Ladies and gentlemen, good afternoon. Thank you standing by, and welcome to the Intuitive Surgical Quarter 1 Earnings Conference Call. At this time, all lines are in a listen only mode. There'll be an opportunity for your questions and instructions to be given at that time. And as a reminder, this conference is being recorded.
I would now like to turn the conference over to our host, Director of Financial Planning, for Intuitive Surgical, Mr. Kelvin Darling. Please go ahead.
Thank you. Good afternoon, and welcome to Intuitive Surgical first quarter conference call. With me today, we 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 like to inform you that 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 investments in 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 intuitivesurgical.com on the audio archive section under our Investor Relations page. In addition, today's release has been posted to our website. Today's format will consist of providing you with highlights of our first 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 review our first quarter financial results. Alex will discuss provide you with an update to our financial forecast for 2011. And finally, we will host a question and answer session. With that, I will turn it over to Gary.
Thank you for joining us today. In this first quarter, our team is do well and we have had solid performance in procedures, system sales, and the financial results that follow. For 2011, we are focused on the following. The benefits of minimally invasive surgery in gynecology and urology, expanding robotic surgery and deepening our organizational capability Europe and Asia, crisp execution in our product development efforts, and enabling emerging procedures in thoracic trans oral and colorectal surge We grew in several specialties and geographies in the quarter. Da Vinci Protectomy experienced strong growth in the quarter, led by the continued adoption of DBP in Europe.
In gynecology, malignant hysterectomy showed continued strength. Behind his erectomy showed early year seasonality, particularly in January February. Emerging procedures continued to experience growth in our early adopting centers in Transoral robotic surgery, thoracic surgery, and colorectal procedures. Alex will provide procedure commentary later in the call. Turning to operating highlights for the first quarter.
Procedures grew 30% over the first quarter of 2010. We saw 120 Dementia Surgical Systems, up from 104 during the first quarter of last year. Total revenue was $388,000,000, up eight percent over last year. Instrument and accessory revenue increased to $157,000,000, up 28% over Q1 2010. Total revenue grew to 221,000,000, up 28% from prior year and comprising 57% of total revenue.
Net income was 1 $4,000,000, up 22% over last year. We generated an operating profit of $180,000,000 before cash stock option expense, up percent of Q1 revenue. We ended the quarter with $1,757,000,000 in cash and investments, up $148,000,000 from last quarter. Significant cash outlays during the quarter included purchasing stock. Excluding the impact of these outlays, as well as $60,000,000 from stock proceeds and $53,000,000 used for working capital, we generated 100 $68,000,000 in gross cash flow from operations, which is 162% of our reported GAAP net income for the first quarter.
As we have mentioned on past calls, we are making significant investments in progress and product development. In Q1, we received the CE Mark for our single site dementia instruments and accessories. We have begun a stage roll out of single site in Europe focused on single site cholestisectomy. Our early and product performance results there have been encouraging. In the U S, the FDA has requested additional clinical data on our single products.
We are in the process of collecting this data in part from our European experience, and we'll provide it to FDA as needed. In the quarter, we received FDA for our da Vinci fluorescence imaging system and have likewise begun a staged rollout in the US. With our initial launch of single site in Europe and fluorescence in the US, we are focused on an outstanding early customer experience and the development of clinical evidence supporting their use. We can to make progress on both our Diminci vessel sealing instrument and our Diminci stapler. Our vessel sealer has been submitted to the FDA, and we are working through production readiness for this product.
Our stapler is undergoing validation work and engineering refinement. We have not yet submitted the stapler for clearance. Lastly, we introduced our da Vinci surgical simulator in Q4 of 2010 and shipped our first units in volume in the first quarter. We are working with leading markets and drive into new product arenas, we continue to invest in building our team and expanding partnerships into acquiring those technologies that can make difference to robotic surgery. This quarter, we added 69 people to our team, predominantly in sales, manufacturing and R and D, bringing total team to 1729 employees.
I'll now pass the time over to Marshall, our Chief Financial Officer.
