Ladies and gentlemen, thank you for standing by, and welcome to the Intuitive Surgical Q2 2013 Earnings Release Conference Call. Instructions will be given at that time. As a reminder, this conference is being recorded. Would now like to turn the conference over to our host, Kelvin Darling, Senior Director of Finance for Intuitive Surgical. Please go ahead, sir.
Thank you. Good afternoon, and welcome to Intuitive Surgical Second Quarter Earnings Conference Call. With me today have Gary Goodhart, our President and CEO Marshall Moore, our Chief Financial Officer and Alex Soukich, our Vice President of Strategic Planning. Before we begin, I would 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 10Q filed on April 19, 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 Investor Relations page. In addition, today's press release has been posted to our website. Today's format will consist of providing you with the highlights of our second quarter results as described in our press release announced earlier today followed by a question quarter financial results. Alex will discuss marketing and clinical highlights, then I will provide an update to our financial forecast for 2013.
And finally, we will post a question and answer session. With that, I'll turn it over to Gary.
Thank you for joining us today. As we previously announced, our 2nd quarter has been a challenging one. Capital sales fell 5% from the prior year, with the shortfall concentrated in the United States. We attribute the miss primarily to slower than expected da Vinci benign gynecology procedure growth in the United States. Take globally, overall procedure performance in the quarter was solid, rising 18% over prior year in the face of several headwinds.
Summarizing procedures in the United States, strong general surgery growth continued centered within single site cholecystectomy and colon and rectal resections. In gynecology, DVH for malignant conditions was solid, while DVH growth for benign indications grew more slowly than expected. Eurologic procedures continued to be stable. In Europe, procedures grew sequentially over Q1, led by urology and early growth in malignant DVH. Growth was strongest in the UK and Nordic countries, moderate in the core countries, and we in the south.
Procedure growth in Asia was strong off of a small base, led by growth in urology and general surgery particular strength in Japan, Taiwan and China. Turning to systems, we sold 143 systems 7 fewer than Q2 of 2012, with sales of new systems in the United States, totaling 90, down from 124 a year ago. We believe the slowing of our growth in benign gynecologic procedures in the United States to be a significant contributor to weaker than expected system sales. There appear to be a couple of underlying causes for slower than expected US benign DBH growth. Overall admission for benign gynecology appear to be under pressure in the first half of twenty thirteen.
Since we are a significant share of hysterectomy, Our growth rate in DVH is sensitive to these admissions. 2nd, our MCS notification and negative press occurred in the quarter and may have pressured growth and utilization, although estimating their impact on procedure volume is difficult. Given that the average da Vinci system is used for 100 of procedures per year, and pressure new system sales. This appears to be the case this quarter. Looking toward the second half of the year, we see increasing pressure Globally, our business in Asia has continued to build.
Showing continued interest in da Vinci Surgery. Our work with surgical societies is ongoing in their efforts to obtain national reimbursement for procedures beyond prostatectomy. Currently, it appears unlikely that additional procedures will receive national reimbursement in the April 2014 insurance revision given recent guidance from MHLW. As we've said in the past, we can to expect Japan system sales to be highly variable from quarter to quarter. We are investing in building our team in Japan with a view towards long term performance.
Capital sales in Europe in Europe have made a positive difference. We are gathering European clinical and reimbursement data and expect these investments to increase in the future. Given macroeconomic stresses in Europe and government processes, we expect reimbursement efforts to be a long term endeavor. During the quarter, FDA conducted an on-site audit of ISI and issued a set of 4 observations in a form 483 previously reported in June. Yesterday, we received a warning letter from FDA as a follow on to these audit inspection findings asking for additional steps to resolve 2 of the observations.
These concerns are addressable and we are in the process of doing so. Turning to operating performance for the 2nd quarter. Procedures grew approximately 18% over the second quarter of 2012. Sold 143 Davinci surgical systems, down from 150 during the second quarter of last year. Total revenue was 5 $79,000,000, up 8% over last year.
Instrument and accessory revenue increased to $265,000,000, up 18% over Q2 twenty Total recurring revenue grew to 363,000,000 63% of total revenue. Net income was $159,000,000, up 3% over last year, and we generated an operating profit of $257,000,000 before non cash stock option expense, down 1% from the second quarter of last year and represent 45% of Q2 revenue. We ended the quarter with $3,270,000,000 in cash and investment down $89,000,000 from last quarter. In the quarter, we generated $189,000,000 in gross 19% of our reported GAAP net income. And finally, we repurchased $270,000,000 of our stock.
