Ladies and gentlemen, thank you for standing by. Welcome to the Intuitive Surgical Q3 2012 earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. Should you require assistance during this call, you may press star and then zero, and an operator will assist you offline. As a reminder, today's teleconference is being recorded. At this time, we would like to turn the conference call over to your host, Senior Director of Finance, Mr. Calvin Darling. Please go ahead, sir.
Thank you. Good afternoon. Welcome to Intuitive Surgical's third quarter conference call. With me today, we have Gary Guthart, our President and CEO, Marshall Mohr, our Chief Financial Officer, and Alex Sukitch, our Vice President of Strategic Planning. 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. 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 Intuitive Archives on the Audio Archives 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 highlights of our third quarter's results, as described in our press release announced earlier today, followed by a question and answer session. Gary will present the quarter's business and operational highlights. Marshall will provide a review of our third-quarter financial results. Alex will discuss marketing and clinical highlights. I'll provide an update to our financial forecast for 2012. Finally, we will host a question and answer session. With that, I'll turn it over to Gary.
Thank you for joining us today. The third quarter highlighted both market strengths and headwinds. Our procedure performance came in below our expectations, driven by challenging conditions in Europe and changes in prostate cancer detection and treatment. On the positive side, acceptance of da Vinci surgery in general and gynecologic surgery continues to grow in complex cancer procedures, benign procedures, and in single-port robotic surgery. In the third quarter, procedure growth was challenged by continuing weakness in Europe and acceleration in the decline of our U.S. da Vinci prostatectomies. The prostatectomy decline appears to be driven by a combination of the U.S. Preventive Services Task Force recommendation against PSA testing and a change in treatment recommendations for low-risk prostate cancer away from definitive treatment.
European procedure weakness appears to be driven by three underlying conditions: broad economic pressure in Europe, sentiment behind the PSA testing recommendation from the U.S. reflecting into Europe, and the need for increased depth in our commercial organization. As we have mentioned on prior calls, we expect economic pressure in Europe to persist for the near future. We have been investing in our European commercial organization over the past couple of quarters and anticipate doing so for the next several. Moving to general surgery, we experienced continued strong growth, which was multifaceted, including growth in colon and rectal surgery for cancers, as well as cholecystectomy, the latter following the introduction of Single-Site earlier in the year. Gynecology performance was solid, and like general surgery, gynecology growth was broad-based, including hysterectomy, sacrocolpopexy, and myomectomy. Alex will provide additional procedure commentary later in the call.
In Japan, system sales and procedure performance have both continued to grow, led by dVP. Two da Vinci training centers have opened this year, one at Fujita Health and one at Tokyo Medical University, to increase in-country capacity for training Japanese surgeons. Turning to our operating performance for the third quarter. We sold 155 da Vinci Surgical Systems, up from 133 during the third quarter of last year. Procedures grew approximately 22% over the third quarter of 2011. Instrument and accessory revenue was $218 million, up 24% over Q3 2011. Total revenue was $538 million, up 20% over last year. Total recurring revenue grew to $306 million, up 24% from prior year and comprising 57% of total revenue. We generated an operating profit of $259 million before non-cash stock option expense, up 21% from the third quarter of last year and representing 48% of Q3 revenue.
Net income was $183 million, up 50% over last year. We ended the quarter with $2,701 million in cash and investments, up $70 million from last quarter. Turning to recently launched products and those in development. In the third quarter, we continued to focus on our launches of Single-Site for cholecystectomy and Vessel Sealer. This quarter, we submitted a 510(k) for Single-Site instruments and indications for use in benign hysterectomy and supracervical hysterectomy. We have received FDA's questions and are encouraged by the conversation for this extension of Single-Site. We will work over the next few months to gather the data they have requested. We mentioned on our last call that we expect applications for the da Vinci Vessel Sealer to be centered on general surgery and gynecologic procedures. Uptake and customer response to the Vessel Sealer has been positive in both of these disciplines.
Lastly, with regard to our da Vinci stapler, we have submitted our responses to FDA and believe that we have answered their questions. We are awaiting their response. As we enter new surgical markets and drive into new product arenas, we continue to invest in building our team, in expanding partnerships, and in acquiring technology that can make a difference to robotic surgery. Given the uptake of da Vinci in general surgery, we expect to increase our sales force for emerging general surgery procedures and to increase customer training capacity. Furthermore, we plan to continue investment in our sales and marketing team in Europe and our overall organization in Japan. This quarter, we added 92 people to our team, predominantly in sales, manufacturing, and R&D, bringing our total team to 2,192 employees. I'll now pass the time over to Marshall, our Chief Financial Officer.
Thank you, Gary. Our third quarter revenue was $538 million, up 20% compared with $447 million for the third quarter of 2011, and up slightly compared to the $536 million last quarter. Third quarter revenues by product category were as follows. Third quarter instrument accessory revenue was $218 million, up 24% compared with $176 million for the third quarter of 2011, and down 3% compared with $224 million in the second quarter of 2012. The year-over-year increase in I&A was driven by procedure growth of approximately 22% in sales of our new instrument and accessory products, including Single-Site, Vessel Sealer, and Firefly. The year-over-year procedure growth was led by U.S. gynecologic procedures and U.S. general surgery growth, partially offset by lower growth in Europe and a decrease in U.S. DVPs. Third quarter 2012 U.S. DVP procedures decreased 20% compared to the prior year.
