Ladies and gentlemen, thank you for standing by. Welcome to the Intuitive Surgical Fourth Quarter Earnings Release. At this time, all participants given at that time. As a reminder, this conference is being recorded. Would now like to turn the conference over to our host, Senior Director of Finance, Mr.
Kelvin Darling. Please go ahead.
Thanks, you. Good afternoon, and welcome to Intuitive Surgical's 4th quarter earnings conference call. With me today, we have Gary Goodhart, our President and CEO Marshall Moore, our Chief Financial Officer and Patrick Clingan, Director of Fine 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 4, 2013, and our Form 10 Q filed October 18, 2013. 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 financial data tables have been posted to our website. Today's format will consist of providing you with highlights of our fourth 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 fourth quarter financial results.
Patrick will discuss marketing and clinical highlights, then I will provide financial outlook for 2014. And finally, we will host a question and answer session. With that, I'll turn it over to Gary.
Thank you for joining us on the call today. 2013 was a challenging year for Intuitive. Trends that emerged in the second quarter of 2013 continued the balance of the year, including revenue uncertainties for United States customers due to pressure on gynecologic surgery broadly the implementation of the Affordable Care Act and confusion surrounding the public debate regarding some da Vinci procedures. The factors resulted in a slowing of our growth in gynecology and a subsequent decline in the sale of systems in the United States. The year also featured several strengths in our business.
Among them, the publication of several large studies supporting the clinical and economic value of DaVinci use. We also experienced the acceleration of procedure growth in Europe and Japan, broad based growth in general surgery procedures in the United States and continued adoption of our new products worldwide. I will start with a review of procedures. Year over year growth in procedures closed at 16%, led by grown use of da Vinci and jumbled surgery in the United States, accelerating growth and the use of da Vinci outside the United States and continued uptake in U. S.
Gynecology. General Surgery growth in the United States was 93% in the year, including increased use of da Vinci and colorectal surgery and Cole's is technically using da Vinci single site and Fireflies as well as growth in other general surgery procedures. In the fourth quarter, general surgery overtook urology in the 2nd largest category of DaVinci use in the United States. Outside of the United States, procedure growth accelerated of procedures in 2012 based on strength in Europe and Japan. We will review procedure trends in greater detail later in the call.
Looking at trends in capital sales for the year, procedure deceleration in the United States free capacity on already installed systems, combined with a lack of visibility of revenue for our customers due to pressure on gynecologic surgery and the Affordable Care Act, U. S. Capital sales fell for the year. Outside of the United States, our capital business in Europe and Asia performed very well with international systems revenue growing 59 over 2012. Investments in Europe have yielded solid results and we expect to continue to grow our European team given the large opportunity we see for da Vinci use several procedures and countries.
As we've mentioned on prior calls, sustained growth in our business in Japan depends upon approval for reimbursement for additional procedures, which is targeted for the 2016 revision to national insurance coverage. Until additional procedure reimbursement is received in Japan, capital sales are likely to be constrained and to varying timing. The combination of gynecology trends and the ACA implementation in the United States and I'm certainty of future capital purchases in Japan creates difficulty in revenue forecasting for at least the first half of twenty fourteen. Kevin will take you through our view of 2014 later in the call. Our product launches proceeded well in 2013 and reflect the growing segmentation of our business, The combination of enabling technology, procedure opportunity, and aligned economics is important.
In the higher volume benign segments we serve, our single kit of instruments and accessories are being used increasingly for hysterectomy as well as co cystectomy. We plan on rolling out our single site kit for hysterectomy more broadly in 2014 and are working on a Risted single site needle driver to augment our existing offering. We anticipate submitting the Risted single site needle driver, 510 in the first half of twenty fourteen. In 2013, we received a biliary visualization indication for our Fireflies fluorescence imaging system in the third quarter, enabling enhanced visualization of anatomy during call cystectomy. Fireflies use and biliary imaging grew nicely in the fourth quarter.
Turning to products used for procedures typically performed through an open incision, our focus has been on creating products that improve visualization, precision and control for surgeons performing each procedure. Taking colorectal surgery as an example, open colorectal surgery is hard on morbidity, mortality, and readmission rates compared with minimally invasive surgery. We now offer colorectal surgeons the combination of risted vessel sealing, risted stapling, and Fireflies perfusion imaging. The combination of these technologies with the base capability of da Vinci is powerful in enabling minimally invasive colorectal surgery for a larger patient population. Looking at each product individually, our vessel sealer was cleared for use in Korea in Q3 and Japan in Q4 of 2013 and feedback from general surgeons and gynecologists has been positive.
We are also pleased with the performance of our da Vinci stapler in 2013. With outstanding feedback from customers on its clinical performance, ease of use and smart clamp feature. We expect most use of current stapler to be in colorectal procedures. We are currently expanding our roll up of the stapler to general surgery customers in the United States. A brief aside, you may have seen a press release yesterday by Luna Innovations announcing our acquisition of their shape sensing business for medical use.
We have worked with Luna for several years, and believe the sensing technology and the team that invented it represent a foundation for new types of flexible mechanisms that can augment or extend our products. This is part of a long term effort by intuitive to innovate in reducing invasiveness in the access to the body and we do not expect it to materially impact our business in 2014. Looking back at the full year 2013, our operating performance was as follows. Worldwide procedures grew by approximately 16%. We sold 546 Dimitchie surgical systems in the year, down from 6 20.