Before turning the time over to Marshall, It's worth taking a step back and looking at a longer term view of da Vinci Technology in surgery. We remain deeply positive the value Davitje can bring to surgery now and in the future. The benefit Davitje brings as an alternative to open surgery has been demonstrated in hundreds of peer reviewed clinical papers and is widely accepted by our customers. As some da Vinci procedures mature in the United States, we increasingly exposed to volatility in patient admissions for our core procedures and the consequent lumpiness in capital sales. Beared over the long term dementia surgery contributes to a trend in surgery toward consolidation of procedures and to fewer surgeons with higher volume.
We believe this of da Vinci enabled minimally invasive surgery as applied to complex conditions. In recent quarters, we have seen building interest in the use of da Vinci in general surgery, spanning procedures from the pelvis to the upper gastrointestinal tract. As we expand our offerings in technologies like vessel ceiling, stapling, and firefly, We are seeing increased utilization and efficiency in general surgery procedures that are otherwise very difficult to perform Taking a recent example, ENDO risk vessel sealers are now installed in roughly half of our U. S. Customers.
These technologies also open the door to additional clinical applications such as thoracic surgery where long term additions to stapling can bring benefit to procedures that are off difficult to perform through small incisions. Looking at single incision surgery, single side cholecystectomy kits have purchased by approximately half of prior to VINCI procedure. Early adopting clinical sites have been progressing and refining procedure choreography with single site hysterectomy as well. Furthermore, we are investing in expanding single site technology and expect to bring to market additional single site instruments as well as integration with other da Vinci technologies. Including firefly and simulation.
As our products site. Considering trends in health care policy around the globe, a long term intention to move away from fee for service and towards single payment per treatment of can advantage parentcy of individual surgeon and hospital outcomes has the potential to shift patient dynamics toward those programs showing the best outcomes. Again, while we cannot predict future implementations of policy, we believe their direction may set up well for dementia surgeons their patients, surgery and are focused on the following: extending the benefits of minimally invasive surgery using da Vinci in gynecology and urology worldwide. Building dementia capability and its supporting use and supporting its use in general surgery. Disciplined execution in our stapling and single site product launches and finally continuing to invest in our capabilities in international markets, particularly Europe and Japan.
I'll now pass the time over to Marshall, our Chief Financial Officer. Thank you, Gary. Our second quarter revenue was $579,000,000, up 8% compared with $537,000,000 for the second of 2012 and down 5% from last quarter. 2nd quarter revenues by product category were as follows. 2nd quarter instrument and accessory revenue was 2 $65,000,000, up 18% compared with $224,000,000 for the second quarter of 2012 and up 1% compared with the first quarter of 2013.
Sales of new products, including single site, vessel sealer and Fireflies, partially offset by lower instrument and accessories stocking orders associated with
procedures
colagic growth reflects a number of factors, including, but not limited to, weaker hospital admissions for benign da Vinci procedures. Our second quarter 2013 U. S. DVP procedures were approximately 5% lower than the second quarter of 2012 lower than the first quarter of 2013. Partially offset by lower instrument and accessory stocking orders.
Instrument and accessory revenue realized per procedure including initial stocking orders, was approximately $20 per procedure, which was roughly equal to the second quarter of 2012. And lower than the approximately $2.10 last quarter. The decrease compared to the first quarter reflected lower stocking orders and the time of orders. 2nd quarter 2013 systems revenue of $216,000,000 decreased 6% compared with $229,000,000 for the second quarter of 2012 and decreased 16% compared with $256,000,000 last quarter. Overall, we sold 143 quarter of last year and 164 systems last quarter.
We sold 90 systems into the U. S. Market in second quarter of 2013 compared with 124 systems last year and 115 systems last quarter. The lower second quarter 20 13 U. S.
System sales reflected among other things, the impacts of moderating growth in U. S. Benign gynecologic procedures and increased economic pressure on hospitals. During the second quarter of 2013, we sold 53 systems into international markets, including 21 into Europe and 12, which included 13 in the Europe and 7 in Japan and 49 systems in international markets in the first quarter 2013, which included 16 compared with 1,530,000 models, all simulators and firefly when configured with the system and exclude upgrades. Our second quarter's 2 2013 ASVs were lower than the first quarter due to a lower proportion of dual console configurations and slightly higher proportion of sales involving trade in 43 of our second quarter 2013 system sales involve trade ins comprised of 39 DaVinciF and 4 standard models.
35 of our second quarter 2012 sales involved trade ins and 39 of our first quarter 2013 sales involves trading. Service revenue increased to $98,000,000, up 18% compared with 80 $1,000,000 last year and up 4% compared with $94,000,000 last quarter. The growth in service revenue was primarily driven by a larger system installed base. International revenue results were as follows. 2nd quarter revenue outside the U.
