Ladies and gentlemen, thank you for standing by, and welcome to the Intuitive Surgical Q3 2014 earnings release. At this time, all lines are in a listen only mode. Later, there'll be an opportunity for your questions and instructions will be given at that time. And as a reminder, this conference is being recorded. I'll now turn the conference over to Calvin Darling, Senior Director of Finance for intuitive surgical.
Please go ahead, sir.
Thank you. Good afternoon and welcome to Intuitive Surgical's 3rd quarter earnings conference today, we have Gary Goodhart, our President and CEO, Marshall Moore, our Chief Financial Officer and Patrick Clingan, Director of Finance. Before we begin, I would like to inform you that comments mentioned on today's call may be deemed to contain forward looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties These risks and uncertainties are described in detail in the company's Securities And Exchange Commission filings, including our most recent Form 10 K filed on February 3, 2014 10 Q filed on July 24, 2014. 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 post 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 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 procedures and clinical highlights then I'll provide our updated financial outlook for 2014.
Session.
Customers have continued to advance minimally invasive surgery through the use of their da Vinci surgical systems. Total da Vinci procedures grew nearly 10% over prior year, led by multi faceted growth in general surgery and growth in urology in Europe and Asia. Capital placements in the quarter were solid, totaling 111 systems with strong performance outside of the United States. Our newest system DaVinci XI is receiving favorable reviews and interest from our customers. Looking more closely at the United States, growth in general surgery led the way with procedure with the procedure category our 2nd largest behind gynecology.
General Surgery procedure growth was broad based, including colon resection, rectal resection and hernia repair. Trends present in prior quarters in gynecology continued with stable trends in hysterectomy for malignant conditions, combined with a slight decline in benign hysterectomy versus prior year. Urology grew in the U. S. In the quarter with strength in prostatectomy and partial nephrectomy.
Given the large proportion of da Vinci use and to cancer surgery, the increase in da Vinci prostatectomy likely reflects broader trends in patient care. Q1 systems in the quarter, 80 percent of these systems were our newest product, the da Vinci XI Surgical System. In Europe, procedure growth returned to form, Growth in Germany improved materially. Likewise, I'm pleased with our performance in France with multiple segments contributing. Growth in Italy, UK and the Nordic countries was also encouraging and broad based.
Capital sales in Europe were strong. We continue to see capital segmentation with interest in both our most featured product, the da Vinci XI system, as well as interest in refurbished systems acquired by price sensitive customers. In Asia, the urology category leads continues to lead in volume, while procedure growth was driven by both urology and general surgery As you know, from last quarter, we are in the midst of a transition of our commercial business from our distribution partner in Japan to a direct team. We're building our direct sales organization as well as building deeper marketing, service and support functions to better serve our Japanese customers. I'm encouraged by their progress.
We continue to pursue additional reimbursement in Japan and surgeons have initiated prospective clinical trials to gather data for this purpose. The reimbursement process in Japan can be lengthy. We will report on our progress as we gain greater clarity. Turning to capital sales in Asia. As we've said in the past, timing of placements can be lumpy and Q3 is no exception.
We placed 19 systems in the region, 10 of which were to customers in China. Given the role pro form a operating performance for the third quarter is as follows. Proceeds grew nearly 10% over the third quarter of 2013. We placed 111 da Vinci surgical systems, up from 101 during the third quarter of last year. Pro form a total revenue was $534,000,000, up 7% from last year.
Pro form a instrument and accessory revenue was $272,000,000, up 14% over Q3 of 2013. Total pro form We generated a pro form a operating profit of $197,000,000, down 14% from the third quarter of last year, and representing 37 percent of Q3 revenue. Pro form a net income was $145,000,000, down 25% over last year. And cash and investments in the quarter grew by $219,000,000. Our new products continue to gain acceptance with customers.
Starting with systems, da Vinci XI has been well received. It is being used in a wide range of procedures, including urology, gynecology, general surgery, and thoracic surgery. Positive customer feedback highlights the flexibility and efficiency of setup, the ability of the system to work over a large workspace in the body, ability of the endoscope to move to any port and the integration and convenience of the imaging system, including Fireflies. Urologists, colorectal surgeons and general surgeons have been the main proponents for Xisys and purchases to date. Also, we received regulatory clearance for da Vinci X in Korea earlier this utility and compatibility with XI.
I believe SP will have strong applicability for procedures in which a single small entry point to the body and parallel delivery of instruments is important. A good example is head and neck surgery. We anticipate initiating clinical of our Xi compatible SP in the latter half of twenty fifteen, likely in support of regulatory submissions. We are planning a measured rollout SP as we receive necessary clearances and optimize our supply chain and now do not expect 510 clearance for our XI compatible SP in 2015. Turning to instruments, we initiated a stop use of our da Vinci Sis taper in the quarter after 3 reports of Mel function.