Total revenue grew to $2,265,000,000, up 4% over 2012. Recurring revenue grew to $1,430,100,000,000, up up 15% and comprising 63 percent of total revenue. We generated $1,021,100,000 in operating profit before non cash non cash stock compensation expense, down 1% from last year. GAAP net income grew to $671,000,000 up 2% year over year. And we reduced our shares outstanding by repurchasing 2,600,000 shares during 2013.
Finally, we generated $880,000,000 in cash flows Turning to our operating performance for the 4th quarter. Procedures grew approximately 12% over the fourth quarter of last year. We sold 138 Da Vinci Surgical Systems down from 175 in fourth quarter of 2012. Total revenue for the quarter was $576,000,000, down 5% from the prior year. Instrument and accessory revenue increased to $268,000,000 of 6%.
We generated an operating profit of $250,000,000 in the quarter before non cash stock option expense, down 13% from the fourth quarter of last year and GAAP net income decreased to $166,000,000, down 5%. In 2013, we opened 2 new technology training centers in the United States, one of our headquarters in Sunnyvale and the other in Atlanta, We ended areas through 2014, with a particular emphasis on Asia and Europe. Before reviewing our priorities for 2014, I'll take a moment to touch on our mission. In the face of near term pressure and scrutiny, our commitment to our mission to fundamentally improve surgery remains unshaken. Around the globe, surgery for many complex conditions is still conducted through an open incision with serious risks of complications, morbidity, mortality, readmission, and prolonged recovery.
Despite their long availability, conventional MIS technologies are difficult to apply to some patient population, and the advanced skills required to use them for complex procedures are hard to master. Da Vinci has overcome these limitations for our targeted procedures with proven results. Furthermore, today's minimally invasive surgery still leaves room for improvement in outcomes, predictability, recovery and economics. Taken together, these opportunities are the focus of our current and future product development efforts. Our team has roathered 2013 well and is fully engaged in the challenge of providing tools that improve the experience of surgery for those who need it.
Looking to 2014, our priorities are as follows: 1st, we will focus on the expanded use of da Vinci in general surgery, particularly colorectal surgery and single incision surgery. 2nd, we will support growth of da Vinci use in gynecology and urology worldwide. 3rd, we will broaden our stapling and single site launches, including the planned introduction of a Risted single site instrument. And finally, we will continue to strengthen our capabilities in international markets particularly Europe and Japan. Before passing the time over to Marshall, I would like to take a moment to thank Alex Zukic, for his outstanding service to this group.
Alex will continue to work with the company in an advisory capacity but will no longer join us on these calls. We welcome Patrick clinging to this role. Many of you know Patrick already, and he has ably represented us. With that, I turn the call over to Marshall, who will review financial points.
Thank you, Gary. Our 4th quarter 2013 revenue and procedures were consistent with our press release issued on January 14, 4th quarter revenues were $576,000,000 from last quarter. Procedures for the 4th quarter grew approximately 12% compared with the fourth quarter of 2012 and approximately 8% compared with last quarter. Procedure highlights will be covered by Patrick. Revenue highlights are as follows: Instrument and accessory revenue grew 6% compared to restocking orders associated with fewer system sales.
The change from the prior quarter reflects procedure growth in the sales of new products. Instrument in accessory revenue realized per procedure, including initial staffing orders, was approximately $19.30 per procedure. Compared with $20.50 in fourth quarter of 20 $8.60 last quarter. By new product sales. The increase from the prior quarter primarily reflects new product sales Systems revenue of $205,000,000 decreased 23% compared with the fourth quarter of 2012, an increase 29% compared with the third quarter of 2013.
The decline in systems revenue primarily reflects fewer system sales in the U. S, partially the
U. S.
12 and 66 systems in the third quarter of 2013. The decline in U. S. System sales relative to the fourth quarter of 2012 reflects the impact of debate regarding some da Vinci procedures. The increase relative to the third quarter of 2013 reflects seasonality and increased sales of our SIE product.
As benign conditions are becoming a larger portion of our procedure mix in the U. S, we are experiencing demand for lower cost system for use in reimbursement sensitive benign conditions in patient settings. As a result, we sold 20 SIEs with prices between $1,000,000 to $1,200,000 pending under configuration. Globally, our system ASP of 1,455,000 declined relative to the third quarter system ASP of $1,556,000. The decline reflects a high proportion of SIE systems in the U.
S, partially offset by geographic mix and a higher mix of dual console systems. In the fourth quarter, we sold 38 dual console systems compared with 32 systems in the third quarter. Outside the U. S, we sold 66 systems in the 4th quarter, including 28 in the Europe, 21 into Japan compared with 42 into international markets in the fourth quarter of 2012, which included 24 into Europe and 10 in Japan and 36 systems in international markets in the third quarter of 2013, which included 17 in sales also included 8 into Korea, 7 into Italy, 5 into France and 7 into the Nordic countries, Moving on to the remainder of for the fourth quarter of 2012 71.5 percent for the third quarter of 2013. Our lower margin percentage reflects expensing certain system production costs in light of lower system unit production.