S. Was $158,000,000, up 56% compared with revenue of $101,000,000 in the second quarter of last year and up 3% compared to $153,000,000 last quarter. Our higher year over year international revenue growth was driven primarily by higher da Vinci system sales into the Japanese European markets. Our higher sequential international revenue was driven by higher European system sales, partially offset by lower system sales into Japan. Second quarter 2013 international procedure volume was approximately 23% higher than the second quarter of 2012 and 6% higher than the first quarter of this year.
Moving on to the remainder of the P and L. Gross margin in the second of 2012 71% for the first quarter of 2013. Our lower margin percentage compared to the second quarter of last year resulted primarily on the impact of the medical device excise tax enacted beginning in 2013 and product mix, our lower gross margin percentage compared to last quarter was driven primarily by costs associated with the MCS recall, lower system ASPs and product mix. 2nd quarter 2013 operating expenses of $187,000,000 were up 16% compared with the second quarter of 2012, up 2% compared with con additions. Our increase compared to last quarter was driven by headcount additions and higher legal costs, offset by lower incentive compensation, 2nd quarter 2013 operating income was $219,000,000 or 38 percent of sales compared compared with $225,000,000 or 42 percent of sales last year and $251,000,000 or 41 percent of sales last quarter.
2nd quarter 20 13 operating income included $39,000,000 of non cash stock compensation expense compared with $33,000,000 last year, $38,000,000 last quarter. 2.4% for the second quarter of 2012 and 26.1% last quarter. Our 2nd quarter rate was a bit lower than the midpoint tax income. Our net income was $159,000,000 dollars per share last year $189,000,000 or $4.56 per share last quarter. Now moving to cash with March 31, 2013.
The decrease was driven by $270,000,000 used to repurchase our common stock and $25,000,000 capital and IP acquisition, partially offset by $189,000,000 in cash flow generated from operation. During the second quarter, we bought back approximately 546,000 approximately $900,000,000 authorized
for highlights. Thank you, Marshall. During the second quarter, we sold 143 Da Vinci systems, 90 in the United 21 into Europe and 32 into rest of the world markets. As part of the 143 system sales, 4 standard da Vinci systems and 39 da Vinci S systems were traded in for credit against sales for new da Vinci S I systems. We finished the 9, the cumulative number of da Vinci systems worldwide.
2001 in the United States, 443 in Europe and 355 in rest of world markets. 61 of the 143 systems installed during the quarter represented Pete system sales to existing customers. In total, 140 of the 143 systems sold represented da Vinci SI or SIE systems, which included 27 dual console systems. The 53 system sales internationally included 20 hand, 4 into Russia, and 3 into the countries of France, Germany, the U. K, Australia, and Taiwan.
Clinically, Q2 year over year procedure growth was approximately 18%, led by the category of general surgery. Paced by cholecystectomy followed by choline rectal resection. Other general surgery procedures showing strong growth included gastric, Panc ADIC and esophageal procedures. Overall, urology growth was solid and included strong OUS DBP growth. With continued stability in U.
S. DVP. As Gary stated, our benign GYN procedure the the procedure the slower adoption within the benign GYN segment will most likely lead to continued lumpiness in U. S. System placements.
Recently released new products continue to perform well. Through Q2, we've sold single site instrument and accessory kits to approximately 740 U. S. Customers. Our vessel sealer product sales were strong with the FLY continues to expand with 96 customers purchasing a da Vinci simulator and 76 customers purchasing Fireflies systems as part of their initial system purchase this quarter.
In addition, we've expanded our phased rollout of both the da Vinci surgical stapling system and single site hysterectomy products to several new sites. These rollouts will be expanded in a measured fashion so we do not expect them to contribute materially to 2013 revenue. During the quarter, several 100 robotic abstracts and papers, representing a variety of surgical specialties were published within various peer reviewed journals, while quarterly clinical conferences produced several live da Vinci procedure transmissions, postgraduate robotic courses, podium presentations and clinical poster sessions. I'll take a few of surgical conversions from laparoscopic procedure to an open surgery is most often related to the complexity of the procedure. We've described this relation within our urologic and gynecologic procedure businesses and believe it applies to all surgical specialties in which we participate.
This past quarter, several peer reviewed general surgery studies described da Vinci surgery within this very context. A colorectal study published in the journal Surgical Endoscopy compared 84 consecutive minimally invasive low anterior resections 47 incorporating da Vinci and 37 employing traditional laparoscopic technique. The study emanating out of the division of colon wrecked surgery at Yance University Hospital completed in 2010 had a median follow-up period of 31.5 months Within their review, the authors describe overall safety and efficacy as similar within the 2 cohorts. However, the differences in the conversion rate from MIS to report, 16.2% of the patients had required conversions to open surgical technique. As compared to 2.1% within the da Vinci cohort though both techniques are minimally invasive, the requisite hospitalization for patients undergoing a da Vinci colon rectal resection was reduced by 2 days.