The decrease in I&A revenue compared to last quarter was primarily driven by the timing of stocking and distributor orders. Instrument and accessory revenue realized per procedure, including initial stocking orders, was approximately $1,980 per procedure, which is higher than the $1,950 realized in the third quarter of 2011, and lower than the $2,020 realized in the second quarter of 2012. The sequential decrease was driven by the timing of instrument and accessory stocking orders associated with new system sales and the timing of distributor orders. Third quarter 2012 systems revenue of $232 million increased 17% compared with $199 million for the third quarter of 2011, and increased 1% compared with $229 million for the second quarter of 2012. We sold 155 systems in the third quarter of 2012, compared with 133 systems in the third quarter of 2011, and 150 systems in the second quarter of 2012.
Our third quarter average sales price per system was $1.48 million, an increase from the $1.46 million realized in the third quarter of 2011, and a decrease compared to the $1.53 million realized in the second quarter. ASPs include all da Vinci models, all simulators, and Firefly when configured with a system, and exclude upgrades. The decrease in ASPs compared with the second quarter of 2012 was driven by a lower proportion of dual console and simulator configurations and lower revenue recognized on euro-denominated sales. We sold 87 simulators during the quarter, mostly in conjunction with new system sales, compared with 121 last quarter. We sold 20 dual console systems compared to 28 in the second quarter. 34 of our third quarter 2012 system sales involved trade-ins, comprised of 26 da Vinci Ss and eight standard models.
35 of our second quarter 2012 system sales involved trade-ins, comprised of 23 da Vinci Ss and 12 standard models. ASPs will fluctuate quarter-to-quarter based on product, customer, and trade-in mix, as well as foreign exchange rates on direct sales to foreign customers. Service revenue increased to $88 million, up 22% compared with $72 million last year, and up 5% compared with $83 million last quarter. The growth in service revenue was primarily driven by a larger system install base. Total third quarter recurring revenue, comprised of instrument, accessory, and service revenue, increased to $306 million, up 24% compared with the third quarter of 2011, and roughly equal to the second quarter of 2012. Recurring revenue represented 57% of total third quarter revenue, compared with 55% in the third quarter last year and 57% last quarter. International results were as follows.
Third quarter revenue outside the U.S. was $115 million, up 22% compared with revenue of $94 million in the third quarter of 2011, and up 14% compared with revenue of $101 million in the second quarter of 2012. Our international revenue growth was primarily driven by higher system sales into Japan. 16 da Vinci S systems were sold into Japan during the third quarter of 2012, compared to six during the third quarter of 2011 and seven during the second quarter of 2012. International instrument accessory revenue grew approximately 9% year-over-year and decreased 17% sequentially. The changes in instrument accessory revenue roughly followed the procedure volumes and reflect summer seasonality, a difficult European economic environment, and distributor buying patterns. We sold 41 systems outside the United States, compared with 34 in the third quarter of 2011, and 26 last quarter, reflecting higher Japanese replacements.
We sold 13 systems in Europe this quarter, compared with 18 in the third quarter of 2011 and 13 last quarter. The decline in year-over-year European system sales reflects the difficult macroeconomic environment. Alex will provide additional details of international system sales. Moving on to the remainder of the P&L. Gross margin in the third quarter was 72.5%, compared with 72.9% during the third quarter of 2011 and 72% last quarter. Our slightly higher gross margin percentage compared to last quarter resulted primarily from cost improvements made to our new products. Third quarter 2012 operating expenses of $179 million were up 22% compared with the third quarter of 2011, and up 11% compared with the second quarter of 2012. Our higher third quarter 2012 operating expenses resulted in large part from the timing of non-cash stock option expenses.
Beginning in 2012, we changed our stock option granting pattern so that employees are now granted options at both February 15th and August 15th, compared with only at February 15th in prior years. Although approximately the same number of options were granted in each year, we recognized a higher proportion of stock option expense in the third quarter of 2012 relative to the first two quarters of 2012 and the third quarter of 2011. On a year-to-date basis, the stock option expense in 2012 is comparable to 2011. Our higher third quarter 2012 operating expenses also reflect higher R&D project expenses and increased headcount. We added 92 employees in the quarter, including 44 employees in our commercial operations and 36 employees in product operations.
Third quarter 2012 operating income was $211 million, or 39% of sales compared with $179 million or 40% of sales for the third quarter of 2011, and $225 million or 42% of sales for the second quarter of 2012. Third quarter 2012 operating income reflected $47 million of non-cash stock compensation expense compared with $35 million for the third quarter of 2011, and $33 million last quarter. Our effective tax rate for the third quarter was 15%, compared with 32% for the third quarter of 2011 and 32% last quarter. Our lower third quarter tax rate resulted from the release of reserves specific to tax years where the statute of limitations has now expired, and adjustments to our 2011 provision, as we have now finalized and filed the related returns. Excluding one-time benefits, our third quarter tax provision would have been approximately $38 million higher.
Our net income was $183 million or $4.46 per share, compared with $122 million or $3.05 per share for the third quarter of 2011, and $155 million or $3.75 per share for the second quarter of 2012. Excluding the one-time tax benefits, our third quarter net income would have been $145 million or $3.54 per share. Let me quickly summarize our results for the first nine months of 2012. Procedures grew by 25%. Total revenue was $1,570 million, up 25%, compared with $1,261 million last year. The revenue increase included recurring revenue growth of 27% and an increase in systems revenue of 21%. Year-to-date operating income was $630 million, up 27%, compared with $495 million last year. Operating income included $115 million of stock-based compensation charges, compared with $102 million in 2011.