4th quarter 2013 operating expenses of 189,000,000 were approximately the same as the fourth quarter of 2012 and were up 4% compared with last quarter. Our 4th quarter 2013 operating expense compared to 2012 operating expense reflects headcount additions offset by lower incentive compensation and lower R and D prototypes expense Our increase compared to last quarter was driven by higher R and D prototype costs, severance costs and increased headcount, partially offset by lower stock compensation costs. Our effective tax rate percent for the fourth quarter of 2012 12 percent last quarter. The third quarter of 2012 tax rate benefited from the release of reserves specific to tax years where the statute of limitations have now expired. The fourth quarter 2013 rate benefited from a greater proportion of our pre tax income coming from outside the US where our tax rates are lower.
Our net income was $166,000,000 or 4.28 per share compared with $175,000,000 or $4.25 per share for the fourth quarter of 20 $9 per share for the third quarter of 2013. Excluding one time tax benefits, our third quarter 20 13 net income would have been $131,000,000 or $3.32 per share. An important measure of our performance cash flow from operations. We defined cash flow from operations as net income, excluding after tax, non cash compensation and amortization of 13, we generated $193,000,000 in non GAAP net income or $4.98 per share compared with 205,000,000 or $4.99 per share for the fourth quarter of 2012. For the year ended December 31, 20 18, we generated $795,000,000 in non GAAP net income or $19.83 per share compared with $777,000,000 or $18.91 per share last year.
We will be providing this statistic to you going forward. We ended the year with cash and investments of $2,800,000,000, up $222,000,000 compared with September 30, 2013. This increase was primarily driven by net cash provided by operating activities. During the year, we of $4.29 per share. As of December 31, we still have over to Patrick who will go over our marketing and clinical highlights.
Thanks, Marshall. Q4 year over year procedure growth was approximately 12% was led by U. S. General surgery and international procedures. In the U.
S. General surgery was faced by cholecystectomy, colorectal resection, and a wide variety of emerging procedures, reflecting the broad based interest in DaVinci Surgery among different subspecialties within general surgery. U. S. Urology continues to exercise of stabilization as modest declines in DBP will nearly offset by growth in treatments for kidney cancer As expected, the growth rate system sales.
Q4 international procedure growth of 23% was led by urology, with contributions from GYN and General Surgery. DBP uptake in Europe and Japan was robust, accelerating in the back half of twenty thirteen. During the fourth quarter, international DBP volume surpassed U. S. GDP volumes, despite representing approximately 30% penetration in key developed markets.
Earlier this month, the U. K. National Institute for health and care excellence published an update to its 2008 clinical guidelines on prostate cancer, which recommends consideration of robotic surgery and the treatment of prostate cancer. Recommendation also states that surgical treatments of localized prostate cancer are cost effective by facing them in centers that are expected to perform at least 150 procedures per year. As Gary mentioned, our U.
S. Customers are increasingly segmenting our business to realize the opportunities within these segments. The adoption of da Vinci Surgery and less complex benign procedures has changed our procedure mix growing from approximately 40% In order to provide solutions for customers single site instruments or lower costs, enabling us to offer the advantages of robotic surgery and a lower instrument price The addition of a risted needle driver to the single site product family will optimize this technology for additional procedures beginning with benign hysterectomy. So single site surgery provides an alternative to traditional approaches for procedures that are largely being performed in a minimally invasive manner. However, the push by robotic surgeons into less complex benign procedures is not simply about patient choice, but the potential for safer outcomes.
Following our September 5, 10 K approval of Biofied for biliary imaging, we have witnessed acceleration in the adoption of fluorescence imaging during da Vinci close cyctomy, as Firefly enables visualization of the biliary anatomy that cannot be seen under white light. During the fourth quarter, Fireflies was included on 80% of the U. S. S. To 2013 system sales, not all capacity is in the right location.
This industry wide shift in surgeries from inpatient to outpatient setting has led some hospitals to pursue robotic surgery in an outpatient setting. We believe our SIE platform is suited to meet the needs of these hospitals At the other end of the spectrum, we believe the value proposition and evidence based supporting conversion of complex and cancer surgeries from open to MIS is growing increasingly. Traditional minimally invasive tools have attempted to make inroads into these seizures for decade, but the technical complexity and challenging patient anatomies has limited adoption. We believe da Vinci surgery evolution and minimally invasive technology that can expand MIS more deeply into a number of traditionally open procedures. Given the high value we bring to converting complex open surgery to MIS, we are seeing increased global interest in our fully featured system and advanced instrumentation.
Vessel ceiling and stapling technologies are important tools for colorectal surgeons and with our stapler entering full launch mode in the U. S, we believe we are well suited to drive adoption in colorectal resections. Globally, there are more open colorectal resections and prostatectomy and malignant is directories combined, and we believe our vessel ceiling, stapling, and firefly technologies bring a powerful array of tools to enable deeper penetration of MIS into colorectal surgery. During the quarter, we continued to see growth in peer reviewed publications, highlighting robotic surgery in a number of journals I'll take a moment to highlight just a few. Doctor.
Davis from MD Anderson authored a multi institution database study in the December issue of Journal of Endo Urology that evaluated over 71,000 prostatectomy patients from 2004 to 2010. This paper showed da Vinci surgery a shorter hospital stay and lower rate of complications compared to open surgery, even for surgeons in their initial 25 procedures We believe these outcomes reflect the value created by Turning to GYN and specifically benign hysterectomy, while near term ACA implementation creates some uncertainty among our customers, this study supports Davinci Surgery aligns with the underlying principles of health care reform, published in the October version of the Journal of Minimally Invasive Gantecology, Doctor. Martino and colleagues from the Lehigh Valley Health Network presented results covering more than 2500 benign hysterectomies across all four surgical modalities: robotic, laparoscopic, vaginal and abdominal. The authors concluded that Davinci benign hysterectomy had a statistically significantly lower rate of 30 day readmissions as well as reduced blood loss and length of compared to the other 3 modalities of care. Moving back to urology, a national database study of approximately 5500 prostatectomy patients and was published by Doctor.