Our investigation has identified the underlying causes of the malfunctions and our team has developed potential solutions. We're making good progress in validating these solutions and we will update our customers and you once these validations are complete. Finally, we have received 510 regulatory clearance and initiated first cases for our single site risked needle driver, an important addition to our product line for use in single incision surgery with the SI platform, The risk of needle driver is the 1st instrument of its kind, a fully articulating single port surgery instrument that returns to the surgeon and a risk capability in a single incision format. Gynecologists performing single incision hysterectomy are expressing a high level of interest and excitement about the wrist and needle driver. Surgeons performing initial cases with the wrist and needle driver have integrated it seamlessly into their cases, bringing a wrist to the single site platform for da Vinci SI further enhances SI's capability and ease of use for surgeons pursuing single incision technique and provides a capable and cost effective platform for our customers.
In summary, we are passionately pursuing the long term opportunity to fundamentally improve the surgery and are focused on the following: 1st, extending the benefits of minimally invasive surgery using da Vinci systems worldwide. Building da Vinci capability and supporting its use in general surgery, disciplined execution in our product in our new product launches, and finally continuing to invest in capabilities in key international markets. I'll now pass the time over to Marshall, our Chief Financial Officer.
Thank you, Gary. I'll be describing our results on a non GAAP pro form a basis, which excludes the impact of our excise trading programs, legal claim accruals, stock based compensation, amortization of intangibles and investment impairments. Are providing pro form a information in addition to GAAP 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 GAAP results later. We have posted reconciliations of our pro form a results to our GAAP results on our website so that there is no confusion.
Form a third quarter revenue was $534,000,000, up 7% compared with $499,000,000 for the third quarter of 20 18 and up 5% from last quarter. Procedure growth for the 3rd quarter rounded up to approximately 10% compared with the third quarter of 2013 and was seasonally slower by approximately 1% compared with the last quarter Procedure highlights will be discussed by Patrick. Pro form a revenue excludes the impact of offers made to XI surgical system, we offered certain customers in the U. S. And Europe the ability to trade in or recently purchased da Vinci S.
High surgical systems for da Vinci XI Surgical Systems. These trading offers also provided these customers the opportunity to exchange certain da Vinci for da Vinci Xai instruments and accessories. As a result of these offers, we've reserved $26,000,000 of U. S. Revenue in the 1st quarter and reserved $6,000,000 of European revenue in the second quarter.
As these customers accepted or declined their trading offers, we refine our of the revenue reserves. In the 3rd quarter, we recognized $16,000,000 of revenue, reflecting 8 trade outs completed and a refinement of the number of customers that we expect to accept our offer. Pro form a results exclude the impact of this program. September 30, we had $4,000,000 of reserves for 3 trade ins that we expect to occur in the 4th quarter. Revenue highlights are as follows: Pro form a instrument and accessory revenue of $272,000,000 was up 14% compared with the third quarter of 20 13 and was up 4% compared with the second quarter of 2014.
The increase relative to last year primarily reflects increased procedures new product revenue and increased stocking orders. The increase relative to last quarter primarily reflects customer buying patterns new product revenue and increased stocking orders. Pro form a stocking orders was approximately $19.30 per procedure compared with $18.60 in the third quarter of 2013 and $18.30 last quarter. Pro form a systems revenue of $154,000,000 decreased 3% compared with the third quarter of 2013, an increased 11% compared with last quarter. We placed 111 systems in the third quarter, excluding the the 8 XIs traded for SIs under our training program compared with 101 systems placed last year in 96 last quarter.
6 of the systems placed 6 of the system placements in the quarter and 3 of the placements in the 2nd quarter of 2014 were structured as operating leases. The average system average selling price for the third quarter was 1,450,000 which is lower than the $1,560,000 recognized in the third quarter of last year and $1,500,000 recognized in the second quarter of this year. The decreases compared to prior quarters reflect a greater number of trade ins and products sold to cost sensitive customers, particularly in Europe. 59 or a little more than half of the 111 systems placed in the third quarter were da Vinci XI models. 38 were 7 were SIEs and 7 were S models.
Hospitals financed approximately 27% of systems placed in the 3rd quarter, down from 37% last quarter. We directly financed 11 of which 6 restructuring is operating leases and 5 is sales type leases. Through the third quarter of 2014, we've entered into 9 operating leases. The amount of revenue that we recognize in any future quarter for these operating leases will be immaterial. In the U.
S, we placed 61 systems in the third quarter compared with 65 systems last year in 61 systems last dollars, up 15% compared with revenue of $133,000,000 in the third quarter of last year and up 14% compared with revenue of 135,000,000 last quarter. Our higher year over year OUS revenue was driven by increased procedures and higher system sales Our higher sequential OUS revenue primarily reflects higher system sales, partially offset by a seasonal decline in procedures. 3rd quarter 2014 procedure volume outside the U. S. Was approximately 20% higher than the third quarter of 2013, and 4% lower than the second quarter of this year.
The growth over the prior year reflects DBP growth in Europe and Japan. The decrease compared to last quarter primarily reflects 3rd quarter seasonality in Europe, partially offset by increased procedures in Asia. We placed 50 systems outside of the U. S. In third quarter, including 25 into Europe and 7 into Japan, compared with 36 in the outside the U.