Thank you, Gary. Our quarter revenue was $388,000,000, up 18% compared with $329,000,000 for the first quarter of 2010 and a approximately the same as the 389,000,000 reported for the fourth quarter of 2010. 1st quarter revenues by product category were as follows. 1st quarter instrument and accessory revenue was $157,000,000, up 28% compared with $123,000,000 for the first quarter of 20 percent compared with 151,000,000
industry
$1940 per procedure, which is lower than the first quarter of 2010 by approximately fourth quarter of 2010. Relative to the first quarter of 2010, the reduction reflects the lower impact of stocking orders over larger basis of revenue. Relative to the fourth quarter, we had lower stocking orders, which were offset by increased orders associated with customer buying patterns. We expect instruments and accessories per procedure to decline slowly over docking orders have a lower impact on a larger installed base. First quarter 2011 systems revenue 167,000,000 increased 8% with $155,000,000 of systems revenue for the first quarter of 2010 and decreased 6% compared $178,000,000 of systems revenue for the fourth quarter of 2010.
Beginning with the fourth quarter of 2010, we began delivering new S systems for customers' s systems versus converting s systems into SI systems via field upgrades. The contract terms and economics for these SI for S trade ins are now more closely reflective of SI sales as a result of age. Accordingly, we began reporting asset SI trade ins as system sales. The inclusive of 19 S to SI trade ins, we sold 120 systems in the first quarter of 20 compares to 104 systems in the first quarter of 2010 and 124 systems in the fourth quarter of 2010. Note that the first quarter 2010 system count excluded 9 SSI upgrade that were treated as upgrade revenue and the 4 quarter of 2010 system count included 10s to SI traded.
Upgrade revenue for the first quarter of 2011 was $2,000,000 compared to $5,000,000 for the first quarter of 2000 and $3,000,000 for the fourth quarter of 2010. Our first quarter average sales price per system $38,000,000, a decrease from the $1,410,000 realized in the 4th quarter. And approximately $1,300,000 of revenue associated with simulators that was deferred as the stimulators were delivered for customer discounts for persistent compared with the prior year reflects both factors outlined for the sequential quarter comparison. Combined with the positive product and geographic mix in the first quarter of 2010. Service revenue increased to 64,000,000, up 26% compared with 51,000,000 last year and up 5% compared with 61,000,000 last quarter.
The growth service revenue was primarily driven by and service revenue increased to $221,000,000 and up 4% compared with the fourth quarter of 2010. Recurring revenue represented 57% the first quarter were as follows. Outside the US, procedures grew 38% on a year to year basis, with DDP in Europe being the greatest driver. We experienced percent compared with revenue of $69,000,000 in the first quarter of 2010 and down 5% compared with revenue of 90 $1,000,000 in fourth quarter of 2010. Instrument and accessory revenue grew 39% year over year and 31% sequentially.
We sold 31 systems outside the U. S. Compared with 24 38 last quarter. We sold 15 systems in Europe this quarter compared with 11 in the first quarter of 201020 8 last quarter. The 4th quarter has historically been the seasonally strongest quarter for system sales in Europe.
5 of the systems sold in the 1st quarter to Japanese customers. However, the tsunami and follow on issues are expected to curtail sales in Japan for the foreseeable future. Alex will provide additional details of overseas system sales.
Moving on to the remainder
of the P and L. Gross margin in the first quarter was 72 percent compared with the first quarter 20 end. The decreases compared to prior periods primarily reflect decreased system ASPs. 1st quarter 20 11, operating expenses of 131,000,000 were up 18% compared with the first quarter of 2010 and up 2% compared with 4th quarter. The quarter over quarter increase reflects costs associated with employees added during the quarter.
We added 69 during the quarter, including 48 employees in our commercial operations organization and 18 employees in product 1st quarter 2011 operating income was 148,000,000 or 38 percent of sales compared with 100 $1,000,000 or 39 percent of sales for the first quarter of 20 fourth quarter of 2010. 1st quarter 2011 operating income reflected $32,000,000 of noncash stock compensation expense compared with 20 $7,000,000 for the first quarter of 20 10 $30,000,000 last quarter. The year over year growth in non cash which reflects our annual grant made February 15th each year. Our effective tax rate for the 1st year of the first quarter of 32% was lower than our 20 10 rate of 33%. The reduction in rates between years reflects lower state taxes and a greater portion of our income being generated outside the US.