The author stated, and I quote, we compared the long and short term results for patients who underwent robotic and laparoscopic low anterior resection and cola anal anastimosis. Robotic cola anal anastimosis had short and long term outcomes parable with those of laparoscopy. In particular, we found that patients in a robotic group demonstrated significantly lower rates of conversion to open surgery and had shorter hospital stay than the patients in the laparoscopic group, a low rate of conversion to open search has a very important impact clinically In the annals of pancreatectomy is superior to laparoscopic technique, compare the results of the department's 1st 30 da Vinci distal pancreatectomies to a historical cohort comprised of their last 94 laparoscopic distal pancreatectomies. The patients in the study demonstrated equivalent age, sex, race, ASA scores and tumor size. Within their comments, the authors noted to their surprise that the operating time between the two cohorts showed a substantial reduction of over 75 minutes in favor of the da Vinci technique.
In addition, they reported that the rate of conversion to open surgery was 6 percent for the laparoscopic patients versus
0
for malignancy within the da Vinci group. Also noteworthy was more pancreatic ductile adenocarcinomas were approached robotically 43% then laparoscopically at 15%. Onchologic outcomes in these cases were superior for the robotic assisted group with higher rates of margin negative resection and improved lymph node yield for both benign and malignant lesions. In their summaries, the authors wrote and I quote robotic distal pancreatectomies were equivalent to lap in to open reception despite a statistically greater probability of malignancy in the robotic cohort. We concluded that robotic assistance may broaden in patients for minimally invasive pancreatectomy.
This concludes my remarks and I'll now pass the time over to Kelvin.
Thank you, Alex. I will be providing you with an provide estimates
to
than procedures performed in 2012. Now based upon moderating growth rates for U. S. Benign gynecologic procedures, we are adjusting our projection for full year 2013 procedure growth to a range of between 15% 18%. Moving to revenues.
As has been discussed earlier on this call, capital sales of da Vinci systems are highly sensitive to changes in procedure growth patterns. Moderating procedure growth has led to increased capacity in our installed base. Given this sensitivity, it is challenging for us forecast the number of systems we expect to sell in the second half of this year, so we have widened our guidance range. Given the significant of our revenue that is derived from system sales, we now expect total 2013 to revenue to range from approximately flat to 7% growth compared to full year 2012. Turning to operating income.
On our last call, we forecast operating income to fall within a range of between 30
At this
spending cuts paid full year 2013 operating income to fall within a range of between 37% 38% of revenue. Now with regard to non cash stock compensation expenses. On our last call, we forecast 2013 total stock compensation to total between $184,000,000 $192,000,000 for the year. Based upon our current stock price, we are reducing our forecast to a range of between $164,000,000 $172,000,000 for the year. Timing of recognition should follow a quarterly pattern similar to 2012.
We expect other income, which is comprised mostly of interest income to total between $17,019,000,000 in 20.13. With regard to income tax, Our Q2 Our share count for calculating EPS in Q2 2013 was approximately 40,800,000 shares. Directionally in Q3, our share count will likely modestly decline from the Q2 level. The actual share count will depend on several factors in
questions.
You'll hear tone indicating that you've been placed in queue. Our first question comes from the line of Ben Andrew with William Blair. Please go ahead.
Good morning or good afternoon guys. I wanted to follow-up on a couple of points, I guess, to start. And Gary, you talked about, the fact that, that, you know, system growth would likely be lumpy over the of the coming quarters. Can you give us some sense of what your inputs have been lately from the field and from customers relative to how lumpy and what the mix between new customers and existing customers is likely to look like going forward?
I think the commentary is pretty much as we've outlined it for you. We see, really an issue in the U. S. So, them existing customers looking at capacity see. We don't see existing customers walking away from, the technology or the opportunity, but more a question timing for them.
So it feels more like, delay than otherwise. As we've said in the past, I think capital, is really driven. Capital sales are really driven by 3 underlying, drivers. One of them is additional capacity and and existing customers. One of them is, technologies or new, new features that they'd like to get.
And the third are, customers that are not yet, da Vinci owners who are interested in engaging. We've had good success with the new technologies that we've been bringing out. And so we see that as proceeding. I think the growth rate on benign gynecologic procedures has come in, in the second quarter, grew, but grew at a slower rate than we were expecting. And, there's just a multiplier effect there on capacity.
And so the capacity constraints in existing accounts but we'll take some quarters to work out.
