing in any of these conversations is total cost to treat. Not price. And so that helps them really understand total cost to treat.
And it's we found it to be an extremely productive and rich conversation with with the customer base. So, they like that. And it also gives them some sense of variation amongst different procedures and different surgeons so they get a sense of much variability they see within their institutions.
Okay. And then on margins, you talked about reengineering some of the newer products. I know last quarter you talked a little bit about longer term gross margins. I mean, should we expect to see an impact from some of the reengineering programs the next couple of quarters? Or how do we think about the potential there?
So, yeah, we've talked about the fact that when we introduced new products, the margins are lower than mature products and lower than they'll be ultimately once that product's been around for a while, both because we we're able to drive down the costs of vendors through volume as well as be able to redesign the product And yeah, we've undertaken some redesigns as well as increasing volumes. I think the, what we've said before is that, those efforts are well underway. We're happy with where they're going. They won't drive a lot of benefit this quarter. More of the benefit will be 2016 and even more in 2017.
Okay. And then, you had more operating leases this quarter. Can you maybe just talk about that and your willingness to use that as a lever to place more system placements, in particular, maybe outside the U. S, if you have more I
think what we're trying to do is to be flexible with our customers. And our customers are looking for that flexibility. And once we get a system installed, obviously it drives procedures and instrument and accessory volume. So it's a win win win all the way around. We did 13 this quarter.
We have 36 outstanding, operating leases outstanding. We're also doing capital leases. We have a number of capital leases out there. I think on the operating lease side, some of these have turned into purchases where the customers that ultimately bought the product. And, so it, it, again, it feels like a real win situation for us to leverage our balance sheet and provide our customers flexibility to get into robotics.
They've been generally satisfied with it and we have to
Okay, great. And then just lastly on hernia, are you comfortable with kind of the sustainability of the trends here, for both Central and Equinor?
I think on the, on both sides, there are sub segments in those markets. And so getting the total available market in those is, a little bit hard to forecast. There are definitely segments in both where we think there's really good long term sustainable value how big those segments become, I think it's going to be hard to predict. We're just going to have to work through it.
Thank you. The next question in queue will come from Tal Levy with Wedbush. Please go ahead.
Great. Thanks. So first question, I was wondering if maybe you could explain if there's any difference between the and kind of what's available with the SI. And I guess, again, I kind of scratched my head as to why someone would want to use an Xi single site in just, for COLI?
Yes, fair question. So, in terms of functionally, they're functionally equivalent. So, there are some small technical differences, but from in terms of what a surgeon can do, They're pretty similar. XI has offers a couple of advantages having to do with the way the arms work. But I think for the most part, you can think of them as equivalent.
The reason people have an interest in them are a certain number of hospitals, have really room in their program a single robotic system. If they want that mix to include single side and they want to be able to upgrade to the XI technology, this gives them that option. So for those, one system sites that lets them do the full portfolio of the things they want
Okay, great. And, in terms of utilization of Fireflies in COLI, I think you mentioned, about 40 per percent. What about in other areas like colorectal surgeries? Are you seeing any adoption of Fireflies in those areas?
Look, to Patrick, I don't have
the numbers at my fingertips in terms of, perfusion? Yes, we have been seeing just use of the technology across a broad section of procedures and it's ramped nicely over time.
And then just so just following up on that, my last question, is that the ACS conference, the company talked a lot about the imaging kind of being one of the biggest areas of investment for the company. So maybe if you could expand on that a little bit and what areas are you guys working on that that's going to really improve patient outcome specifically around imaging and the benefits that brings either the patients or surgeon comfort
Yes. As we've spoken before, there are a few things that I think are coming together that can really benefit surgeons. One of them is that sensor technology has been advancing rapidly around the world having to do with technology development for other things like cell phones. We can take advantage of that for applications in, in, surgical applications by developing sensors and products that are specific to what surgeons want to do and see. That's one dimension.
The other dimension is to use other types of, imaging modalities, sometimes other frequency bands, sometimes molecules to allow surgeons to see things that are not visible with the naked eye. So highlight structures or highlight anatomical organisms that a surgeon wants to see during the surgery. And in that sense, Fireflies is really a platform idea, not just a single molecule. And so over time, we think there are things that we can bring to market that will allow surgeons to see more and to customize their vision for the a procedure they want to be in.