The first quarter rate was also favorably impacted by the benefit of stock option exercise. Our net income was 104,000,000 of $2.59 per share compared with $85,000,000 or $2.12 per share for the first quarter of 2011 and $121,000,000 or 3 dollars 2¢ per share for the fourth quarter of 2010. Now moving to the balance sheet,
we
ended the 1st quarter with cash and investments of $1,757,000,000, up $148,000,000 compared with December 31, 20 The increase was driven by 100,000,000 of cash flows from operations, plus 60,000,000 from the exercise of stock options, partially offset by 12 dollars of stock buyback and $15,000,000 of capital and IP purchases. During the first quarter, we bought back 36,000 shares at an average price of $3.23 per authorized buybacks remaining. Our stock buyback program remains active, and we intend to utilize the authorization to offset solution created by stock options. Our accounts receivable balance increased to 260,000,000 at March 31st from 247,000,000 December 31st, reflecting the timing of receivables and collection. There was no change in the quality of our receivables during the quarter.
Our inventory increased to $93,000,000 at March 31st from $87,000,000 at December 31st. The increase reflects steps taken to increased component inventory where supplies have tightened and a build of finished goods to reduce the risk of supply disruption as we move our operations to our new building in Sunnyvale at the end of the second quarter. And with that, I'd like to turn it over to Alex who will go over our sales, marketing include highlights.
Thank you, Marshall. During the first quarter, we sold 120 da Vinci systems, 89 in the United States, 15 in Europe and 16 in rest of world markets. As part of the 120 system sales, 13 standard da Vinci were traded in for credit against sales for new da Vinci Si systems and 19 F systems were traded in for SI systems. We had a net 88 system additions to the installed base during the quarter, which brings to 1840 the cumulative number of da Vinci systems Worldwide, 1344 in the US, 330 in Europe, and 166 in rest of world markets. Of the 120 systems installed represented repeat system sales to existing customers.
In total, 110 of the 120 systems sold during the quarter represented da Vinci Si systems, which included 15 dual console systems. The 31 system sales internationally included 5 da Vinci systems into Japan 4 into Australia and 3 into the countries of Germany, France, and Turkey. Clinically, we had a solid quarter achieving overall year over year procedure growth approximately 30%. Urology and thoracic showed particularly solid sequential strength. On a year over year basis, the categories of thoracic, head and neck, GYN, colorectal, and general surgery displayed the strongest growth.
As previously discussed, Q1 early year lumpiness within benign gynecologic procedures. Consistent with Q1 2010 procedure trends. Malignant DVH showed greater sequential strength than benign DVH during the quarter. However, on a year over year basis, benign DVH is growing at a on a year over Our DBP business remains strong and particularly so outside the United States, specifically within year France and Germany are coming up DVP business as relatively flat over the and in Q1 it showed sequential strength. Having said that, we believe the greatest opportunity for growth will will continue to be related presentations, abstracts and postgraduate courses, dominated the agenda.
And the live surgery presentations were projected into standing with the audiences. And at next month's AUA conference over 200 da Vinci related abstracts have already accepted. In addition, 16 AUA postgraduate courses will include da Vinci. DVP growth and urology in general remains on and is certainly a catalyst for many of our OUS system placements. Regarding Japan, as you can imagine, the catastrophic earthquake subsequent tsunami have caused significant disruptions to the healthcare system and has placed a tremendous burden on all Japanese government resources.
To prevail for some time to come, and we will share more as it becomes known. During the quarter, over 2 clinical papers were presented at various conferences and or within peer reviewed journals, but I will take a moment to highlight just a few. In the recent addition of the journal Gynecologic Oncology, Doctor. Lim and Kang etsol published a paper entitled a comparative detailed analysis of the Learning and surgical outcome for robotic hysterectomy with lymphadenectomy versus laparoscopic hysterectomy with lymphadenectomy treatment endometrial cancer, a case match control study of the first 122 patients. The goal was to determine the learning curve and surgical outcome for the first 122 robotic hysterectomy with lymphadenectomy patients in comparison to the first 100 22 patients who underwent the same procedure laparoscopically.