Net income was $482 million, or $11.72 per share, compared with $344 million or $8.55 per share last year. Year-to-date cash flow from operations was $597 million, compared with $464 million last year. Now moving to the balance sheet. We ended the third quarter with cash and investments of $2.7 billion, up $70 million compared with June 30th, 2012. The increase was driven by $246 million of cash flows from operations, plus $38 million from the exercise of stock options, partially offset by $170 million in stock buybacks and $17 million of capital and IP purchases. We bought back 343,000 shares at an average price of $495 per share, and we have $383 million board authorized buybacks remaining. With that, I'd like to turn it over to Alex, who'll go over our sales, marketing, clinical highlights.
Thank you, Marshall. During the third quarter, we sold 155 da Vinci systems, 114 in the U.S., 13 into Europe and 28 into rest of world markets. As part of the 155 system sales, eight standard da Vinci systems and 26 da Vinci S systems were traded in for credit against sales for new da Vinci Si systems. We had a net 121 system additions to the installed base during the quarter, which brings to 2,462 the cumulative number of da Vinci systems worldwide. 1,789 in the U.S., 400 in Europe and 273 in rest of world markets. 79 of the 155 systems installed during the quarter represented repeat system sales to existing customers. In total, 139 of the 155 systems sold represented da Vinci Si or Si-e systems, which included 20 dual console systems.
The 41 system sales internationally included 16 into Japan, four into Australia and three into Belgium. The 16 systems placed in Japan establishes it as our second-largest da Vinci market worldwide with 70 placements. With the exception of Europe, our da Vinci system performance remained very solid. Clinically, we did not meet our procedure expectations for the quarter, achieving year-over-year procedure growth of approximately 22%. The shortfall can be attributed to two factors, a larger than expected decline in our U.S. dVP business and procedure underperformance in Europe. The pressure we face within our U.S. dVP business can be traced to both conservative PSA screening protocols and a change in treatment recommendations for low-risk cancer patients away from definitive treatment. Our EU procedure business shortfall is a bit more complex to define, as it appears to be both macroeconomic and structural in nature, as Gary stated.
With the exception of these two areas, procedure performance was solid. Growth during the quarter was led by the categories of general surgery and GYN. Procedures, which included da Vinci hysterectomy, cholecystectomy, colon and rectal resections, lobectomy, endometriosis resections, sacrocolpopexy, myomectomy, mitral valve repair, and nephrectomy, all displayed solid growth. Recently released new products continue to do well, most notably Single-Site. Early customer feedback has been positive, and our initial sales have been strong. Clinical awareness for da Vinci Single-Site cholecystectomy was very apparent at the recent American College of Surgeons conference held in Chicago. The clinical presentations that were delivered drew large audiences, with both U.S. and international surgeons participating. Through the third quarter, we sold Single-Site instrument and accessory kits to over 350 U.S. customers.
Our recently launched Vessel Sealer product was also favorably received at this conference, with most of the interest coming from colorectal and advanced general surgery clinicians. This product is performing well in the field, and the feature set, specifically the articulated wrist design, appears to be satisfying a strong market need. The customer adoption for both da Vinci Simulator and Firefly continues to expand, with 87 customers purchasing a da Vinci Simulator and 64 customers purchasing Firefly systems as part of their initial system purchases this quarter. During the quarter, several hundred robotic abstracts and papers representing a variety of surgical specialties were published within various peer-reviewed journals. Quarterly conferences produced several live da Vinci procedure transmissions, post-graduate robotic courses, podium presentations, and clinical poster sessions. Much of our early general surgery success has been within procedures that are deemed difficult to perform.
Near the top of that category is low rectal cancer surgery. In a recent edition of the Annals of Surgery, a prospective study entitled "Impact of Robotic Surgery on Sexual and Urinary Functions After Fully Robotic Nerve-Sparing Total Mesorectal Excision for Rectal Cancer," described the results of 74 da Vinci rectal resections completed at the European Institute of Oncology in Milan, Italy. Urinary and sexual dysfunctions are recognized as serious complications within rectal surgery but have yet to be reported on robotically, which was the aim of this study. 74 patients undergoing fully robotic resection for rectal cancer were prospectively included in the study. Urinary and sexual dysfunctions affecting quality of life were assessed with specific self-administered questionnaires in all patients undergoing robotic total mesorectal excision, and the results were calculated using validated scoring systems and statistically analyzed.
The analysis showed that the sexual function and general sexual satisfaction initially decreased one month post-surgery for erectile function and general satisfaction in men and for arousal and general satisfaction, respectively, in women. Subsequent testing showed that both parameters increased progressively, and at 12 months post-surgery, the values were comparable to pre-surgical baselines. Concerning urinary function, the grade of incontinence measured one year after intervention was consistent to pre-surgical measurements in both sexes. The study conclusion was, and I quote, "Robotic total mesorectal excision allows for preservation of urinary and sexual functions." Close quote. The authors went on to say that this is most likely due to their ability to perform superior wristed movements, fine dissection, coupled with a stable, magnified 3D view when working around the inferior hypogastric plexus.