Is this 5 years out or 2 years So These,
some of them are long time frames and some of them are a little sooner. So it's really a mixture there and, not ready to go into detail with you this call as to each of the sequences. But the investments we've made in distill chip imaging, the step into XI is a set of investments that we think gives us a long runway in terms of the variety of endoscopes we can deliver and the kinds of technologies we can deliver on that platform.
Thank you. The next question in queue will come from David Lewis with Morgan Stanley. Please go ahead.
Good afternoon. Gary, just two quick questions. I guess the first is, we think it's pretty early to be getting excited about the competitive systems that no one on earth has seen to put it mildly. But if you were to comment on one element at a high level, I wonder, and that's the theme emerging from some of these competitors one day is that they're talking about a smaller capital footprint, which seems to be lower priced systems. And I guess do you see lower price capital systems being more important going forward or can you continue to price the value in keep system ASPs high?
And a quick follow-up.
I think on that first one, really, that's a question that's going to be determined by the customer. And And we understand the technology pretty well and have been thoughtful about it in terms of what we've developed. As you refer to in your question, I completely agree, it's about value, not price. And the question is, what are the outcomes that are going to be direct derived to buy these kinds of systems? And what's the price point at which you can offer them We have a wide range from XI down to SIEs and SI Research.
And that range is very large. And what we find is that the majority of our customers, buy capability. I think in this last quarter, you can look at what the XI to SI exchange what that mix was. We explore and we think about where are there other positions and price points that make sense? Certainly, we hear the same kinds of customer commentary that you hear and others hear.
And I think the real question is not what you show on the show floor. It's is what do these systems do in surgery. And that's going to come down to what can they deliver, what kind of outcomes can they deliver. And that's how we think
Okay, very helpful. And then just a follow-up on Tycho's questions on margin. So if I take commentary from you in March the last couple of quarters, I mean, there's 2 data points to come out. It feels like gross margins above 68% and EBIT margins above 40% are going to be challenging, but then based on this quarter, it's very clear, you certainly have the ability to surpass those 2 margin objectives. So Gary, if I think about 68% growth and 40% margins, I mean, these goalposts reflect the reality and investments you're going to have to make the next several years or things about product mix or do they just simply reflect conservative outlook?
Yeah, I'm not quite sure. I understood the question. I think Just stepping in, I'll tell you what we care about and where we're headed. I think that, these technologies, they're, as we said before, they're complex mixtures of robotics and imaging and instrumentation. And there's a certain amount of investment that's required to put them in a position that they're a cost effective for the company.
And that gives us the opportunity to have them be cost effective for the customer. Those are good things to invest in. There's a point at which we believe we're early in the adoption of robotics surgery globally. And so some of that gross margin is around the cost to us and some of it around price. And what we want to be able to do is lower the price cost point to us, and that gives us flexibility with regard to the price point.
And so that's what we're doing and that's what we're focused on. Where it will go long term, we'll depend a lot on, we think both what we can do in terms
of our supply chain and our design and where we think the customer value equation is. In the quarter, the two points that you're referencing were more a result of product mix and alignment of positives that, that, as I said in my script, we don't expect to recur.
Okay. Thank you very much.
Thanks, David.
Thank you. The next question in queue that will come from Richard Newitter with Leerink Partners. Please go ahead.
Hi, thanks for taking the questions. Marshall, maybe just a continuation of the last question on margins. Can you give us just broad strokes the view, the puts and the takes that we should be thinking of going forward even into next year, on the margin side and then also gross margin that is. And then if you can just tell us or remind us how you guys view operating
if there are a number of different, influences. 1 is a product mix. And the products the margins on I and A are greater than on systems. So to the extent that we have, systems doing well or not doing well, the net will swing the margin. We also have geographic where we sell in the United States and dollars.
Obviously, we sell to our distributors at a discount to that. We sell to, in certain markets in foreign currencies. And depending on foreign exchange, that can have some impact on the amount of revenue that we have. And then we have, we have expanding opportunities at, in our newer product those newer products happen to have lower margins. And so to the extent that we're successful in, let's say, stapling and a vessel ceiling, it's a positive for the company you're taking greater share of wallet.