Pallecki from Northwestern in the November Journal of Endo Urology. This study reported statistically significant results that favored robotic surgery. Including a total complication rate of 6% for da Vinci versus 23% for open surgery, a surgical complication rate of 1% for da Vinci 3% for open surgery and a readmission rate of 3.5% for da Vinci versus 5.5% for open surgery These results came at the cost of an additional 38 minutes of operative time for Dovinci. Finally, we'll conclude with a large national database study on sections originated from Doctor. Jewel and colleagues at John Hopkins, who studied 244,000 U.
S. Surgeries from 2008 to 2010. This paper published in the December ish edition of JAMA shows that minimally invasive colon resections offer lower mortality rates, lower complication rates, shorter length of stay and reduced costs compared to open surgery. Robotics surgery represents less than 1% of the collecting is performed in this day set. When comparing this small cohort to laparoscopy, there were 2 statistically significant outcomes of favorite robotics to reduce hospital stay and lower conversion rate while costs statistically significantly favored laparoscopy.
The authors concluded that robotic surgery was similar to laparoscopy with a higher cost, but noted that less than 50 percent of colon resections within this study were performed laparoscopically in 2010. The authors could not include rectal resection in this study, which are notably absent given a higher proportion of open surgery. We encourage you to look closely at the underlying data and consider the opportunity for da Vinci surgery to expand MIS for colon resection as adoption grows among colorectal surgeons Please visit the clinical evidence section of our website to learn more about these and other publications regarding da Vinci surgery. Thank you for your time, and I will now turn
the call over to Cal.
Thank you, Patrick. Thank you, Patrick. I will be providing you with our financial outlook for 2014. Starting with procedures, In 2013, total divinity procedures grew approximately 16% to roughly 523,000 procedures performed worldwide. We exited 2013 with 4th quarter year.
During 2014, we anticipate 9% to 12%. Based on an increasing proportion of benign procedures in our procedure mix, We anticipate a Moving to revenues. As has been discussed earlier, several factors are pressuring our business, making it difficult in the near term for us to predict system sales volumes and as a consequence, total revenue. As we enter 2014, our visibility into system sales is challenged by the breadth of the range of our procedure growth forecast. As a reminder, procedures drive capital sales and the relationship between certainty at hospitals associated with the implementation care dynamics as described by Patrick earlier in the call and likely variability in the timing of Japan system sales given the time until additional procedure reimbursement.
Anticipated in 2016. Given our capital sales performance in the back described above, it is likely that we will sell fewer systems in 2014 than the 546 systems sold in 2013 Due to limited visibility regarding the capital side of our business, we will not be providing revenue forecast at this time. As we gain greater visibility, it is our intention to reinstate revenue guidance. We believe deeply in our ability to fundamentally improve surgery and are pursuing plans to increase the use of da Vinci enabled MIS around the globe. As a result, 2014 will be capital sales uncertainty.
We will be building our international capabilities investing in new product development and pursuing growth
in
roughly 12 to 15% above 2013 levels. We expect our non cash stock compensation to range between 13. We expect dollars in 20 14. With regard to income tax, we expect our 2014 income tax rate to be between 25% 28% of pretax income, depending primarily on the mix of U. S.
And international profits. This forecast does not assume the reinstatement Our share count for calculating diluted EPS in Q4 2013 was approximately 38,800,000 shares, declining 500,000 shares in the quarter, primarily due to the full quarter impact of Q3 buybacks. Our actual Q1 and fiscal year 2014 share count will depend on several factors, including the magnitude and timing of any additional share buybacks. That concludes our prepared
you. The first question goes to the line of Tal Levy with Wedbush.
Yeah. Hi. Good afternoon. Hey, sir. Hey.
So a couple of questions on my end. Obviously, the decision not to provide full year guidance leaves us a little bit off I guess, not necessarily confused, but struggling to figure out where our number should end up this year, especially given all the volatility would you maybe comment on the comfort that you feel around sort of where consensus is at at this moment? In terms of your top line or, you're gonna stay away from from that type of guidance?
Not clear where consensus will wind up. So I think trying to project where that will go. I think there's probably not worth speculating on the call. I think we laid out the underlying dynamics that had produced near term visibility through the script. Pretty well.
And if we had greater visibility on that, we share it with you. I think that's looking out at what the inpatient admissions will be for the benign procedures we serve and what those dynamics will be has been moving around. Looking at how hospitals model their revenues in the face of ACA and that benign segment that we operate in and then trying to predict Japan will do. We have an operating plan. We understand where we're going.
We're disciplined about what we expect to to do in terms of activity, but there's a wide range. And so rather than speculate, I think this is where we are.
Okay. And I think at the beginning of the script, you had mentioned that there was more concern around the first half of the year. Specifically on capital system placements. Is there something that happens at the middle of the year back half of the year that, you know, again, would get you more comfortable?