Consistent with the theme of difficult to perform general surgical procedures is a paper out of the University of Pittsburgh Medical Center, which recently published in the Annals of Surgery. The paper entitled "Robot-Assisted Minimally Invasive Distal Pancreatectomy Is Superior to Laparoscopic Technique," described the technical limitations of the laparoscopic approach and how it may limit patient eligibility and require conversion to open or hand-assist surgery to maintain patient safety. The study compared the perioperative outcomes, 90-day morbidity, and mortality of their first 30 robotic distal pancreatectomies to a historical control of 94 consecutive laparoscopic distal pancreatectomies. They reported that the postoperative length of hospital stay and rates of pancreatic fistula, blood transfusions, and readmissions were not statistically different between the groups.
For patients in the robotic group, the conversion rate to open surgery was zero, as compared to the lap group of 16%, which significantly reduced the risk of excessive blood loss. Also of note was that more pancreatic ductal adenocarcinomas were approached robotically than laparoscopically, 43% compared to 15%. Oncologic outcomes in these cases were superior for the robotic-assisted group, with higher rates of margin-negative resection and improved lymph node yields for both benign and malignant lesions.
The author's conclusion, I quote, "Robotic distal pancreatectomies were equivalent to laparoscopic distal pancreatectomies in nearly all measurements of outcome and safety but significantly reduced the risk of conversion to open resection, despite a statistically greater probability of malignancy in the robotic cohort." We concluded that robotic assistance may broaden indications for minimally invasive pancreatectomy." From time to time, we'll read critical reviews relating to the cost of robotic surgery, where the underlying comparator is usually laparoscopic or laparoscopically-assisted surgery. Some comparisons have lumped several procedures into the same analysis, labeling them all as robotic, while others have looked at each procedure individually. While it would be presumptuous to dismiss all previous analysis as incorrect, it would be accurate to point out that every procedure has its own economic profile and can only be compared accordingly.
In a recent edition of the "Journal of Endourology," a study entitled, "Cost Analysis of Robotic-Assisted versus Hand-Assisted Laparoscopic Partial Nephrectomy," reviewed the economics for one of our largest and most successful procedures, partial nephrectomy. The aim of the study was to perform a cost comparison of three approaches to partial nephrectomy. Those being open partial nephrectomy, hand-assisted laparoscopic partial nephrectomy, and robotic partial nephrectomy. The retrospective analysis evaluated cost and clinical data from 89 patients who had undergone the three surgical approaches. Baseline demographic data, patient comorbidities, nephrometry score, and perioperative outcomes were assessed. Cost and sub-cost from the operating room and hospital were evaluated using nonparametric statistical analysis. Since the patient comorbidities and tumor characteristics were different in the open partial nephrectomy cohort, it was excluded from the cost comparison, thus allowing for an apples-to-apples comparison between hand-assist laparoscopic partial nephrectomy and robotic partial nephrectomy.
The study found no difference in overall cost between hand-assist and robotic partial nephrectomy. OR costs were higher for the robotic partial nephrectomy because of the higher robotic capital and reusable equipment cost that outweighed the cost of disposable product for the hand-assist laparoscopic partial nephrectomy group. OR time-related costs were similar between the groups. Robotic partial nephrectomy patients had a shorter length of stay, which decreased post-operative hospital costs. They concluded by saying, and I quote, "No difference in overall cost was found between robotic partial nephrectomy and hand-assist laparoscopic partial nephrectomy. Robot allocation, OR equipment use, and length of stay are important determinants of total cost. Further study regarding recovery and quality of life may reveal added benefits to minimally invasive approach and increase use in nephron-sparing surgery." This concludes my comments, and I'll now turn the time over to Calvin.
Thank you, Alex. I will be providing you with an update to our financial forecast for 2012, including procedures, revenues, and other elements of the income statement on a GAAP basis. I will also provide estimates of significant non-cash expenses to provide you with visibility into our expected future cash flows. Starting with procedures. On our last call, we forecast procedures to grow approximately 25%-27% from the base of approximately 360,000 procedures performed in 2011. Three quarters through 2012, our procedure growth stands at approximately 25%. During the third quarter, we saw further pressure on our U.S. dVP volumes and upon our overall European procedure business. As a result, we now forecast full year 2012 da Vinci procedure volume to grow approximately 24% above our 2011 total. Moving on to revenues.
On our last call, we forecast 2012 revenues to grow between 20% and 23% above our 2011 revenue of $1.76 billion. As we enter the fourth quarter, we are now able to refine our guidance to the upper half of this range. Turning to non-cash expenses. We continue to expect non-cash stock compensation to fall within a range of between $152 million and $156 million for the year. Through three quarters of this year, $115 million of stock compensation has been recognized, and all of the quarterly timing differences related to our revised 2012 employee grant process have cycled through. The Q4 portion of total 2012 option expense should follow historical patterns. Turning to other income. On our last call, we forecast operating income to fall within a range of between 39% and 40% of net revenue.
Based upon the impact of recent material cost reductions and expense timing, we expect operating income to come in at the high end of the range at about 40% for the year. We continue to expect other income, which is mainly comprised of interest income, to total between $16 million and $17 million for the year. With regard to income tax, our Q3 reported tax rate of 15% reflected a discrete benefit related to releasing reserves for tax years where the statutes of limitations have expired. This discrete item favorably impacted Q3 but will not impact Q4. We continue to expect the Q4 tax rate to be approximately 31% of pre-tax income, which does not assume any reinstatement of the R&D tax credit. Going forward into 2013, we expect to see a gradual reduction in rate to a range of between 29% and 31%.
Looking into 2013, the Medical Device Excise Tax is scheduled to become effective on January 1st.