But in terms of the gross margin percentage, it will push down the gross margin percentage because the margins on those products are not as high as our mature products. So there's a number of different things that can effect, gross margin. As far as the leverage, we, we, we, we manage we manage the company wisely. We try to, to improve margins. We have up number of programs like we said in place to reduce the cost of products, but we're We're also, as Gary said, we're in we're new in a lot of markets and we will, expand we will sacrifice a point of margin for expansion of market.
The way we think about it is you have opportunities for scale and leverage in things like instruments and accessories to some degree in imaging. And then mature procedures on the commercial part. But you have opportunities for investment, and that's in new products, cost reductions and new geographies, and we're balancing those 2. So we think about both.
Great. And then just one last one. SIE sales look like they were 0 this quarter first time. And
since I
think you launched that product, Gary, can you just comment on what you're seeing in the marketplace as far as demand goes for kind of the lower price point in in the context of more complex and the systems like the XI that you're launching and the steam that might be building behind that. What does this mean if anything for kind of demand transfer SIE or the lower end of the spectrum?
We're happy to provide the customer a system that meets their needs as to where they want to go and how they view the robotics programs. And I think the results speak for themselves. I think that XI is being well adopted. I think as we finish the product set and complete the product set, that has made it more attractive to those who may be waiting for that completion. We still sell SI refurbs and SIEs.
And I think the difference between an SIE and what core arm is value people see. I think that while there are a lot of procedures you can do through your arm, people really enjoy that. We're valued at Fourth Harmon. So you see fewer SIEs. I think it's as simple as that.
Operator, we have time for just one more question here, please.
Thank you, sir. And that will come from Vijay Kumar with Evercore. Please go ahead.
Hey guys, thanks for squeezing me in and congrats on a nice quarter. Maybe one on the margins here, I know that you sort of mentioned mix, right? And when you think about mix, you had a higher proportion of XI. And if I remember correctly on the last call, you said XI, you're still scaling up margins was low, but XI was higher, but then, you know, offsetting that you had a higher, higher proportional system sales coming in from the U. S.
I'm just trying to think how those 2 trade off and how that benefited your gross margins?
Yes. I think this quarter specifically, we benefited from the product mix and that there was a high proportion of the dual console excise. And when you look at the product side, the extra surgeon console, that's a mature technology with the lower costs on that and you get the extra price to run through margin. So That helped us out. As Marshall said, there were negligible inventory charges in the quarter and other costs, other charges to cost of sales pretty minor.
So a lot of things lined up pretty well for us in the fourth quarter or in 3rd quarter 4th quarter, we think it would probably revert to a more typical pattern in terms of the product mix and some of the other costs. And a seasonally stronger capital quarter, if you have more system sales, those carry lower margins than the recurring revenue side. And we'll have more definitive comments about 'sixteen on the next
Great. And one follow-up, Marshall, on cap allocation, sort of, just wondering, so of what your priorities are in a buyback was a little anemic in the quarter. I was just wondering sort of what the moving parts were?
Yes, there's no change in our philosophy. We'll continue to purchase shares when at the right opportunity. Keep in mind that, the stock has been depressed over the last, 30, 40 days. And yet, that's a period in which we cannot be in the market because it's a blackout period for the company. And so anyway, we'll continue that philosophy and you've seen us purchase repurchase over 2,500,000,000 dollars worth of stock over the last couple of years.
And we think at the rate prices.
That was our last question. As we've said previously, while we focus on financial metrics such as revenues, profits and cash flow during this conference call, our organizational focus remains on helping surgeons increase patient value by improving surgical outcomes and reducing surgical trauma. The following quote by Doctor. Parekh, an experienced urologist at the University of Miami sheds light on how our customers view our systems. The latest version of da Vinci of the da Vinci System XI allows us to offer more minimally invasive surgical options to more patients.
Hard to reach tumors or those encompassing more than 1 organ can potentially now be approached with this more agile and visually enhanced device. 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 bottle a 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 in 3 months.
Thank you. And ladies and gentlemen, that does conclude your conference call for today. Do thank you for your participation and for using AT And T's Executive Teleconference. You may now disconnect.