I don't think it's an event. It's I think more around, as we see, how patient flows are going to our customer they'll have a better view. And as their view improves, our view improves. And I think it's really as simple as that.
Okay.
And just lastly, maybe you could talk about the profitability of of the SIE system versus, versus the SI, just given that that's becoming a bigger party of mix.
Sure. I'll ask Marshall to take you through a little bit of what that framing looks like. And my only comment before he jumps in is beware of averaging. Years. There's now multiple products in the line and the average is not necessarily predictive of what's going on underneath.
So as I said in the call, the average price pricing that we received for SIEs was between about $1,000,002 depending on the configuration. Obviously lower than a an SI with 4 arms. The SIE though is does only get 3 arms. And it does not cost us the same amount of money to produce. The gross margins are several points below 6 to 7 points below what they are for, for SI systems.
But if it's able to open up benign procedures for us, particularly in outpatient settings, we're, we're all
floored. Okay. Thank you.
Thank you. We'll go to the line of Michael Peterson with JP Morgan.
Hey, thanks for taking the question. Maybe just following up on the last one, what should we be thinking about in terms of a run rate for SIE placements and maybe you also just touch on your pricing assumptions that you're thinking about for 'fourteen overall?
So, yes, we really have if you go back, we sold 3 in the first quarter, 2 in the second quarter, 2 in 3rd quarter, and then we sold 21 total. There were 20 in U. S. 21 total. I mean, that's an end.
To me, that's one quarter of success in selling it at a to customers that are looking for a lower cost system for benign conditions. I think, I don't have enough data to really predict exactly many I'm going to be selling every quarter, so I'm not going to go there.
And then can you comment on your pricing assumptions? For 2014?
Yes. I assume you mean the system pricing assumptions. And like Gary said here, it's really important to be aware of the averages. If you look at it overall, our ASP was about $1,500,000 in both the full year of 2012 2013. And in Q4, our our ASP declined to $1,455,000 as we saw this significant increase in the lower priced 3 arm SIEs.
As you know, these SIEs are targeted towards the growing procedure segment of single site and less complex procedures And in 2014, we will remain focused on growing this procedure category with more SIE system sales. But also, as was mentioned, at the same time, the proportion of the higher featured dual console and Fireflies systems also increased in 2013. And furthermore, the systems that went to Japan in strong numbers where we're higher. So I guess the point of it is going forward, the ASPs will potentially vary more significantly quarter to quarter based upon this broader pricing mix. And then, and I'll just pull short of trying to guess which way it's going to go.
One comment, I guess I'd add a little clarity there is I don't think with within each sub segment, the ASPs are going to fluctuate that much. It's the mix of those sub segments the prediction part.
Okay. That's helpful. And then on Japan, it sounds like we should assume that you had a bullish placements here and going to slow a little bit. Is that the right way to be thinking about it for 14?
The timing of it is very hard to predict, but we have 1415 before the next round of broad national reimbursement. There may be hospitals that get individual exemptions to collect data. But broadly, there'll be some time. And so, figuring out how much absorption there'll be in Japan over that 2 year period is just a very large model. And so what the timing looks like is hard to predict.
But over time, I think it's going to be constrained until directionally, I don't think you'll keep selling systems at a very hard until that constraint is broken with reimbursement.
And then last one, you talked about having to reinvest a bit this year, you had a small headcount reduction at the end of last year. Maybe just should we be think about headcount being up and talk maybe a little bit more specifically, if you can, on where those investments are being made? Do you need to build the channel to see ambulatory market for example?
Yes. Good question. So we had, a small reduction in our U. S. Sales force at the end of the year.
It was about 50 people, just for those who may be listening that haven't heard this conversation, the, we had a team that had grown that was layered on top of our main forest that was designed to pursue gynecology as gynecology as matured in the U. S. They were, in a sense, double serving those accounts. And so we folded them back into the main force. That was 50 out of commercial force of about 800.
We anticipate growing forward in the year in a few places. Europe, we continue to see investment in our organization there. In Asia, more broadly, we will invest in that opportunity and our channel there. In the U. S.
In product development, we'll continue investment and in operation other parts of operations. So I think headcount growth will continue through the year. It won't be a sharp increase, but I think it'll be targeted where we need it. With regard to where how we discuss opportunities with hospital customers in terms of side of care, we think our capital sales team is well positioned to start the year here to have those conversations.
Okay. Thank you.
Thank you. We'll move to the line of David Roman with Goldman Sachs.
Thank you. And good afternoon. I also wanted just to point out that it's very helpful. All the additional disclosure you're giving on the website. No.
It takes time to add that add that all together. So thank you for that. So I guess on my question, I wanted to just take a step back for a second. As you look at the overall U. S.
Market and what's transpired this year, I guess in some ways, when I look at the trends in capital that this could have sort of this could have happened at any point in time as procedure volumes slowed, because the and what I'm trying to reconcile is that you had a modest slowing in procedure volumes, but a very significant drop off capital. So I'm just wondering if you could talk about how we why we shouldn't think that there's overcapacity in the system and that you've penetrated just a large segment of the addressable market here and that there's going to be sort of a normalization period until procedure volume picks back up.
Let me start and Calvin, you can jump in. I think a couple of things. Underlying capital sales are really three factors and you've hit on a couple. But one of them is procedure capacity and that's a highly sensitive element so that just a percent change in procedure growth rate can free about 20 systems worth capacity, give or take not an exact number. So there's a high sensitivity there.