Based upon our 2012 regional and product mix, we would estimate the tax to equate to roughly 1.1% of our net consolidated revenue. We would plan to record the expense as a component of cost of sales. We estimate that our share counts for calculating EPS in Q4 2012 will be roughly flat to Q3 at approximately 41.1 million shares. That concludes our prepared remarks. We will now open the call to your questions.
Thank you very much. Ladies and gentlemen, if you do wish to ask a question, please press star and then one on your touchtone phone. You will hear a tone indicating that you have been placed in queue, and you may remove yourself from the queue at any time by pressing the pound key. Once again, if you have questions, you may press star followed by one at this time. We'll take our first question in queue from the line of David Lewis with Morgan Stanley. Please go ahead.
Good afternoon. Gary or Alex, or anyone for that matter, just thinking about the third quarter kind of from a macro perspective, it looks like the third quarter is a lot like the second quarter. We saw significant Japan strength and U.S. de novo system strength offset by Europe. We saw dVP U.S. and OUS weakness offset obviously by DVH as well, some general surgery improvements. Do you sort of any sense the fourth quarter guidance sort of implies stable trends on procedures with the third quarter? Do you have any sense the balance of these positive and negative forces, how many quarters you think this could persist?
Hi, Dave. Gary. It's pretty hard to call U.S. prostatectomy. That's, as you know, more an issue of medical management and watchful waiting than it is a change in da Vinci surgery versus other kinds of surgery. We don't have a crystal ball as to where that procedure's going to go over time. The data we look at is probably pretty similar to the data that you look at in terms of where PSA testing is taking us. On the upside, I think the things that are growing, we can measure good interest from our customers. We can measure sales force activity. That tends to be a little bit more in our camp versus out in the world. On the downside, pretty tough to call.
On the upside, we can look at the activities that we can influence and feel pretty confident about the things that we can do.
Gary, just following up on one of those key catalysts, which obviously is single incision. I don't know if I caught it on the call, but could you sort of confirm whether SILS has sort of moved into your third largest procedure for the company?
We have talked about before is that cholecystectomy as a total procedure of all types, multi-port and Single -Site together combined is the third. Single port on its own is not.
It's important to note that as a reminder, of course, it's a distant third. You have hysterectomy, you have prostatectomy, and you have cholecystectomy. You have other procedures that are sort of in the general neighborhood procedures such as partial nephrectomy and sacrocolpopexy and others. It is indeed third, but as a reminder, it is a distant third.
There's one more difference that's worth pointing out is that unlike prostatectomy and hysterectomy, cholecystectomy can be an entry point into a clinical pathway for somebody who wants to end somewhere else. Those procedures can be a little more volatile.
Gary, just one quick one. I apologize for two, three questions. You talked about an increase in spending for both U.S. general surgery and potentially, I would imagine if you're going to go after Europe and change structurally how you're selling, that it could be increased expense. Could you help us sort of frame those relative expenses versus other very significant sales investments you've made, perhaps the 2010 significant investment in the U.S.?
Yeah, this won't quite be the same scale. It's a little bit more targeted. In Europe, it's really filling open headcount in the field and investing a little bit more in the back office in terms of clinical trials and other types of marketing investments, economic analyses, and so on. That's kind of what the European side looks like. On the general surgery side, it'll be general surgery-focused expertise and depth.
Great. Thank you very much.
Thanks, David.
Thank you. Our next question in queue will come from the line of Ben Andrew with William Blair. Please go ahead.
Good afternoon, guys. Gary, can you break down the procedure growth for us between the U.S., Europe, and ROW?
I'll turn it to Calvin.
Right. The procedure growth
I'll find the Excuse me. Go ahead.
Total procedure growth year-over-year was 22%. What we said was that the procedure growth outside of the U.S. year-over-year was 9%.
Was the U.S. close to around 30%? Wouldn't be that high.
Yeah, you could probably back into it on your models there. Again, worldwide, we're looking at about 22% for Q3, 25% on a year-to-date basis. Included in those numbers would be a decline in the U.S. DVP volume that Marshall mentioned of 20% on a quarter basis and 14% on a year-to-date basis. I think kind of what it implies is that if the U.S. stayed flat from year-to-year, the worldwide growth would have been about 26% in Q3 and 28% on a year-to-date basis.
Right. I guess what I'm getting at is, DVP down 20% in the U.S. If you were on a base of, say, 75,000 cases for 2011, if that's down 20% full year, you're talking something in the low 60,000 cases, -15,000 at the most, 12 to 15. If BVH has grown 60 and chole's adding 10, and all the other stuff is adding another 30, 40, 50, you end up with robust procedure growth in the United States. The real evidence of a problem is obviously Europe, which is macro, and some concern about obviously DVP. At some point, DVP has to bottom.
The question becomes, is there sort of a structural level of prostatectomy that we can think about where this will shake out over the course of, call it 6, 8 quarters, and we'll end up at maybe a rate of 50,000 DVPs in the U.S.? Does that make sense?
The flow of your argument makes sense. I think that Calvin may argue with you about some of the numbers, just make sure that you time them out right. Generally speaking, the flow makes sense. Calling that number of what the baseline number of prostatectomies in the U.S. is hard to do. We've seen some analysis out there that's probably similar to the kinds of analysis that you've seen, and I think we're just going to have to see where that base establishes itself. I think there are a couple of things that argue for a base. One of them is that prostate cancer, the highest cure rate will come from surgery, not from medical management. The other thing that we know is that over time, watchful waiting patients, some fraction of them, usually a majority of them, will convert to definitive treatment over time.