The learning curve of the surgical procedure was determined by measuring operative time with respect to chronological order estimated blood loss, days of hospitalization and complications of all patients were also analyzed and compared. Data were analyzed mean age, body mass index, operative time, estimated blood loss, lymph node retrieval, and complications for surgical procedures. In their results, they order for the DVH cohort as compared to the traditional laparoscopic cohort. The mean estimated blood loss was statistically significant at 81 milliliters for da Vinci hysterectomy compared to 207 milliliters for the laparoscopic approach. The days of hospital for the of complications in the DVH group was 1 as compared to 7 within the lab group.
The authors concluded by saying and Robotic hysterectomy with lymphadenectomy has a faster with lymphadenectomy. The adequacy of the surgical staging was comparable and procedure. The interest in da Vinci from the thoracic community is increasing rapidly. In addition to lubectomies, we are seeing interest in thoracic pull through procedures such as mediastinal mass restrictions. While the procedure numbers may relatively small, Acek Surgery, a paper out of the University of Antwerp, Belgium authored by doctors Baldulik and Hendrick It's all entitled Quality of Life after anterior mediastyle mastrosection, a prospective study comparing with robotic assisted thoracoscopic reception was published.
Quality of life evolution after robotic assist resection. The authors used a validated European quality of life questionnaire. The quality of life prospect of all patients undergoing surgery for mediastinal tumors, a total of 36 patients underwent thoracoscopic resection using either the Vinci robotics system or a sternotomy based open reception. Questionnaires were administered before surgery and at 13 6 12 months postoperatively with response rates of 100 respectively. The results were as follows.
Both approaches had comparable pre operative patient characteristics and quality of life upscales. Open resection by Sternodomy was characterized by a significant decrease in general function 1 month after surgery, both physical and social. In the 1st 3 months post surgery. Following a da Vinci robotic reception, quality of life scores approximated the baseline preoperative scores 1 month after surgery. In other words, there were no reduction in patient functions scores as the first post operative quality of life measurement.
The author's conclusion, and I quote, numerous techniques have published with different degrees of invasiveness generating the existing controversy as to which is the best surgical approach for Anne carrier mediastinal tumors. After the da Vinci robotic assisted dorkoscopic reception. The initial experience and post operative resectable mediastinal tumors measuring less than 4 centimeters. The patient value of replacing large store economies and or sternotomy with a small, minimally invasive incision is significant, which is one of the reasons why thoracic surgery has one of our fastest growing specialties. In closing, I'll remind you that the second quarter marks the peak of our global conference season with the AUA ACOG AATS and the American Society of Colorectal Surgery conferences taking place to name a few We will provide you with the clinical time over to Calvin.
Features, revenues, and other elements of the income statement on a GAAP basis. I will also provide estimates for significant non cash expenses to provide you with visibility of our expected future cash flows. Starting with procedures, Our first quarter 2011 procedures grew approximately 30% compared to the first quarter of last year. Based upon our latest projections, in consistent with our previous forecast, we continue to expect our total procedures for 2011 to grow approximately 25 to 28% for the year from approximately 278,000 procedures performed in 2010. Moving on to revenues.
2011 total revenue forecast also remains unchanged compared to our previous quarter's estimate. 11 revenues increased 18% compared to Q1 of last year. We continue to expect our full 2011 revenue to grow call, we estimated our 2011 gross margin percentage to fall between 72% 73% of revenue. Our first quarter 2011 gross profit margin of 71.8 percent was just below this range as system ASPs and product margins were impact by higher da Vinci S trade in volume, a factor that we expect to continue going forward. We now anticipate our on our Salesforce, Manufacturing, and R&D.
Consistent with our last call, we anticipate growing operating expenses between 16% 20 11, in line with our top line growth. In terms of non expenses, we 1,000,000, up from 118,000,000 reported in 2010. And we continue to expect 2011 amortization of purchased intellectual property to total between to come in at the higher end of the $17,000,000 to $18,000,000 range forecast on our last call. With regard to income tax driven primarily by lower percent of pretax income from 34 percent forecast on our last call. We estimate that our diluted share count for calculating q2211 earnings per share will be approximately 40,300,000 shares.