Capacity is highly sensitive to proceed to growth rate. That's one element. 2nd element is, do hospital customers feel they have the right to pursue the opportunity that's in front of them. So if they have an S system and they want to pursue colorectal or single site, then there's an upgrade opportunity for them to to move up into SI. And then Patrick pointed out in his section that not always systems are not always in the same operating rooms so that if hospitals are doing a benign procedures a different point of ambulatory surgery environment, hospital owned, it's not the same set of awards.
So while they have capacity in one place, it's not necessarily in the in the right place. And so those three things are underlying what happens. And one of them highly sensitive procedure volume, the other 2 one technology, one is point of care. Gavin? Yes.
I mean, I don't have much to add to that other than just to acknowledge that prior to 2013, we had really a longstanding history a gradually increasing utilization per system. And it is true that based upon the issues that we've described, we had a modest in utilization, average utilization and again, beware of averages in 2013. But again, capacity is really one of just one of the factors and, and, system acquisitions by hospitals.
But to end up to finish the thought, to acknowledge your question, I think procedures are the number one of the three things procedures are very important and procedure growth rate important and it's something we're focused on.
Okay. That's helpful. And maybe just a follow-up. As you sort of think about the operating profile of the business from profitability standpoint. I know you've talked a lot about being focused on top line growth and while your margins have come down, they are still very high, particularly on a on a cash basis.
So can you maybe just talk about how you're thinking about P and L leverage versus efforts you undertake to re stimulate top line growth. And I would assume that at this point, resumption of top line growth is is the priority and that you have financial levers to help protect, protect earnings, or am I not thinking about that the right way?
I'll start and Marshall can chime in. I think the first thing is we'll manage the business for the long term and we'll look around and say our mission, our mission of the company and the way we ought to be evaluated is, are we satisfying the mission of improving surgery in the areas and markets that we can do that. And I think there's a lot of opportunity for us, and we will pursue that. Fiscal discipline is important. And I think it's important in two ways.
1 is, spending discipline is important to make sure that we're careful about where we spend and investment is important. In this period of time, we will invest. We'll invest in a disciplined way, but we think that the opportunity for ahead of the company to surgery better is substantial and we're in a great position to do it. And I think pulling back that set of investments in the face of some near term uncertainty not be in the long term interest of the company. So that's how we look at it.
In terms of operating levers, other sort of near term and long term and a lot Thanks. Talk to that.
Some operating levers are already sort of they operate on their own. What I mean by that is a commission, a large portion of our cost base is variable. It varies with revenue. So in the even in the SG and A category, a large portion is commission based so as revenue fluctuates, so does the amounts of costs that we have. And but otherwise, I think Gary sort of outlined that some of the other things.
I think that we have some levers, but we're going to continue to invest in our future.
Got it. Thank you.
Thank you. We'll go to the line of Ben Andrew with William Blair. Good afternoon guys. It's actually Margaret at this time. Thanks for taking the questions.
Gary, as we look at the opportunity in colorectal in 2014 and as you kind of look at the current system and the current tool set, do you think that can get to to the procedure growth guidance that at least you're modeling internally if not giving to us. And then how do you view the rate of penetration in general surgery over the next several years in 2014? Is it going to be similar to DBP, DVH or slower? Any clarity would be helpful well?
I'll speak to the first one. The second question has a few moving parts. On the first one, we think that the set of, vessel sealer Stapler, as you know, Stapler as a whole marketplace is quite broad in terms of the number of subproducts you need in a family and a Stapering family. Our first offering is targeted at colorectal and feedback on that has been great. And then perfusion imaging with fire apply.
Those three things together combined with da Vinci is really powerful and a great starting point. It will not be the last set of things we do in general surgery, but we think it's powerful. And I think that it is in a good position to power early growth, that we're seeing in Colorado surgery here and then later in markets outside the United In terms of what that looks like for total colorectal as a whole, I think we're early in the adoption. But I think we'll have a real opportunity for growth there. You had said, how do we think about general surgery growth rates as a whole?
And I'll give you one framework that I think is important is we have gynecology and urology as precedents. In urology, prostitectomy was really the lead procedure and there were just a few procedures that followed kidney cancer treatment and partial nephrectomy bladder cancer treatment in cystectomy. So it was not a huge, a huge broad set. Gynecology is a little bit broader, but hysterectomy was really the leading growth engine and then some other behind it, myomectomy and cyclical pepsi before reconstruction. General surgery does not quite have that same structure.
There are some special that are quite broad. So you have colorectal subspecialty. You have 4 gut procedures. You have bariatric surgery. What the folks do in academic centers is quite different than what they do in community centers.
So the category as a whole is going to be the sum of adoptions in different places. The sum of adoption in single site, the sum of adoption in colorectal. And those are really different. Single site is largely done in community settings. Colosectomy czar, colorectal procedures are largely concentrated in in cancer hospitals.
And so those different growth rates they differ, how they add up, I think, is a little bit hard to predict. Patrick or Tal anything you'd like to add.
Is there something on the learning curve that can maybe speed that up as you come out with kind of new add ons, tool sets and so on to help drive general surgery.