And Gary, can you maybe give us some comments or maybe perhaps Alex on this about any correlation between the volume of benign GYN cases and and physician visits because we've heard some noise back and forth about flattish or even sometimes cladding patient volumes overall. Does that appear to be part of it? Is it maybe hysterectomy being utilized less frequently? Any other things like that? Around the procedure growth is obviously a big change in hysterectomy growth has kind of happened here in the last couple of quarters.
Yes, it's I think in terms of total inpatient admissions as a whole. And then, people coming in seeking women coming in, seeking hysterect As you know, the inpatient admission data broadly lags for a while. So we get at that by, more or less the same way you do by talking to our customers, by looking at survey data and trying to look at other analysis. It's clear that in the first quarter, total inpatient admissions were lower than people had expected them. In some cases, in some institutions negative, as the total in Q2, we are hearing mixed, feedback on total As for hysterectomy as a whole, our customers are seeing a pressure both in Q1 and in Q2, find that in Q2 is tough, just because the the the data lags.
And so qual qualitatively, seen some pressure there. And then and there's some things that are just hard for us to handicap in terms of intuitive specific events, and their impact on non hist, things like the MCS notification, are just harder for us to quantify what that pack was.
Sure. And then Calvin, I guess very briefly on the procedure guidance, the 15 to 18, does that assume that benign hysterectomy grows sequentially in the back half versus the first half? I know you've got some big year over year comparisons there as well. So I mean, maybe a well, a different answer versus year on year?
I think when you look at the overall guidance and the revised range, we're talking about general surgery performing well and in line with our earlier guidance. And similarly on the urology side and international. So I think the change overall really is very much attributable to the benign gynecologic procedures in the U. S. And so I think we're still talking about growth.
It's a moderating growth pattern and the trajectory through the quarters ought to follow a similar pattern to what we've seen historically.
Next question comes from the line of Tao Levy with Wedbush Securities. Please go ahead.
Can you hear me okay?
Yes, yes. Okay, good. Thanks.
So just let's see on the warning letter that you received seems rather fast for the FDA to come in in June and then a few weeks later, give you guys warning letter. Can you maybe go into a little more details as to what they're looking for,
out of that?
The content of the letter is, really a reflection of the content that was in the 43 a form that was issued in June. Of there, there were 4 observations. There are 2 mentions in the warning letter which will be become public. 2 mentions of things they'd like additional insight into. One of them had to do with the procedure by which calls are classified and their participation in that classification, that was kind of the first bullet in the and the other bullet they want additional information on has to do with user input and design elements.
Happy to do with particular product. Our those are addressable. We're working on addressing them. I think we can address them quickly, and, and then we'll move on.
Did the did the letter mention anything about having, having to come back and revisit the facility or or
There is a mention that they will come back and audit specifically around recall classifications.
And you also mentioned about Japan and now not expecting any additional reimbursed procedures, in the next cycle. What, what did the MHLW kinda mentioned to you guys about
They are MHLW is working on, guidance documentation for reimbursement but more broadly than us for new technologies. That's outlining data requirements for what they'd like to see in Japan. Japan specific data. For prostatectomy, we were able to use global data and had a good interaction with MHL view. Given current guidance, again, I think it's a class of products more broad than us.
They're looking for additional data collection in Japan specifically. That's going to vary by procedure. Their data requirements appear to vary by procedure having to do with the maturity of clinical data. And so it's not all locked down yet. We're continuing to work with the surgical societies who in turn work with MHLW.
But given the visibility we have on it now, it looks like there'll be parcel reimbursement followed by national reimbursement on a timeline that has to be decided based on data requirements. And as we get additional insight and understand it deeper, we'll share that with you.
That lastly, and the sort of the the cadence on on the system sales throughout the rest of the year, is the the pressure that they we should model, that's primarily just, just US based. Is that the right way to think about it, or do you see anything else in sort of Europe versus the world? I'll
I'll I'll start with a broad answer and let Marshall color it as as well. In the US, I I think the dynamics that we saw in the second quarter may persist for the back half of the In terms of OUS, we're we're pleased with the progress we're making in Europe, but as you know, Europe can be really lumpy. And, likewise in Japan, I think that that Japan, has had some boluses of pent demand and what that looks like in future quarters is likely to not be stable. I don't think I would use the past couple of quarters to to predict the future next quarter's partial issue.
Specifically in Japan, we introduced that site at the beginning of the year. And I think helped drive, increased system sales. And we don't see that level continuing. And as Gary said, Europe will be lumpy, particularly Q3 as a vacation period for them. And so historically, we've seen lower sales in Europe in Q3.
Our next question comes from the line of David Roman with Goldman Sachs. Please go ahead.