We aim to keep the share count a around this level throughout to to be significantly higher than our reported net income. We believe cash flows generated from operations is a better measure of our actual financial performance than income. During q 1, we repurchased and retired $12,000,000 of our common stock. Entering q 2, we have 389,000,000 or mainly authorized by the board to purchase additional shares. Our repurchase program is active and we expect
you.
Our first question today comes from the line of Bill Andrew, representing William Blair. Please go ahead.
Hi, guys. Thank you for taking the question. I wanted to ask Yuri if I might on plans for continued hiring. You've been growing the organization very rapidly trying to scale into some new significant opportunities. Yeah.
How far have you come in that process and can you give us a thought on maybe how many more quarters we would see this above trend hiring or is this now the new trend?
Yeah. I I I think it'll start temper as a as a percentage of the base, and and it already has actually in Q1 from from Q4. So, we'll continue to hire, but not quite at the same percentage growth rate. And, you know, the 2, the 2 barbells that have been commanding, most of the hiring have been, the clinical side in the field, as we try to get territories balanced for the right procedure is getting pretty close to where we wanted. It's really now just filling open territories as needed.
And then a little bit on R and D and and operations side to support, programs as we're calling. So I think you'll see it, temper. We'll continue to hire, but it'll start to temper.
Okay. And then maybe a question for Alex. If my math is right, did you add 59 de novo systems in the US this quarter?
Give me a second on that,
While you're lifted, it it should be close to that. It's Believe
it 59.
That that is corrected. It's
Okay. Okay. My question is, as you look at that, that rate, that has come down a little bit from, say, the the Q4 and Q1 were a bit below the trend seen the previous 3 or 4 quarters for de novo US placements. How do you think about the the pipeline of of the 10 new hospitals flowing in, and you did mention kind of multi system orders, but just talk a little bit about the flow of potential customers dinovo systems in the US, if you would.
So, I believe 89 systems in the US cents a new high watermark for us. So the flow of systems into the United States remains very strong. What be, probably have a more difficult time assessing on a go forward basis is at what rate existing customers wanna upgrade either their standard system or their S system to the SI system. I know it's a little different than the question you asked about the de novo system, but as you look add the activity that the sales organization has to go through to, trade out a system and trade up or cultivate a new de novo them. It isn't that there is an enormous difference in the in the time required to get one done versus the other.
So as look at the overall system placement, in the United States, it, you know, remains important for us to continue to either get our customers into the SI systems or, you know, cultivate new greenfield. I don't know that there's a trend we can point at that says, this is going to continue. I think it will probably oscillate up and down, a bit as we go forward. And that's probably the most visibility we have.
Facilities. It sounds like you're seeing, you know, some pickup in the number of multisystem orders or hospitals with, you know, see recurring orders. So is that more important to you, if you will, as developing, maybe not more important, but is that is that obviously a point of focus for the company to grow that installed base of existing and strong customers, maybe even more important than driving, new customer installations. Thanks.
You know, it's hard to say, again, I and I think you you you caught yourself in the question and I and I think that's probably the way we'd answered it. It's it's hard to say what is the most important. I would I would say this that when you have customers who are coming back and buying second, third, 4th, or 5th system. I believe we now have 5 hospitals have 6 systems, and they've built very comprehensive programs. That's very valuable for us, both regionally and nationally.
And so, you know, I don't want to diminish from that, but at the same time opening up a new store, if you will, if you the analogy being same store versus new stores is also important. The the the most important element is driving into those stores and keep the shelves full with procedures. And so that happens both ways. So we're really not going to pick and choose as to which one is valuable or a little less valuable. They're very valuable to us, and we'll continue to operate that way.
Thank you.
Can I
have the next question?
We go to the next question? Yes, please. Okay. Mr. Peterson, your line is open.
Hey.
Thanks for taking the question. Maybe just starting out with with ASPs, there's obviously some guys and takes with with Nick here. Can you just talk about where you see ASPs maybe on da Vinci progressing for the rest of the year? And maybe talk about you talk about the simulator impacting this quarter, does that carry over as we go forward?