I think both of those things will argue for finding a floor, and what exactly that floor level is, we're just going to have to wait and see.
I think, Ben, the central theme of your thesis there is accurate, that is, if you look outside of those two areas, U.S. dVP and the European weakness, the remainder of the procedure business was very strong year-to-date and for the quarter.
I'll sneak in one more as well. If you look at Japan, we've done some calls recently, it sounds as though the Japanese government has authorized funding for about 150 systems. Our sources were sort of indicating that that could come into play by the end of 2013, and certainly 16 in the third quarter goes a long way towards that. Is that consistent with sustaining this sort of a 2016 or pretty substantial rate, and is that a reasonable target for an installed base going out of 2013? Thanks.
Yeah, I don't think we're ready to size the total market opportunity. I think that system sales by themselves are going to be lumpy quarter to quarter. I would expect some lumpiness. Long term, we're really excited about the Japanese market opportunity. The opinion leaders, the people we talk to on the ground are excited about robotic surgery. We think it will build. That's another area of investment. Again, kind of calling the specifics is not something we're prepared to do.
Yeah, I think there's just one caveat that's worth mentioning is, as a reminder, we have one national reimbursement, which is prostatectomy. There are ways for it, as evidenced by the activities prior to that national reimbursement, that hospitals can go through, let's call them, a one-off basis or a checklist basis where they can apply for certain levels of reimbursement on other procedures. From a national perspective, we are really in this environment where we are working within prostatectomy primarily, and then there may be a few other procedures that get worked in on a one-off basis. That's the environment we're in for a little while.
Yeah, the next scheduled pass at procedures being added to the reimbursement list would be April of 2014 for a general system-wide reimbursement.
Based on the way that MHLW runs already.
Okay. Thank you.
Thank you. Our next question in queue will come from the line of Tycho Peterson with JPMorgan. Please go ahead.
Hey, thanks for taking the question. First question maybe on chole. Wondering if you could just give us a little bit of a breakdown as to how much of the chole uptake is Single-Site versus multi-arm, and are you starting to see chole drive system placements?
I think we're not prepared to break out what that mix is. Honestly, I think the important message here is to really look at this structurally. You have general surgeons who don't have a lot of robotic experience going in, they are going to work through various procedures to some level to make sure that they have a good understanding of the X's and O's of the system. Then what is today a general multi-port cholecystectomy, the expectation is that those move into Single-Site. There will be a relationship, and I think trying to call it at any given time, I don't know how meaningful that is. Collectively, as we said, it is the third largest procedure.
I think the way we would categorize the importance of procedures as they relate to new system placements, it's hard to tease out what is cholecystectomy and what is general surgery. To Gary's earlier comments, sometimes cholecystectomy is not the endpoint which the general surgeons are trying to get to. It becomes one of many procedures that they see in their armamentarium over time. It's really hard to say what evidence we have at this point that it's chole specific that is driving the system. There is definite evidence that general surgeons are becoming more and more important to system placements.
In your commentary, you talked about additional indications for Single-Site, benign hysterectomy, and nephrectomy. Can you just talk about how you think about those opportunities and then how much you want to push through Single-Site versus at some point it's logical to introduce a new system?
On the first side, we think that hysterectomy is a patient population that sets up well for a single-port robotic approach. We've gotten good feedback from customers in Europe and in the U.S. that that's something worth pursuing. That's been our next procedure, that and hysterectomy. We'll see in terms of what happens next after Single-Site, we'll continue to invest in instrumentation that makes sense in that platform and in indications. I don't think that'll be the last stopping point in terms of an indication for Single-Site as we go forward. As always, we continue to invest in technologies that can make things more capable, we invest in tissue interaction technologies, we invest in patient access, smaller ports, and different ways to get into the body. With regard to Single-Site, we'll continue to do that.
I think the way we think about, for example, the Single-Site in GYN or benign hysterectomy is if you think about the way we've always described the market, there is a level of complexity that was inherent in our target for hysterectomy, both benign, complex benign as well as malignant. There's a sub-segment of the market that is by definition, if you will, relatively less complex or simple. It seems like a very good area for us to apply some resources and see if this is indeed something we can access with new technology, which is the approach.
Okay. Just one last one, because I'm sure we'll all get the question. In terms of the stapler, based on your interactions with FDA, are you still thinking this could come by year-end, or should we think about stages next year? Just how do we think about timing there?
It's always hard to predict exactly timing on these things, so I won't. We've had a healthy conversation with FDA. We've understood their questions. I think that we've provided answers that make sense, we'll let you know what happens thereafter.
Okay, thank you.
Thank you very much. Our next question in queue will come from the line of Bob Hopkins with Bank of America Merrill Lynch. Please go ahead.
Oh, hi, guys. Thanks so much for taking the questions. First question is, it sounds like you're seeing a lot of good momentum in Japan. I'm wondering if you could just comment on what Japan contributed to either overall procedure growth in a quarter or to the 9% international growth.
Just in a broad brush, it's growing nicely off a very small base. In country, we're delighted with the growth rate. In terms of total contribution to the overall, it's probably not a material contribution at this point.
Okay. Just to go back to Europe, Gary, you talked about the fact that it's partly the macro environment and partly structural, which it sounds like you're working to address some of the structural issues, but I'm wondering if you could just give a little more detail on what those structural issues are. From my conversations with some European physicians, it sounds like 2 of the challenges over there are, 1, that in some countries there are per diem reimbursement systems, which maybe makes the length of stay reduction less valuable up front, but then also just the fact that there's less competition among hospitals. Are those kind of the 2 main structural issues, or is there something I'm missing there that you guys are working to address?