S. In third quarter of 2013, which included 17 into Europe and 13 into Japan and 35 systems outside the U. S. Last quarter, which included 19 into Europe and 5 into Japan. 3rd quarter system sales included 10 into China and 9 into Germany.
The sales into China were completed under tender offers following the Ministry of Health's announcement in 2013 that 38 hospitals were eligible to import da Vinci systems through 2015. The Ministry of Health's Announcement does not represent a commitment to purchase, and we do not expect additional systems to be sold under the tender the fourth quarter and there is no assurance that the remaining 28 hospitals will purchase systems. Sales in new markets and markets where we have limited reimbursement like Japan will be percent in the third 69.2 percent for the second quarter of 2014. Our lower margin percentage reflects a higher mix of new product sales, including the da Vinci exercise system, costs associated with our accounting for the buyout of our Japanese distributors market rights and service costs associated with product recalls and the XI rollout. In the first quarter, we recorded a pretax charge of $67,000,000 to reflect the estimated costs of settling a number of product liability legal claims against the company.
During the second quarter, we recorded an additional $10,000,000 charge reflecting additional claims. Our estimates remained unchanged in the 3rd quarter and we paid out approximately $16,000,000 associated with previously accrued amounts. Pro form a operating expenses, which exclude reserves for legal claims, stock compensation expense and amortization of intent tables were $162,000,000 for the third quarter of 2014 compared with $138,000,000 for the third quarter of 2013, and $155,000,000 costs to ramp in the fourth quarter, primarily associated with the international expansion, particularly in Japan and Europe and new product launches. Our pro form a effective tax rate for the third quarter was 27.2 percent compared with 17% The tax rate 2014 reflects an increase of non U. S.
Taxable income relative to U. S. Taxable income. Our pro form a net income was $145,000,000 or $3.92 per share compared with $194,000,000 or 4 point $9.4 per share for the third quarter of 2013 $140,000,000 or $3.73 per share for the second quarter of 2014. I will now summarize our GAAP results.
GAAP for the third quarter of was $124,000,000 or $3.35 per share for the third quarter of 2014 compared with 157,000,000 or $3.99 per share for the third quarter of 20 dollars per share for the second quarter of 2014. We ended the quarter with cash and investments of $2,300,000,000 up from $2,000,000,000 as of June 30, 2014. The increase was primarily driven by cash generated from operations. We have completed the point 5,000,000 shares at an average purchase price of $3.97.52 per share. And with that, I'd
like to turn it over to Patrick who go over over procedure and clinical highlights. Thanks, Marshall. As mentioned earlier, total Q3 year over year procedures grew nearly 10% with U. S. Procedures growing 8% and international procedures growing 20%.
U. S. Procedure results were broadly similar to our commentary after Q2. With the exception of DBP, which was better than expected. Given our high rate of penetration in the U.
S. Prostatectomy market, we Our DBP volumes are likely to track to overall U. S. Prostatectomy volumes. In U.
S. Gynecology, Q3 results were similar to the first half of twenty fourteen with low single digit procedure declines. DVH B volume appears consistent with expected total market benign hysterectomy procedure declines, while the myomectomy negative year over year trend continued from the second quarter. Single site hysterectomy grew quickly off a small base and we will monitor the adoption of our Risted single site needle driver's impact on this procedure.
Moving on
to U. S. General surgery, adoption continues to be solid across a broad number of procedures. Colorectal procedure adoption remains a source of strength. It is too early to precisely estimate the impact the Stapler stop ship action may have on our procedure growth, though initial inspection suggested they weigh on rectal procedure growth.
Single site cholestestectomy continued to grow in Q3, though at a more modest rate relative the first half of twenty we are hearing positive feedback from surgeons about the clinical outcomes being generated with their da Vinci surgical systems. During the quarter, we One of the first studies comparing robotic laparoscopic ventral hernia was published supporting the feedback we have been receiving. These results when combined with some of the early cost analysis that suggests robotics has a similar level of material operating cost as laparoscopic ventral hernia repair gives us belief that the current adoption is sustainable. Looking abroad, international procedure growth of 20 percent continues to be led by global adoption of DVP and other urologic procedures. Solid early contributions from Gynecology and general surgery.
Procedure growth rebounded in Europe after holidays weighed on the Q2 growth rate. In Japan, we have observed a slight disruption to procedure growth in Q3 as we transition sales and service to our direct organization. We believe that trials to support our reimbursement submissions for partial nephrectomy and gastrectomy have begun enrollment, though it is uncertain how quickly these trials will enroll and whether they'll achieve the outcomes needed to reimbursement. We continue to expect international procedure adoption to be a driver of procedure growth as the opportunity for da Vinci surgery is substantial. As we've said in the past, quarterly procedure growth rates may be lumpy as adoption is not uniform across countries and procedures.