Good afternoon, everyone. Thank you for taking the question. I wanted to Gary, I think in both your and Alex's prepared remarks, you referenced the volume of data that continue to come out regarding the da Vinci system. But as you think about some of the headlines out there that have been materialized in the past 6.5 months, and the rising concerns potentially around from payers as it relates to hysterectomies. To what extent have you started to rethink the need or potential need for a large scale, randomized clinical trial to really definitively put a line in the sand on the value proposition of da Vinci that's a multicenter, multi 100 patient clinical trial, even if it is sponsored by the company?
That's a good question. We we going forward, I think clearly, large scale studies are, multi institutional, multi surgeons are powerful and are important. Speaking to the headlines a little bit, I think the headlines often confound the differences between complex procedures and simple ones and the use of da Vinci as an alternative to open for is the use of da Vinci as an alternative laparoscopy. I think there's a lot of very strong data for the use of da Vinci as an alternative to open surgery That said, going back to your comment, we are investing in large scale studies. They're not always prospective randomized trials.
Sometimes they're registries, sometimes they're observational trials, sometimes they're prospective randomized. That depends a lot on institutions that are doing them. And the nature of the data they already have and the data they're collecting. But we're believers in big data sets. We think that matters.
And over time, we'll see more of that come out, both in in hysterectomy and in other procedures.
And maybe just on the system side, I certainly can appreciate that that the slowing utilization or slowing procedure volumes will impact the rate at which you sell systems, but it it it seems like a pretty fast drop off in system placements relative to what is a lease looks to be in the quarter, a pretty modest slowing in procedure volume. So is that am I reading that wrong if I say that there was already a lot of capacity out there of systems and then a small tweak on the volume side is going to make a big impact on procedures? Or is it something that procedures were throughout the quarter. So the forward view is a little bit more cautious. Am I looking at that wrong?
I'll separate it into 2 things. I think the I'm going to take the second part first. The idea of did we see a softening in the back end of the quarter in terms of procedures and that driving additional conservatism for the back half of the year. We did not see a strong falloff in procedures through quarter. It wasn't that we got to the end and procedures were really ramping down or anything like that in terms of rates.
In terms of sensitivity, we came out of a strong fourth quarter of 12, both in procedures and in systems. Saw some mixed dynamics in Q1 across the industry and us included, in terms of procedure volumes and inpatient admissions. And that benign hysterectomy gene growth rate really struggled to gain traction again in Q2. And I think that has added up to the sensitivity you're seeing in systems. I do think because systems are used for hundreds of procedures a year, And we're doing a fair number of procedures in the U.
S. That are benign, benign hysterectomy procedures. There's the sensitivity that gets you to that capital number.
Okay. That's that's helpful. And maybe lastly, on, the the guy, the flat to set up to up to 7% total revenue guidance for the year. Just roughly looking at it, it looks it seems as though you've taken a pretty conservative approach with respect to systems and it almost looks like you're extrapolating 2nd quarter trend and close to flat finding them through the balance of the year. So is that guidance meant to reflect the degree of uncertainty that might exist in both the capital markets as well as it so the the timing of any violation to slowing procedure volumes and slowing systems that this is a view based on what you know today.
And to have taken that forward and that sort of gives you some room on the overall performance of the business?
Yes. David, our wider range in the revenue guidance does reflect the slower growth in da Vinci procedures and really the uncertainty in the trend in DVH. We our underlying assumptions, we assume roughly flat system utilization for the back half of the year with the reduced growth assumptions on procedures. And the rest basically falls through. Again, as we discussed, the capital sales are highly sensitive to changes a procedure growth trends in our guidance does assume materially fewer system sales in the second half of twenty thirteen than the And a couple other points on guidance, while we're on the topic, we talk a lot about system ASPs.
It's probably likely the second the system ASPs may be modestly lower than the first half based on a higher proportion of the sales that may involve trade ins with the lower volume And then secondly, the second half instrument and accessory revenue per procedure will probably also directionally be a bit lower than we saw in the first half based upon fewer stocking orders associated with the lower system sales.
Okay. That's extremely helpful. Thank you.
Our next question comes from the line of Amit Hazan with SunTrust. Please go ahead.
Thanks guys. Just one question on the DVH side. One of the reasons you noted for weakness was the move of history me from the inpatient to outpatient setting, but the data kind of shows pretty clearly kind of this has been an ongoing thing for years now. Maybe about 5% or so a year consistently for a long time. So I'm wondering what has really changed now particularly this quarter for you to have noted that kind of beyond that already existing long term trend?