I think there are a couple things. 1 of the structural things is just open territories on our side and making sure we have the right number of salespeople in the various countries, and we can run that against internal metrics. It's a pretty simple one, and the solution there is to make sure that we're fully staffed. The second thing are more along the lines you've discussed, although I describe them a little bit differently. I think it is not really that a single-payer system is not capable or interested in adopting da Vinci surgery. We've seen Japan's single-payer system has been moving pretty quickly. Sweden is a single-payer system, has moved quickly. It isn't the act of being a single payer.
It's more making sure that the conversations with government-run hospitals around both economic value and clinical data are put into forms that they can accept, and we can match their timelines. You're absolutely right with regard to systems that are using per diem, that that's a real challenge for hospitals to adopt da Vinci surgery. We see per diem systems being challenged in favor of DRGs in a lot of different places, not only for da Vinci. I think the trend is away from per diem, not towards it. I don't see that as systemic across all of Europe, but really in pockets.
Okay, that's very helpful. Thanks.
Thank you. Our next question in queue will come from the line of Lawrence Keusch with Raymond James. Please go ahead.
Yeah. Hi, good afternoon. Just to pick up on that question, could you talk a little bit about perhaps where you are seeing some of the procedure pressures within Europe? Is it more directed at Southern Europe? Just really trying to get a sense of whether anything's changing out there.
You see capital pressure in Southern Europe, absolutely. Procedure pressure is a little bit less targeted directly with Southern versus Northern. It moves around a little bit. Go ahead.
If you looked at, and again, I think it almost takes even a little, perhaps a derivative deeper. If you looked at environments like public hospitals in France, let's say, versus clinics in France and/or private clinics in other parts of Europe, it becomes probably more akin to those comparisons than it does just individual countries. We've had strength in Germany over, not this particular quarter, but in the past 2 years, we've called out Germany as having a lot of strength. This is the first time we've called out Belgium in probably a year and a half. It seems like it's rotating through various countries, but it's probably more consistent with the public versus private.
Okay. That's helpful. Just 2 other quick ones. As you noted, the 9 hysterectomy and oophorectomy for Single-Site. In getting into those procedures, how dependent is it on the need for new instrumentation? If so, what might be the timing on that? Lastly, you utilized cash this quarter to buy back stock. You still have a lot. Again, if you could just remind us of the general uses of cash.
On the issue of Single-Site, as we've said before, we've just submitted and received our first round of questions from FDA on the extension of our indications for Single-Site into hysterectomy and oophorectomy. I think there that we have, as you know, good momentum in hysterectomy, and I think it goes into a set of surgeons who are interested in robotic surgery and towards a segment of the patient population that would be interested in cosmesis and return to full function. We're excited about that. I think it'll make some sense. We're in the early stages of our interactions with FDA. How long that will take, it's very tough to predict. We won't.
As far as the instruments, Larry, I would say, which is pretty consistent with the way we've approached new markets and new procedure targets, where we have a good base of instruments, but we're not exactly optimized for perfect performance, if you will, in terms of ease of use and having all of the right instruments. Think of it in terms of adding a few instruments rather than creating a whole new category of instruments. I think that's been consistent and will be consistent as we go into new procedure targets.
With regard to uses of cash, I'll turn that to Marshall.
We bought back 343,000 shares this quarter. We have 383 million still authorized by the board. We'll continue the program. We'll buy back stock when it makes sense. It's not an absolutely certain amount every day. Beyond that, the cash is there for investment back into the business over time, particularly if there were to be an extended or deepened economic issue on a macro basis, as well as for investment into IP as the opportunities come up.
Other technologies.
Yeah.
Okay, great. Thank you.
Thank you very much. Our next question in queue will come from David Roman with Goldman Sachs. Please go ahead.
Good afternoon, everyone. Thank you for taking the questions. I was hoping to focus a little bit on the spending side of the equation. Obviously, you had guided to the $20 million sequential uptick this quarter versus the second quarter. If I just look through the income statement, SG&A still being down as a percentage of sales year-over-year. If you take out the options grant this quarter, can you maybe talk about your spending priorities? It sounds like you have a lot on deck here in terms of investing in new procedure categories, trying to fend off the assault on dVP, rebuilding your Europe presence, yet SG&A is still growing slower than revenue. I have a follow-up.
Yeah. We talked just on the numbers side, then I'll hand it over. We guided towards about $20 million increase in operating expenses quarter-to-quarter. It came in closer to $17.5 million, a little bit less than that. I think it had a little bit to do with the timing here. We called out R&D projects last quarter. Some of those you're going to see probably spilling into future quarters. Then I think the timing on SG&A that you allude to, David, we're starting on some things that we thought we might have been a little further along here in Q3 in terms of building the organization and the training capacities and so on.
In terms of the numbers, I think you're going to see some growth in the OpEx going forward into Q4, and that's inherent in the 40% operating income guidance we gave.
I think we've laid out for you the things that we think are deserving of differential or additional investment. We've typically been thoughtful about how we invest, and we don't trend to mad dash one direction or another. We'll be building it out, but we'll build it out against plan.