One of the challenges of evaluating clinical and economic advances in surgery is the diversity in patient and surgeon populations. As da Vinci is used in more efficacy consider the impact of new technology and techniques on different segments of the patient population and surgeon populations. They evaluate important pre and conditions in the patient population such as disease state, obesity, prior surgery and other comorbidities as well as appropriate near term and long term clinical outcome They also consider diversity and surgeon experience and practice patterns. As da Vinci is adopted in gynecology and general surgery, where a range of surgical approaches exists from open surgery to other forms of minimally invasive surgery. Careful segmentation of patient and surgeon populations is important.
Couple of colorectal studies published this quarter are good examples of using an appropriate set of patients and procedures. Unlike rectal resection where open surgery remains the most common procedure, right collecting these are often performed laparoscopically. Studies of various types have noted high rates of complications. One study is a meta analysis by Doctor. Xu and studies and colleagues from the Shandong Cancer Hospital published in the World Journal of surgical oncology, which includes, quote, compared to laparoscopic right collecting, robotic right collecting was associated with reduced estimated blood loss, reduced postoperative applications, longer operative times and a significantly faster recovery of bowel function.
The second study published in surgical endoscopy by Doctor. Trastooley and colleagues noted that intracorporeal anastimosis and right colectomy is associated with improved clinical outcomes remains uncommon in laparoscopic procedures due with intra corporeal and Astomosis were covered more quickly compared to laparoscopic cohorts with both intra corporeal and extracorporeal and Astomos we wanted to take a moment to highlight future clinical initiatives in which support of the Society of Gynecologic Oncologist clinical outcomes registry for cancer procedures as well as a national registry for ventral hernia repair. In addition, supporting research, during the quarter, we also expanded our support of society fellowship trainings with both the American Society of Cole And Rectal Surgeons and the American Association of Thoracic Surgeons. Turning back to research, we are supporting a number of multicenter clinical studies including studies on rectal resection, single site cholestisectomy, thoracic resections, and benign hysterectomies. We are also supporting national database reviews looking at outcomes from a population health perspective for rectal resection, thoracic resection and benign hysterectomy.
This concludes my remarks, and I thank you for your time now turn the call over to Calvin.
Thank you, Patrick. I will be providing you with our updated financial outlook for 2014 in pro form a terms. As Marshall mentioned, our GAAP financial results and pro form a reconciliations are available on our website. Starting with procedures, on our last call, we estimated full year 2014 procedure growth of between 2013. Now based upon trends described earlier 8% 9%.
Consistent with our recent calls, we will not be providing revenue guidance. Moving on a gross profit margin. Our Q3 2014 gross profit margin was 200 basis points lower than Q2. Certain charges to Q3 2014 cost of sales that Marshall described earlier on the call were non recurring in nature. We estimate that these non quarter, depending largely the expenses, we expect to grow our We expect 2014 non cash stock compensation to be towards the lower end of the $70,000,000 to $180,000,000 range forecast on our previous call.
We expect other income excluding the impact of the Q2 impairment charge to total between 12 rate for the balance of 2014 to fall within a range of between 27.5% 29% of pretax income. Our current estimate is directionally the 18 diluted share completed in Q2. We estimate our Q4 diluted share count to range between 36.9 and 37,100,000
please.
You'll hear a tone indicating you've been placed in queue, and you may remove yourself from the queue at any time by pressing the pound key. Our first question will come from David Roman with Goldman Sachs. Go ahead please.
You, everybody. And then for taking the questions. I wanted to start on procedure volumes given Calvin's outlook that you for the balance of the year. And I'm just hoping you could help us understand, the balance of the year and the context of what you've done to your data gets the guidance now implies 6% to 10% growth for the fourth quarter. Maybe you could just sort of frame for us what's happening in the assumption at the bottom end and what's happening at the assumptions at the high end and why we would see why we wouldn't see a continued trajectory from what we've seen year to date?
Yes. I can help you a little there. As you mentioned, we're 3 quarters of the way through the year. Q3 rounded up to 10% as we described. And on a year to date basis, we're also rounding up to 9% I think it has a lot to do with numbers.
You're 3 quarters of the way through the year. But the fact is in order to get a 10% procedure range, let's say you'd have to do in excess of 12% in the 4th quarter. And based upon the trajectories and the procedures that we've seen and our projections. It's just not what we're expecting at this time.
Okay. And maybe on the topic of total revenue. And maybe, Gary, you could just sort of comment on the overall operating environment. I mean, the data points thus far around the hospital CapEx continue look to be coming together a little bit more favorably than where we were starting the year. And I think some of the concerns that if Europe don't look to necessarily played themselves out as expected.
So maybe you should help us understand what's happening in the broader operating environment and what it'll take for you to get more confident in the forward view?
Yes. As we look at the the system sales side, as, as we've described before, really, we could describe our environment. And, and that is really driven by 3 things. One is, an interest in, a borrowing technologies for existing customers. And XI is being well received.
And so we're seeing some interest in trade ins. The second piece has been adding capacity, if their existing hospital, existing customer. And that will have to do with what their procedure mix and procedure growth looks like. And the last one is starting new programs. And, in terms of looking at global capital equipment environments, you're probably in a better position to comment on that than than we in general where hospital finances look stronger that gives them more flexibility.