Yes, I think there are a couple of underlying dynamics in the DVH base and actually pulling them apart and putting numbers on them is very, very tough. One of them has been we've seen over recent quarters a pressure by payers on the use of hysterectomy as a whole. And we're hearing that back through our surgeon channels, what it takes to authorize a hysterectomy and kind of conservative medical management before that. And we're also seeing payer policies towards driving them into ambulatory settings versus in patient settings. Add to that, the deductible dynamics and and other macroeconomic trends and then some intuitive specific dynamics, around negative press and and our notification.
And you've got a set of things that can be contributors sorting exactly which is which real time is very tough for us to do. It really is going to be survey data and retrospective analysis to figure out which of those is dominant. Some of them are increasing trends. Some of them seem to be episodic trends.
Okay. And then back to the system side, I want to just kind of maybe touch on the deferral versus cancellation I think you guys were using the word deferral in your preannouncement press release. Can you talk a little bit about the systems that maybe you were close to closing and didn't that were deferred because of the lower trajectory of expected growth for procedures. And whether you were hearing in large part that that was a deferral and not necessarily a cancellation and a move away from the technology. And are we talking virtually pretty much all of the units that fell into that bucket or were there some that you feel were cancellation that are really moving away from your technology?
The pipeline entering quarter as we as we commented, 3 months ago was a strong and but as you know, capital sales to be back ended. So it wasn't until the end of the quarter that things started to drop off. The reasons that we were given for systems falling off, included things like, inability to get financing, just additional levels of approval required within hospital systems. So it just felt like a harder environment an economic perspective. It did feel like a number of them were pushed off.
Now, we see them being pushed off. Do they ultimately get done? It's really hard to predict. And we don't know if someone was hesitant to buy because, of hospital dynamics or concerns about the economy. Whether they'll still have those concerns for a quarter or 2 out or whether those will go away and, capacities will catch up such that they buy.
So it's really hard for us to predict which ones will come back and which ones will not. But the initial commentary that we're getting from hospitals was that they're pushing up.
Okay. And just one final one for me on utilization. I think you mentioned you're assuming flat utilization in the back half. I'm just wondering as we kind of start think about general surgery and especially cholecystectomy in there being a shorter procedure, whether we should be considered utilization per system starting to go up a little bit more than it has been in the historical trend?
It's a great point. As Coley's and other, simpler procedures get done, they're there faster. They are also, tend to be more scheduleable. The benign disease, patient can can schedule into a slot often better or easier than in the case of avoidant disease. So if that becomes material and bigger, I think that utilization may well go up.
And, and, I think, ultimately, that's a good thing for hospital and a good thing for us, but it can create some uncertainty in terms of predicting where utilization ought to settle. Now things like just to add a point, colorectal procedures that are also growing are complex, longer, general surgery procedures and cancer procedures. So you have both of those dynamics going on at once. And so the mix change is the thing you have to predict to get to utilization and that's how Calvin arrived at his guidance on.
Yeah. And as you know, the trends have been over the last few years gradual growth low mid single digit percentage growth in utilization per system. Now there are almost 2 1800 systems out there now and they're all at various stage of adoption. So my point is it's a large sample size and then that metric historically has moved very gradually in direction.
And and along just speaking for the long term, looking out multiple quarters, higher utilization is all great for hospitals that get a good return on their investment and it's great for the company. So, over time, if it heads that way, then we will adjust.
Thanks guys.
Our next question comes from the line of Please go ahead.
Hello. This is actually John Demchicken for David. Thanks for taking the question. You gave some numbers on the magnitude of growth for your DBP in the quarter, but I didn't really hear, I guess, anything, I guess, that specific towards DvH. So I was wondering if you could give maybe additional color on the magnitude for mulling that are benign.
And if not, if you could also maybe discuss how you're thinking about some of those pressures, if they're maybe more temporary or if you think that they're more permanent or and maybe the total addressable market that you've previously discussed maybe needs to come down a bit?
Yes. I mean, I don't think we're going to get any specific percentage growth rates in the hysterectomy here, but I think we were on a certain trajectory I think through 2012 and then that was a noticeable change in the growth rate in Q1 that was continued out into Q2. And when we look at our guidance, I think we're projecting out our growth rates at the at that lower trend.
Yes. And as far as the addressable market, our again, what we have created is really a construct for the way we think about the procedures that we can access. We talk about in the case of DVH, it started with the complex, beginning with malignant endometrial cervical cancers, etcetera. And then then into the complex benign and we ultimately are going after what is open surgery. There may be some intersection between laparoscopic and so on, but really the primary target.
We still stand by that. We believe that that is our target market But what we have really realized is that as you get to the back half of these adoption curves, accessing those procedures with the same approach as you did on the front half of it is difficult. In other words, they don't consolidate the same way at the same pace. So, we feel strongly about the opportunity still being there and fruitful, but the timing of it on the back end is going to be difficult to predict and there in lies, the challenge that you saw in the 1st couple of quarters and the effect that it has on systems.