Okay. Japan, which has obviously been very successful for you, particularly since you got the reimbursement in April. Can you maybe talk about the sort of sustainability of that business? You referenced, I think, in your prepared remarks that there was some spillover of the dVP concerns of the U.S. into Europe. Now obviously, Japan is at a much more nascent stage in its ramp, so you probably wouldn't see it at this point. Any concerns on that transpiring in Japan, and how would you think about growth in that business over the next 12 months or so?
On the dVP side, actually, the uptick has been significant in terms of dVP in Japan relative to the number of prostatectomies that they do. We do denominate it in prostatectomies based on what they've been doing there. We haven't heard a reflection of this set of concerns into Japan. It's not to say that it might not happen in the future. It might. In general, I think that Japanese surgeons have expressed interest in da Vinci for a pretty broad variety of procedures. Even were that to be pressured over time, I don't know that it would dampen enthusiasm for a long period for other procedures as we go.
Okay.
That said, quarter-to-quarter performance can be lumpy there.
Sure. Then maybe just one really quick clarification question. From an EPS perspective this quarter, the $446 you reported includes the tax benefit that you discussed. Are you pointing people to a non-GAAP number or the GAAP $446 in terms of the ongoing earnings number for the quarter?
We gave you the $446, which is the GAAP number, we also said that if you excluded that, we would have been at $354. We're trying to provide you with all the information so that you can do your own comparisons.
Okay. Thank you.
Thank you very much. Our next question in queue will come from the line of Jeremy LePape with Cantor Fitzgerald. Please go ahead.
Good afternoon. Thanks for taking my question. I wanted to come back to your comments on sales with simulators, Firefly, dual consoles. It seemed like sequentially those were down, even though total da Vinci sales were up sequentially. Is there anything to read into that? Are some customers looking at more de-featured units, or is that just a complete coincidence?
Yeah. It definitely trended down. I think on the Firefly side, though, it was pretty similar. We've been saying about the last three quarters that about half the U.S. systems have gone out with Firefly configuration, and that held true in Q3. As relates to the dual console and the simulator, those kind of go together in some respects as they're in large part training tools and applications. A slow downward trend there is something that we would have predicted internally here as maybe a fair number of sites have invested in these technologies for training, and then, as you know, a lot of the systems we sell now are to existing customers, and some of those existing customers already have simulators and dual consoles. It's maybe less obvious value in those situations. A downward trend there is probably something we would expect, but very gradual.
Okay. Quick follow-up on revenue per procedure. I heard the comments on timing of stocking distributor orders. Is this a run rate that we should be expecting now going forward? Obviously, it had been trending up with a lot of the new instruments, but with a lot of those now in there, is this more of a comfortable run rate?
Yeah. We've been seeing the run-up, as you say, in recent quarters due to the impact of the new products. What we've been saying, there are a lot of factors that can serve to move that metric up or down. In this particular quarter, as Marshall called out in his commentary, we saw some of the timing of those initial stocking orders with system sales and distributor orders kind of serve to drive it slightly down here. I'd say going forward, it could go up or down, depending. We also saw some of the procedure mix, right? The more Single-Site and benign hysterectomies have a lower revenue per procedure for us, kind of pushes it down. Again, I'd say going forward, it could probably go either way from where we are right now.
Okay. That's helpful. Thank you.
That was our last question. As we have said previously, while we focus on financial metrics such as revenues, profits, and cash flow during these conference calls, our organizational focus remains on increasing patient value by improving surgical outcomes and reducing surgical trauma. I hope the following experience from Susan of Ohio gives you some sense of what this means in the lives of our patients. Quote, "I was diagnosed in August of 2011 with adenocarcinoma. I am a mom of five, grandma of 11, and 52 years old. I quit smoking years ago. Wow. I had a lot to think about when, by God's grace, I was introduced to a super surgeon. At the time, he thought I would be a really great candidate for the da Vinci robotic-assisted surgery. I figured it sounded really great. We did the surgery in December of 2011.
At first, when I started reading about it on websites and talking with people, it sounded really scary. After reading testimonies like mine, I realized it was the only way to go. We removed the top lobe of my left lung in December of 2011. I was home in two days. The nurses at the hospital could not believe the type of surgery I'd had. Wow, how the robot changed my life. In no time, I was back to a normal life. My surgeon is one of the best around, and I am living proof. He saved my life, saved me from a grueling recovery, and saved me from a horrific scar. I had a few little holes and a small incision where they removed the lung. While they were in there, they took lymph nodes, which, by the way, are great.
No cancer and a 20% chance that this cancer comes back. If you're considering this type of surgery, I urge you to really think positively about this. Just absolutely amazing what modern medicine is all about. I would welcome the chance to have the surgery versus the old-fashioned way. Recovery was two weeks, and I was back to work in three. It's a miracle that they can do these things with a robot, but they do." End quote. Patients like these are our strongest advocates for da Vinci surgery and form the very foundation of our operating performance. We've built our company to take surgery beyond the limits of the human hand. 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 to improve surgery. We look forward to talking with you again in three months.
Thank you very much. Ladies and gentlemen, this conference call will be available for replay after 3:30 P.M. Pacific Time today running through October 16th, 2013, expiring at midnight. You may access the AT&T Executive Playback Service at any time by dialing 800-475-6701 and entering the access code of 259631. International parties may dial 320-365-3844. Once again, those phone numbers are 800-475-6701 and 320-365-3844 using the access code of 259631. That does conclude your conference call for today. We do thank you for your participation in reaching AT&T's executive teleconference. You may now disconnect.