Turning to Europe, what we've talked about before is really true. It's not a smooth distribution of customers. There are those who are interested in the most highly featured products. And there are those who are interested in real price sensitive offerings. And so we see a little bit of both in that marketplace.
So one size doesn't fit all.
Then maybe very specifically to your business, we started the year, I think, in what would what would some might call a very turbulent set of events and you're talking about I think your language was the unintended consequences around the Affordable Care Act and some of the gyrations in procedure volumes and what was happening at the Hop but particularly the evolution of your technology that followed last year, which was an adjustment period around utilization rates. Like where are we more broadly just in the adoption of your technology? And are we close to the point where you think we're back on a positive trajectory, positive sustainable trajectory?
Speaking first to procedures, I think the procedure performance speaks for itself. We're seeing early adoption in several general surgery procedure categories. I think that's a positive. As that grows and matures, I I think we'll see whether it continues and how fast it accelerates in general reports things like ventral hernia and colorectal surgery have been really strong and, and, and leave us and encouraged. I think with regard to the early impact of Affordable Care Act.
We saw some uncertainty with regard to them and that uncertainty, put put them into a pause mode as it, it related to us, as I think they get better clarity than that, that allows them to plan a little bit and looking forward should smooth things out. What will act we'd be like as time plays out, we'll have to see.
Our next question will come from Tycho Peterson with JP Morgan. Go ahead please. Hey,
thanks. Gary, I'm just wondering if you can elaborate on the SP delay. Was this a function of you guys during trial work? I'm just kind of wondering what the rationale there was.
Yes. The biggest reason for us to move it out little bit was actually some of the positive things we've learned from our Xi launch. We are seeing customer feedback on Xi. Is really strong, and some things that they particularly appreciate. And as we do our customer evaluations on SP and look to integrate those things, there's a few things that like to bring over from one to the other.
And we've made
a decision to do so.
Okay. And then, Marshall, can you comment a little bit more on the drivers of the gross margin softness. I mean, I know you talked about the stable stop use and some of these other dynamics. Is there any way you can kind of quantify the various costs? And I guess the underlying is where do we reach a low watermark on margins?
Yes. So the what we commented on was, there was about 200 basis point decline in gross margins. I would attribute 3 quarters of that to unusual items in the quarter. And you mentioned the, the, the stapler stop use, the, We also had a scope recall. And then we had some costs associated with the with our acquisition of Japan, the Japanese distribution business and the accounting around that.
So I guess I would say that there's a portion of it though that is just part of the normal margin and reflects new product and new product has lower margins to start and we'll continue to try to drive those down over time. As far as where we're going in the future, I think Calvin gave you the projection for Q4, we're not going to give you 2015 but you get a sense as to where we were this quarter.
Okay. And then last one, China, nice number there. Maybe just talk about the sustainability of the trend there? Are we at kind of an inflection point? I think up to now you'd had only 26 systems or so in China.
So just maybe talk about some of the drivers
I think we're in the 1st phase. Long term, we think there's real opportunity in China, but in the near term, I think there are a lot of steps to building a sustainable business there. It's, in terms of feel and approach, we'll feel a little bit like our conversations around Japan. I think there's an element of having a deeper presence in China, both direct and potentially with others and requiring a build out to have sustained, sustained growth. So I think it's a good first step, certainly a positive, but I don't think it is signaling a strong inflection point.
I would not assume that.
And that, that brought our total systems in China ending the quarter up to 36 systems.
Great. Thank you.
Thank you. Our next question is from Rick Wise with Stifel. Go ahead, please.
Good afternoon, everybody. Starting with the XI, Gary, last quarter, it felt like you all were pleased and maybe a surprised by the strong, the strong trends system placement trends. Is XI now this quarter the same kind of surprise is the rollout where you expected at this point or again, are you, is it a little better than you might have thought?
I'd say we're pleased with where we are on the XI rollout. I think that we're, we're getting feedback that I think is what we expected in some parts of the market in terms of multiport access and multi quadrant access. And we're rise and pleased to buy, I think, the broad based nature of, commentary in terms of urologists and, and, Juwon oncologists who are finding value in it perhaps more than we had anticipated. So I think we're continuing the feeling and the trend that we saw in the second
Okay. And back to the stapler, just maybe you went by too quickly. Do you hope to resolve the stapler issues this year. I think you said you weren't going to be specific, but is it in 2014? And And when we reflect on 4th quarter procedure trends, does that recall or have any impact on those procedures or a meaningful impact?
How do we think about that?
We haven't given you a date that will put it back, on the market. We, we think we have root cause, well identified and are in the midst of validating solutions. When those are validated, when we have them in our hands and they're done, the validation is done, we'll report to our customers and to you. I don't have a time frame for you yet. Having said that, I think that the teams are making good progress, both understanding where we are and what the possible solutions In terms of modeling procedure impact, a little bit hard to say.
I think that it's certainly some drag very hard to know how big the drag is.
Okay. And just last for me on the da Vinci prostatectomy side, it sounds like things are stabilizing. Can you just give us a little more color there, Gary? Just, I mean, what's happening? Do you think the market is sort of set to remains stable or actually grow?