Thanks. Thank you. Very helpful. And kind of thinking more on the DvH side also, will the DvH outlook maybe impact any hiring that's going on on the procedure side for general surgery or maybe affect the balance of just reps that you have in access in both areas?
As you know, as we think about opportunity, we look at it in terms of procedure growth regionally. So we look out at U. S. And the various and see what opportunity and penetration levels look like and they're non uniform. It's not that the whole country is all at the same level of adoption.
And as adoption, is deep in some areas for gynecology, that frees resources. To pursue general surgery and other things. And so that's really how we're directing our sales force.
And then just one quick follow-up on the buyback authorization from March. I was just wondering if you could give any additional color on your thoughts towards the capital deployment and maybe timing.
So, it'll be consistent with what we've said in the past. I mean, we'll look for the right opportunity to buy back shares. So looking for discontinuities in the stock price from what from the market. And, we have it authorized and we intend to use it appropriately.
Thank you very much.
And our next question is from the line of Tycho Peterson with JPMorgan. Please go ahead.
Hey, thanks for taking the question. I guess first one just on kind of the general roadmap here for general surge Can you talk a little bit about how sustainable you think the demand you're seeing in COLI is right now? Are you seeing centers trial and then either ramp up or what's the dynamic like there? And then can you also talk on bariatric and maybe some of these other opportunities in general surgery beyond the choline LAR APR?
On, on, single cyclosisectomy, we've, seen a good stick rate in, in some ways, a better stick rate than, past procedures in terms of, early experiences. And we've seen, great growth out of some centers. One of the exciting things about single cycle cystectomy is that number 1, it's a procedure where surgeons can see high volume. And so when they move, they get a lot of experience quickly. So the early part of that experience has been good.
Having said that, there are absolutely some surgeons and there are absolutely some institutions, who will not participate. There are some folks who, believe in the value proposition and see the benefits it's bringing and bringing them into patients. We've had some centers have great growth, and their admissions. But there are some who, who, who are on the sidelines and may on the sidelines. So I think it's going to, split the field for some time.
How far it penetrates and how long I think that remains to be seen. I think there's a segment of patients that value it. I think there's segment of surgeons who value it and who are who are gaining experience rapidly, but trying to call where the end is, is, not something we can do.
And with respect to the broader category that you outlined, I think there's really there's really two things to think about. Two ways to think about it. 1 is the absolute contribution of the individual procedure. So for example, on a distal pancreatec me or on a liver procedure or spleen procedure, esophageal, they're going to contribute the form of INA, but really the hidden power there is the combination of strength from the surgeons that are performing a lot of the benign operation with the Tech to me, collectively getting together into the system purchasing, suite or decision, it is also powerful. So we don't really per se value them as 1 for 1.
I think the broader you go between malignant and and cancer, I should say malignant and benign, the more strength you see in terms of placing systems out of that particular vertical, which we saw in gynecology and we saw in neurology as well.
Tycho, we'll give you one last follow-up here.
Just on Japan, can you talk about how the growth trajectory is going to change in the absence of the new procedures? And, and I mean, you alluded to the fact they're looking for Japan So you probably won't get the reimbursement code, but is that a definitive decision at this point that you won't get it?
It is not definitive, but the conversation is ongoing in. Our statements. We think that broad approvals across multiple procedures are unlikely. I think the I can describe the process what the the growth rate looks like, I think, is hard to predict. Process wise, we will submit data.
I will, for the surgical societies, they will, in turn, work with MHLW. MHLW may require them to solicit and collect data in Japan that may involve a partial reimbursement for a certain number of centers. And if so, then that will start the of data collection for a group of hospitals in Japan. How many and how many procedures concurrently, we don't have resolution on yet, but I said before, as we get closer to it, we'll share it with you. Okay.
That was our last question. I'd like to close with, a letter we received this week from a surgeon and a medical director at 1 of the U. S. Academic centers. We talk about our finances and cash flow and so on, but sort of takes us back to what the value of our products is.
And so this came from a surgeon and medical director. The work you're doing is touching patient lives. It's healing them and getting them better. You cannot put a price on curing someone of their cancer and doing with minimal change to their life. It's priceless.
Let that inspire you to go ahead and continue the innovation to lead surgery into the future Patients are your partners in this endeavor. Sure. Everything can be refined and everything can be improved, but you only get one chance sometimes to cure someone of their cancer. Technology has given me a step up in that pursuit. Companies that help us change patients' lives will survive and prosper.
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.
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT and T Executive Teleconference Service. You may now disconnect.