The simulator impact for the quarter was, we we had greater demand than we had anticipated going into the quarter. And so there were 30 two systems that we did not deliver in the quarter, and delivered we've delivered those early in the second quarter. It's about $1,300,000 worth of revenue. So that you know, the $10,000 impact on the ASPs for the quarter, and to your question, that does carry over into Q2. But wouldn't expect, ASPs very greatly from where we are today.
Okay. And was there any contribution from the I. E?
Yes. I. E, we very, very little. We did. Yeah.
We had 3, 3 SIE units, in the quarter.
Okay. And then on sales, can you just talk about the market opportunity within Europe, what your early traction is like? And then any additional color you can provide on what FDA is asking for here in the US?
So just I'll I'll start with kind of the the initial experience. Alex can talk a little bit about the the broad activity. You know, so far, we're starting in cold cystectomy that the first experiences have been great. We've seen, a procedure outcomes, low complication rates, it's all been colesecctomy, good learning curve. So our our early opening, opening experience in Europe has been has been really strong.
And the conversation with FDA is really centered around, indications for use and the data to support that. So we're collecting additional data and we'll provide it to them for their request. And, off we go. Colosectomy is clearly replaced. We're gonna we're gonna start and and where it takes us from there, will require some procedure and additional medical research, but I'll let Alex take.
Yes, I'll just say, Tycho, you've been following us for a while and I think when we go into a procedure category, we tend to be very diligent, very careful as to how we how we roll out the launch. And so as you can imagine, you know, to Gary's comments, we had a few centers that were up and running. You know, we're really trying to validate the procedure. We're trying to understand sort of the nuances of the procedure and the choreography of the procedure. Then in a very step wise and thoughtful manner expanding it a little bit at a time.
And so that's really the approach that we have whether it's Europe or anywhere else. In terms of the overall market, it's way too early for us to really claim what what that size might be. I think there's probably an update out there that suggests what the laparoscopic cholecystectomy market is that's not what we're saying our opportunity is. We'll figure it out, and we'll do it thoughtfully and we'll share more information as it becomes available.
I guess, as we think about colorectal, can you talk to some of the momentum coming out of Sage's, you know, from from the physician community and and, you know, any additional commentary you can provide coming out of the conference?
Yeah. I I think colorectal in general, if you if you look at and again, it's been a it's been a very, rapid, a sense into that market. Now, we're dealing off a small base, you know, just to level set, but what is very interesting is that, you know, each quarter that goes by, we tend to have a greater awareness in the community when I say the community, we're talking about the, you know, board certified colindirectal surgeons independent of, you know, the interest the general surgeon might have, which some of them do colorectal procedures. But when you really look at the colorectal specialty, you have to look at the board certified colorectal surgeons. And the, you know, the data that was disseminated in the discussions at SAGES and the general awareness that in that community is growing pretty rapidly.
We've said in all along that we think that there are some procedure or some products that will required to fully optimize the opportunity, be it stapling, be it a vessel sealing platform and such an irrigation and so on. We're very pleased that the rate of growth despite having the the perfectly optimized system.
And then just last one on Transworld. Can you just talk us to, you know, how interesting that market's becoming. I guess we get a few more questions on the margin on that opportunity lately. And if you could just talk to, you know, whether it's sleep apnea or other areas that are that are expanding quickly. That'd be helpful.
You know, where where we've set our initial targets is really where we remain today and that's in the, you know, the base of time in some of the malignant cancers tons I should say the base of tongue cancers and some of the benign conditions there as well as resection as well as the tonsil cancers, etcetera. As far as sleep apnea, there's really a lot that we can share there. I know there have been people that have talked about it, but we're aware of the interest people have there, but our focus is really into the high value procedures today that we've identified in our with our customers and we'll continue to drive there.
Okay. Thank you very much.
Next, we will go to the line of David Lewis with Morgan Stanley. Please go ahead.
Hi. This is actually John Demchick in for David. First off, on the trade ins of Vesta SI, the former upgrades, I believe or 19 of them. What was the breakdown between US or US and EU, and how many S systems are still out there?
I think it was 2 international trade ins of which
one was a standard and 1 was an S.
The rest would have been S.