I think that the new instruments that we're bringing in, I think the broadening of the launch of, stapling, and the use of Fireflies those are enabling technologies. They speed the efficiency of the procedure. They allow a better workflow. And so I think that that's helpful. The investments we've made in our training centers are really to make for easy access for learning surgeons that have access to resources.
And I think that's been a good investment for us and that can help. The investments we've made in simulation and access to simulation or other things that I think help. And we're really happy and feel that the data study is important in showing that the totality learning resources for surgeons, not just what intuitive does, what Procter's do, what advanced coursework does, has resulted in great and safe adoption of new technology And I think that's a powerful message and likely to be repeated in other disciplines beyond just prostatectomy.
Okay. And then on the gynecology side, you guys are clearly, fairly well penetrated and hysterectomy and kind of some of the other ancillary procedures, miles and the fecal But how should we think about that as a category now that it's over 50% penetrated? And should it materially slow in 2014, gradual changes and then good single site actually become quickly material? Thanks.
Yes, fair question. I think you know this well. I know your team knows this well. Once you're on these adoption curves, the year over year growth rate falls. That's just the nature of those adopt curve.
So, on the multiport side, I would expect that it continues in the that there's a continued deceleration, the pace of which will be hard to predict. And we'll see hysterectomy single site hysterectomy is an opportunity. We're early in that opportunity. We've been in limited launch. The limited launch has gone very well clinically.
And it's gone really well from uptake in the way surgeons who are being trained have adopted. We're adding some instruments into that kit, bringing back some listed instruments that will, we think, optimize the procedure and give surgeons a little more flexibility in approaching tissue and we're working through those things. I think that's a well known pathway for us. And we think that'll help. That's still early.
We're not into a full very broad launch there, although we have broadened the launch from its early days, really starting in the fourth quarter and continuing through So I think that launch will open up through the single site hysterectomy. And we'll continue to report on it to you as how we progress.
And I would just add, it's we still feel that we have a significant opportunity here in women's health, specifically his direct on the more complex multi port side. They're over 100,000 women now are still having open hysterectomies in the dates where we think our technology can improve their outcomes. And then we're very early on the less complex side on our single site offering where there's something like 200,000 laparoscopic and vaginal procedures that perhaps you would have placed there.
Great. Thank you. Thank you. We'll go to the line of Bob Hopkins with Bank of America.
Great. So just a couple on the guidance. I heard your comments about operating expenses for the year, but I was wondering if you had any comments on gross margins both as it relates to 2014. And then given some of the changes in the customer mix longer term, just any longer thoughts on gross margin as well. So again, for 2014 and then longer term, any thoughts on gross margin?
Yeah, I think you saw in the fourth quarter, there were some points that were mentioned. First off, the margin the gross margin was impacted by lower production volumes, which when you divide some of the manufacturing costs by fewer units of production that has a a negative impact on margin. And so you saw that, could that be a continuing headwind to some extent? I would say yes. Then beyond that, you come down to some of the product mix discussions on gross margin that I think we're not predicting how much it's going to be SIE versus a forearm SIE geographic.
I think it's too many moving parts to make a prediction there. On that.
I think you had asked kind of a longer term question directionally how do we think about it. And I think as we look at the opportunities and we talk about segmentation the business. We want to match the clinical and technical capability of the products we bring, the procedure opportunity and the underlying the of margin profile in both segments. Some of that is near term and some of that is long term in terms of investments in product. And so we will do that.
And then on the decision on the revenue guidance or lack thereof for 2014, I just want to a little bit about that because you guys have always been so adamant about saying that system sales are driven by procedure volume and you're willing to give procedure volume numbers but not some, some thoughts on system sales. And so I'm wondering if there's anything sort of different in that relationship going forward. In other words, you know, we've historically assumed that utilization, you know, just has to go up and that's the way we've tried to predict your system sales. Is there something unique about 2014 that would cause that relationship to, bifurcate further? Do we need to assume much greater utilization than we've been seeing in the past in terms of increases.
And again, just want to ask about that because you guys have been so adamant about the correlation.
I'd just maybe start 2 ways to think about it. I think the first one is the range and procedure guidance is pretty broad relative to the base and because system placements are sensitive to that range, that that's a multiplier on the uncertainty. That's one. The second one is that it may be that utilization trends differ over time just because of point of care, as Patrick had mentioned pretty clearly. And because, hospitals may look out and say, I want to hear capital utilization of what I've got.
And I'm willing to make some compromises and convenience to get that. We may see those 2 different things that work against each other. And so how that plays out. What I'd say on that second half is that those changes are unlikely to switch on a dime because they're operational in nature. You have to move, you have to adjust hospital operations to make it happen.
So that may happen, but I don't think that happens the day after tomorrow. I think that's that would play out in time.
And then lastly
Add to what Gary said, I mean, you you're right. We do believe that procedures will drive systems in the long term there's going to be short term fluctuations in capital sales. But, overall, long term, in mature markets, you're gonna see capital sales catch up or fall behind will catch up over time. Having said that, in nascent, markets like Japan, which also causes our overall utilization statistic to fluctuate, we're selling systems ahead of procedures. And so that one's more difficult to predict.
And then lastly, you guys have again talked about the opportunity for outpatient and more benign type procedures. Can you just help us think about how big of an opportunity that might be for the company. And I assume today sales into, outpatient surgery centers and centers like that are pretty minimal. So you guys given much thought to how big an opportunity that might be?