How are you thinking about it? How would you help us think about it? Thank you.
It's a little bit hard to know based on 1 quarter of return to growth here. So happens in the next quarter and the next one after that hard to predict. It's we have seen in past quarters that when there's an increase in things like watchful waiting, at some period of time after that, you see a bolus of patients come out of watchful waiting and into definitive treatment of one type or another. As some subset of that watchful waiting cohort has their cancer progress. It may be that.
We'll have to wait a couple quarters to see if that indeed is the case.
Next to Ben Andrew with William Blair. Please go ahead.
Good afternoon. Can you talk a little bit about what you're seeing in terms of the expenses because you talked about trimming that back a little bit based on timing. Are those things likely to drop in 20 So we could actually see operating margin go down a bit because I think most of us have modeled it flat kind of through the end of 2015.
Yeah. We've been talking about investments we're making this year and we clearly, we believe strongly on our opportunities and have been investing. We did take the guidance range down a bid on expenses this year. It has mostly to do with the timing of some of the hiring activities in as we move forward into next year, obviously, we will be providing that guidance commentary on the next call. But that being said, in the longer term, we really wouldn't expect to make the types of operating expense investments in future years.
That we made in 2014 relative to revenue growth trends.
Okay, great. That's helpful. Thank you. Gary, is there any comments relative the approval we saw a few weeks ago for base of tongue risk sections. Is that for combination use with UPP for like a Bethney case or is that sort of an entree to the ENT space broadly?
It's a next step in, in clearances for ENT surgeons. It is not a sleep apnea claim, and the company does not take that position. It really is, as it, as it has been published, which is, a clearance to law surgeons through resection of benign tongue based tissue as they deem appropriate. Where they take it from there, I think we'll have to see in future quarters.
Okay. And can you characterize as best you can given the confounding nature of the stapler pullback, how the general surgery procedure growth trajectory has compared to prior procedure growth trajectories, they've tended to parallel each other, except some of the more recent ones were faster. Are those more encouraging than you would have expected
In terms of stepping back, I think as you look at the segments of growth in general surgery, hernia growth is still early in its in its life cycle. But it's been on faster side. In terms of hernia growth, if you look at a separate rectal and colon, rectal, so deep in the pelvis has been the one that is most, utilizing the stapler and, and is the one that, for which I think the surgeons are, are most, wanting it back quickly. That has been, growth that's been consistent with what we've seen in past adoptions. And that's one we'll watch pretty closely for, any changes with regard Stapler.
The solution to the stapler problem is really straightforward, which is, identify the issues, get get the solutions validated and bring it back to the market. We will do that scientifically and carefully, but that's the path forward. As you look at at, columnar section, that, that growth has been positive for us. Also, it's a multifaceted procedure. It's not just one thing.
We do see stapler use in colon resection, but not in all segments. And so it's kind of a mixed story in that one.
Okay. And then finally for me, when might we see the first of some of of our work being done in Japan for expanded indications?
The, the beginnings in terms of reimbursement, those those that those trials have initiated already. I think 1st enrollments have already occurred this month.
But when my lessee results of those, is that 2015?
Oh, that'll play out over multiple quarters in terms of when they start to publish, we'll have to talk about that as we get greater clarity on their timelines.
Thank you.
Thank you. Our next question comes from Tayo Levy with Wedbush Securities. Go ahead please.
Hi, good afternoon. Hi, Tayo.
So, a couple of quick questions.
On the single site, the risted device that you recently got approval. The uptake in that market is it possible that you could start to see, the 9 hysterectomy sort of go flat to positive as a result of that technology. And, basically, what I'm getting at is, you know, is that going to go after the laparoscopic patient population or still the open, patient population that you normally talked well.
Hey Tayo, it's Patrick. First off, we're excited about the level of enthusiasm and interest that Gynecology broadly have shown towards adopting single incision surgery. The initial case series that have begun since the product was approved have been seamlessly integrated and that surgeons have reported positive feedback to us about what they're able to achieve with the device. Relative to what happens in the overall market, this has been a market that has been in decline for a while now as payers have looked through alternative treatments rather than surgery, putting pressure on the overall number of hysterectomies has performed. But we're, we'll see where we go from here, but we'll definitely try to use the device to, to restore our rate of growth, but it's just too early to and on the trajectory at this stage.
I guess is there anything different between the gallbladder sort of a pro or, you know, experienced, obviously different type of surgeon and what you could see in gynecology?
I think the way that we would envision segments here are a little bit different than in the past where the segment typically been open versus MIS. I think this one may draw a little bit from both. So the segmentation is more likely around patient interest in needs with regard to single incision surgery and a little less about open versus lab versus robotics So I will see as it develops, how that actual segment develops.
Great. And then just, your last the approval in Korea, that's one of your larger markets and you're now, you're direct there since I think maybe a year or 2 ago.
How any expectations to how quickly that market could start
to to purchase excise systems?
I believe given the clearance that they can start to purchase product as soon as we start shipping it. And I think we have intentions to ship it before the end of the quarter. Okay.