Okay. Awesome. Very helpful. On procedure adoption with single site in Europe and soon to be in the U. S, then also the stapling and ceiling tools in development.
Can you give us any more clarity on the launch times of these as well as, the main procedures that you're targeting with devices and how you guys are looking at the adoption curves?
Yes, I think there's really not a lot of more detail we can provide on the prospective launch day I think we, again, I think labeled them as either in with the FDA or to be in or will at some point be in with the FDA beyond that, once it gets into that, position, it's difficult to really say. In terms of the opportunities or the market. I think again with the single, the single site system, the initial target is going to be of cystectomy, with respect to the stapler, you know, staplers are used in a variety of applications ranging general surgery to colorectal to lung to GYN oncology and so on and so forth. So, I would envision that following along in parallel to where our procedure efforts are going that require a stapler. And I think the same thing be said with the vessel ceiling.
And lastly, last quarter we saw international placements up around 40 and this year, they were, I guess, a little bit above 30. Is the system placements a reflection of the in the same countries, like your German, Italy, and France, or is it more a result of just broad adoption? Also, with the European box end? Is that more a result of just increased traction or is it easing or austerity? Thank you.
Yes. I think if you look at, the comparison you made and then you can back test this for years. Q4 is the strongest market, excuse me, the strongest period for system sales outside the United States. And Q1 is traditionally, you know, along with Q3 among the, you know, slowest. And so, there's really no surprise to us in terms of, you know, 31 systems as opposed 38, I believe we did last year, excuse me, last quarter.
So I think we're actually pleased with 31. The the market, again, the breakouts, you know, we introduced I think for the first time talking about Australia. We haven't talked about Australia in a while. We haven't talked about Turkey in a while. Those are you know, markets that that again are coming on certainly come on this quarter.
And then, Germany and France and Italy remain in very important markets to the EU. Of austerity measures, there really isn't I think a lot more for us to share there. We've seen it oscillate up and down over the past year or perhaps six quarters, and there's really nothing new for us to add there.
Great. Our next question is from the line of Rick Weiss, representing Larry Swan. Please go ahead.
Yes. Hi, guys. It's of lava for Rick tonight. Can we talk a little bit about Japan? I I appreciate a commentary that, with the, tragic situation that we have over there, there's probably going to be little uptake.
But just prior to that, you had a pretty strong quarter. Is there some something new that you can share with us on the reimbursement front?
Not really anything new we can tell you. We continue to work down the the process there, which is a combination of working with our partners in collecting data and working with, surgical societies, likewise. But but I give you any update on a timeline.
And secondly, maybe on the increase intervention S upgrade, it seems to me, if I'm looking at my model at least correctly, it seems like it's pretty can step up from what you've done from the 9 to 10 upgrades you've done historically to something like 'nineteen this quarter. Is there reason why and you anticipate this continuing, what are the drivers there that you suddenly see this we see a bit of a step up and you expect to see it continuing?
Well, again, and I think in terms of the expectations, we don't really go into a particular quarter or time period and say, you know, we would expect this many customers to participate in an upgrade program, whether we to, you know, through the communication with our sales organization, understand what the range might be, if you will, but what customer ultimately decides to do is really up to the customer and we will help facilitate whichever transaction they wanted. They own a standard and they want to get into an SI, we've got a program to help facilitate that. The same is true with the S. I can't point at one event driven activity that has caused an uptick from 10 to 19. But again, got a few quarters of this now under our belt and I think, you know, you can start to plot it and develop some trends are developing there.
And we just have no reason to think that it's going to it's either going to grow materially or decrease really.
Okay. Thank you. And lastly, there is a study coming up at AUI that some physicians have pointed to us maybe in seeing in terms of, evaluating watchful waiting versus, radical prostatectomy. Do you anticipate any any sort of impact from this study and what could this mean for your Afrezza tax rate in the U. S?
You know, it's really hard to say if not mistaken. That study has been, the patients have been enrolled in that study from the 90s and, you know, there's a long term follow-up on it and that's great. I mean, I think you get long term results. Unfortunately, you have to go through long periods of time and I would expect that there are only a few, if any, da Vinci prosthetics that are part of that And, and so, you know, I think the watchful waiting versus surgery versus radiation debate will be with us for a long time. I don't know that there is anything that we would expect one direction or the other based on that particular study.