As always, we start with procedures and work our way back rather than thinking out outpatient operating rooms and work all day forward. And so Calvin or Patrick can speak to it.
Yes. So if you look at where most of these outpatient surgeries are performed. It's in a hospital outpatient setting. So either within the four walls of the hospital or in an adjacent ambulatory care facility, But the predominance of them are in that channel as opposed to the physician owned freestanding facilities.
Thank you.
We have time for one more question.
Thank you. That'll come from the line of David Lewis with Morgan Stanley.
Good afternoon. Thanks for fitting me in. Gary, I wonder if you could just talk qualitatively about procedures in 2014. Assuming the 2 biggest dynamics driving procedure deceleration is 1, obviously still very rapid growth in general surgery, but maybe slowing off a larger base and then hysterectomy, it is deceleration or stabilization. I wonder if just very broadly you could help us understand those two buckets can general surgery hold its growth rate trend line based on a further or broader launch in a minimally invasive and colorectal and to expect DVA to the holdest trend line slightly decelerate or potentially even improve in 2014
Yes, I'll start with hysterectomy. I think that the underlying disease state is not changing in the U. S. I don't see any rapid change there. I think the set of treatments that are being offered are also not changing very much.
What we seem to be seeing change is payer behavior and kind of patient decision making with that peer behavior. And so it's a little bit hard to predict what that will look like over time. And I think any of the 3 abilities you outlined as possible. I think now look out and Calvin mentioned it really well, there are 100,000 or so open procedures being done and, for women in the United States for hysterectomy, many of whom are great candidates for proven, safer, minimally invasive procedure. And yet, they're getting open procedures and that's an opportunity.
And so that if that patient population comes in and has an opportunity, then that would be a positive and an upside. The other possible upside is, of course, a single incision site hysterectomy as that kit rolls out further and we augment it. So those are possible upsides. How payer behavior change through the year, what some of the patient decision making looks like, that's a little bit harder to predict. On the general surgery side, as you know, adoption rates are always year over year growth rates and an adoption curve always highest in the beginning and then they decline over time as the base grows.
It's absolutely a natural progression. The speed of that, I think, is going to depend on procedure by procedure. What is the total available market for single incision me, that's an estimate. Everybody would look at that and try to figure it out. It's not a clear substitution against another one that's just sitting there.
And so we'll see what that looks like. Colorectal, I think we feel really good about it. You look at a colorectal and we bring a huge amount of value there. Cold cystectomy, patient enthusiasm, surgeon, commitment, training and, and growth in those procedures has been really encouraging. And the last thing is that general surgery has been growing beyond those 2.
Into some other things. And we'll let them evolve for a couple of quarters. But I think that'll be interesting to see, where else general surgeons take the opportunity and the and it looks to be broader than just those 2. And so overall, I think our feeling we can bring a lot of value to general surgery by.
Okay. Gary, just one quick one on, just so I understand the S. A. I mean, that's just This
is going to be very quick and
I promise even for me. And the S. A, it's been for a while, but it sounds like there's sort of growing enthusiasm. So I'm trying to understand that trend lines are relatively stable, which is hard to understand just obviously because this year, larger capitals under pressure. So is the situation with SIE?
You now see better positioning in the ambulatory care market? Has there been an upgrade that system or is it simply going to be a corporate focus on the SA heading into 2014? I'm just trying to figure out what's changing relatively given the system has been available. Thank
you. Yeah, good question. So a short answer, a combination of a couple of things. The single site instrument kit is both procedurally adopted to do a 3 arm system. It's also priced, right, for that set of procedures.
And then Fireflies adding into that is a nice mix together that gives kind of a fully capable system to do those things in an ambulatory setting. So I think those combinations brought together help, and I think, an organizational alignment around describing the value of that also helps. And so that's how we've gotten where we are. Thank you for the question. 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, increasing, patient value by improving surgical outcomes Tim Wilson, Chief of the Division of Urology And Urologic Oncology at the City of Hope Cancer Center, gives you some sense of what this means to da Vinci's surgeons and their patients. In this era of health care reform, policymakers, hospitals and providers are all evaluating to reduce the overall cost burden to society, while improving the quality of outcomes for patients. Often lost in the debate is the need for investment in technology that help mitigate the significant cost drivers of health care. Robotic assistant surgery is a game changing technology in medicine, yet it is deeply misunderstood and often dismissed as just another expensive tool for driving costs up. This could not be further from the truth.
The cost of patients, high rates of death, blood loss and higher risk of infection and higher length of hospital stay is a good investment and aligns with the goals of healthcare reform. Medicine needs innovation, but is usually slow to change. Decades ago, the same criticisms of robotic surgery played laparoscopy. It was expensive on proven and not safe. To date, more than 2,100,000 da Vinci surgeries have been performed worldwide with an extremely low death rate, a declining rate of adverse events and a growing body of clinical evidence that demonstrates safety, effectiveness and an ability to reduce both costs and complications of open surgery.
As a surgeon who has performed thousands of procedures, including open manual laparoscopic and robotic assisted urologic cancer surgeries, I believe robotic assisted surgery is the kind of technological disruption that truly will reform healthcare. The improvements in surgery described by Doctor. Will drive our team and form the foundation of our operating performance. We've built our company to take surgery beyond the limits of the human hand and I assure you that we remain committed to driving the vital few things that truly make a difference. This concludes today's call.
We thank you for your participation and support on this extraordinary journey