Is it, but the interest is
is there. I guess that's kind of what I was.
Yes. We have customers who have an interest. Yes.
Okay. Great.
Thank you a lot.
Thank you. And next we have Bob Hopkins with Bank of America. Go ahead, please.
Great. Good afternoon. Just a couple of quick things. First off, I noticed in your quarter, I think you guys have confirmed there's been a change in your head of sales in the U. S.
And I was just wondering if there's any color you're willing to provide on that change. I'm sure folks on this call would be interesting to to, to hear if there's any commentary from you guys?
Yes, we've had a couple of changes in our, leadership team over the last couple of quarters. You know, I think just standing back, as, the marketplace changes, out in the United States as well as the company needs change I think for both the company and for individuals, people look at, what they want to do, what their skills are, and, and what's a match. We have been the beneficiaries of a really strong team. And we also have a strong bench. So for those who've moved on, we wish them well and expect them to do great things in their in their next engagement.
Having said that, I think we also have a really good team here. And so, it's, as, is natural in the evolution of any company You'll look out at, at, what the needs of the organization are and, and what people's long term needs are, both they do and we do. And, and so these transitions occur I think we have a great team. We're confident in our opportunity and we're confident in their ability.
Great. Other two things I wanted to ask about really quickly is one for, for you, Gary and one on the finance side. And Gary, for you, I was wondering if you could just give us your thoughts on sort of how your thoughts on SP have changed since you first announced the technology? I'm not asking about timing because you've already addressed that. I'm just asking about your thoughts on the kind of long term market opportunity for that technology, things like could the system ultimately be competitive with traditional endoscopic surgery in addition to some of the other things that you've talked about.
So that's my question for you. And then on the finance side, just to get it out of the way, I just wanted to be clear on the comments on operating expense growth as we look forward. Were you suggesting that relative to the double digit growth in OpEx that we might see this year that you wouldn't expect double digit growth going forward or just was that the message? I just wanted clear?
Okay. Well, let me take them in order and, I think I got them both. With regard to SP, I think there's just standing back on the introduction of new technology. There tends to be, a trend for folks to overestimate what they do in the near term and underestimate what they do in the long term. And, and so I look at SP and I think it has a lot of long term potential.
It is fundamentally a technology that enters the body through a small, small entry point. Brings in instruments in a parallel way and works with high precision and in tight spots. And as you sit down and talk to surgeons and I've spoken with many, many, I have personally as well as our team. I think there are a lot of possibilities as to where they could go and take it. What that looks like and whether it displaces one alternative or another depends entirely on what part of the body it's applied to.
There are some places that are really, straightforward, areas to explore that just set up well for this time of technology. And so things like transoral surgery or trans rectal or transvaginal laser areas that have a whole lot of promise. Having said that, bringing a technology market, you want to make sure you do it in a way that brings value early and, and, establishes value for your, for your customer. Gives high value patient outcomes and value to the surgeons and hospitals who adopted. And so how we evolve that, is something that we work through in the next, in the next several quarters.
And as we get closer, we'll describe it to you. With regard to OpEx growth, speaking not to 15, we'll give you our thoughts on 15 in the next call. But longer term, we expect we don't expect that, that will ramp expenses, highly out of sync with, with the growth in revenue. We think, longer term, looking out a few years that we have opportunity for, for, both stabilization and then later leverage. So that's how we're thinking about it.
Thank you. Our next question will come from Ross Muken with IFI Group. Go ahead, please.
Hey, guys. Thanks. Taking my question. This is Vijay. And I had a question on, I guess, last quarter, you know, Gary, lot of questions from instrument accessories.
And I guess, you guys were pretty sort of, I guess, had this view that procedures were up and you expected that number to come back up, right? And I guess going forward, when you look at that, you know, you had this dynamic about general surgery, which has higher, but then you also have hernia and, and, you know, COVID sort of growing. How should we think about the normalized, I guess, longer term I and A revenues for procedure?
Let me give you kind of a directional pointer. And then I think, Calvin, maybe a little help modeling side. I think directionally, remember that general surgery is a cluster of different procedures, and does not model one thing. And and just the few that you mentioned, have really strong differences in I and A procedures. So you think about a rectal case, cancer case uses, staplers will be on the high end of I and A per procedure, hernia, It's somewhere in the middle.
Hernia is also in itself a cluster of procedures. It's not one thing. So ventral hernia is different than inguinal hernia. And there are different techniques in each of those so that the cost basis for each one of those subsets may be a little bit different. And then single site co sectors at the low end of our revenue per procedure.
And so then you start modeling this out. It all has to do with mix and growth rate. And that's when it gets turned over to Calvin.
Yeah. I mean, I think laid it out pretty well. This is an average, right? The average INA revenue per procedure and our message is really just be aware of the average. You've got a widening and widening gap in the actual procedure on the complex side and the less complex side.
So think we have any specific commentary whether it should be increasing or decreasing. It really depends on really which factors, win the day on this thing. And and you can be successful in any scenario as
far as that goes. Yeah. I'd make a last comment on that point. We feel, comfortable with pricing in those procedures. We think gets appropriate for us and for the customer.
And, and we think the margin structure is, is right in those things. So it's really looking out at, what the mix is gonna rather than whether the company has to make a big change.
Great. And I guess I had one follow-up on procedures, right? And I think you guys have pretty consistent, you know, when you were talking about this changing healthcare dynamic and, you know, increased seasonality and back half pickup. And when you look at that guidance of 8 to 9, I guess, at the high end, you're sort of fact getting in a flattish Q on Q. I mean, is that a reasonable assumption?
Or is there a belief that given this exact rate season, Audi Q4 should be better than Q3?
Well, the simple way I think to answer that is we're all together experiencing what seasonality is going to be like, after the implementation of the Affordable Care Act. And, think nobody has been through it. So, we are, have our estimates. We've given the guidance based on those estimates, but I think we're all just going to have to see and some experience together.
Thanks guys. I'll step back in the queue. Congrats on the queue.
Thank you.
Thank you. Our next question is from Richard Noetto with Leerink Partners. Go ahead please.
Hi, thank you for taking the questions. I was just wanted to turn back to the stapler stop use for a moment. Can can you just characterize whether or not or the feedback that you've gotten in the field? Is it a matter of an issue of for the moment not using the stapler. Obviously, it's not available, but the second it comes back, it gets reused, or is there an actual hesitation in your customer base amongst rectal resection users that they're concerned about the safety issues from an ongoing basis?
Or is this just a very transient issue?
The first to characterize where we are, we have asked customers to stop using it until we have identified and given them further instruction. About, what and how to handle it. We've taken a reserve with regard to inventory. Should we want to send them replacements depending on what the conclusions of cause and validations are. I think that the customer sentiment around it has been, they understand our request It is quite a conservative request.
3 malfunctions over, greater than 10,000 fires they, they have viewed this as, understandable. And so I, I think that, we have not seen, I have not seen any deep, confidence being shaken. We have many requests to, hurry up and bring it back. I think they want to use it. I think it's differentiated to other products that they use.
And so that's what we're working on. Okay.
And can you maybe just describe what they're doing in the meantime? Does it actually decrease the utilization? I mean, it sounds like you're more hesitant there. How are they managing through not having access to the stapler?
Yeah. It depends on what the case is. If, if it's a low rectal case and they can, they can do it with a manual stapler. They'll try that. If it's very deep, they may, they may have to use a laparotomy rather than, doing it minimally invasively So there's a real variety depending on what the patient characteristics are.
Great. And if I could just ask one more on just as we look out to your new product initiatives, in the first quarter of 2019. So, I think that's a very good question. So, I think that's a very good question. So, I think that's a very good question.
So, actually expect to hear about making progress on? I'm thinking about things in that brochure that we saw at stages like the rotating bed and where are you on some of those additional features? Thank you.
With regard to commercialization timing with SP, we're not giving you updated timing. We do expect clinical use of the XI compatible SP in 2015. The, with regard to other things that we've been working on, there is another set of of XI Instrumentation, Phase II Instrumentation that will describe as it goes through the process. We are making progress on, an XI integrated bed. I don't have the time line, to describe to you at this time, but in future quarters, we will.
The pipeline is quite robust. And we continue to walk down it.
Thank you.
Thank you. We have a question now from David Lewis with Morgan Stanley. Ahead please.
Well, thank you. Thanks for squeezing me in. Gary, just two quick ones here. On Japan, you talked about the clinical development program. Are you still, is this the company's thinking that 2016 is a good estimate for reimbursement in Japan?
We are working toward 2016 on a couple of fronts. It is as yet uncertain. We don't have, of course, final approval from any on that timeline, but we are working toward that end.
Okay. And
nothing's changed in that front. It sounds like the clinical development program is on track.
Well, it's a dynamic conversation So, I wouldn't characterize it as, everything is solid and locked in stone. I think that's a set of conversations that has been going on and we'll continue to do so. But that's the nature of these kind of conversations in Japan.
And then, Gary, just if you think about the last several quarters adjusting for 2nd quarter where obviously XI was going to be stronger in the U. S. It does look like OUS net system placements were stronger than U. S. You think these kind of three quarters justifies a trend in on a go forward basis, it's likely that OUS net placements are higher than the U.
S. Placements?
Hard to say. I think a couple of things. I'd say that, on the, on the one hand, we are earlier in, total market adoption in some of our OUS, countries. And we think that those are real markets in, and, worthy of pursuit. And so if they go where we hope they go, then we'll see increased spending there.
In the U. S, of course, we have a bigger install base. So the conversation tends to be, somewhat around new technologies and other things they want to do. I think as you look over over years not quarters, I'd expect that the OUS represents a strong growth path for us.
Great. Thank you very much.
Thank you. That was our last question. As we've said previously, while we focus on financial metrics such as revenues, profits, and cash flow during these conference calls, Our organizational focus remains on increasing patient benefit by providing surgical outcomes, by improving surgical outcomes and reducing surgical trauma. 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' time.
Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and choosing AT and T Executive Tele conference.