I'm glad it's being done. I think good science needs to be done in a lot of different areas within prostate cancer, and and we'll see what the results say.
Great. Thank you guys.
Question is from the Romans line with Goldman Sachs. Your line is open, sir.
Good afternoon. Thank you for taking the question. I was hoping to come back to gross margins. I know you talked a little bit about fees negatively impacting numbers. But if I look at the product gross margin, it looks like that was down sort of from 75.5% in in the prior year quarter down to sort of $7.39.
Maybe you could help us sort of understand a little bit more of the dynamics on the gross margin. Is there anything beyond ASPs, and then maybe a follow on on the ASPs. As you're as you're selling repeat systems, are you seeing the ASPs on those systems the same as when you're selling systems to de novo accounts?
Yeah. So the, the product gross profit that you mentioned, yes, 4.5 in q4 down to 73.9. So we're talking about 66ths, you know, the point here. And I think we tried to highlight the biggest after, you know, out there, which would be the ASPs, for the decline in the product margin, specifically the higher volume of best trade ins, which are gonna carry a higher customer credit comes through in the form of a sales discount. So that's the biggest factor.
I think, you know, we talked a little bit about the simulator too and the simulator, you know, it it's being bowled in with a lot of these sales, in the quarter and, you know, there's some cost that goes with the simulator in same time, you know, the ASP was, you know, steady to down. So it's an area we've said all along that we're going to be investing in our business in areas where we think we can grow procedures and and, drive adoption of of robotic surgery. And I think the simulator is is one of those areas of of investment that the kind of see on on the gross
margin line.
And then just on the ASPs, if you look at the the center switch you were selling 2nd, 3rd, or 4th systems, etcetera. When you're making a repeat system sales to any of those hospitals, are the ASP there, are you recognizing something that's close to what you're recognizing on when you're making a new sale to a new hospital?
Not a significant difference between the ASPs on, follow on systems versus initial system sales.
Okay. And then lastly, on on the procedure volume side, I I think it's example, you talked about, prostatectomy sort of flattish and then some seasonal gyrations on the benign hysterectomy side of the business. Would you say that does that mean that the vast majority of the sequential growth in procedures really came from your outside of your 2 core
procedures, I just had
a a potential basis that the incremental procedures are becoming increasingly comprised of, you know, head and neck, for example, in some of the the non guy, not non neurological procedures?
I would say that the urologic procedures grew, and this is one of the quarters that we talked about. And I I mentioned in my commentary from time to time in the United States and we've talked about DBP being flattish for several quarters, but there are quarters where you will see U. S. Growth and specific to Europe, you know, we saw U. S.
Growth. So there was the category of was a decent contributor to the incremental sequential growth. And this growing cash category of other. I think you're right. I think when you look at the category of other, it tends to grow at a faster rate.
You know, than the blend of the 2 main line procedures. And so, nothing really different there and I think you lighted the sequential, or I should say the seasonal challenge with some of the benign procedures specifically DVH that you still to see in the early part of the year that tends to sort of correct itself as we get out beyond the 1st few months.
Okay. Thank you.
Question is from the line of Kyle Levy with Colin Stewart. Please go ahead. Guys.
Hey, Dale.
So, Alex, maybe you could mention that you could talk a little bit
about the the benefits of, of the vessel sealing device, that, that you sent to to the FDA. And not only on sort of, you know, the types of procedures versus kind of the other vessel ceiling products that are very already available to DaVinci users. And also, the benefit to the P and L, if any, or the impact?
Well, you know, as far as benefits, I'm going to be very careful. As you without having FDA clearance or not to be making claims on a particular product. So I'm gonna be careful not to make any claims. I think in the category of vessel sealing, what, what what tends to be the target is moving into a larger, moving into a larger vessel, you know, and some of them, you know, again, you're taking you're taking significant larger vessels than you would with traditional bipolar or or other forms of elective surgery, that, that, that, that's a target. You know, with the da Vinci instruments, you get articulation and, you know, you get control.
So we look to bring all of those things to the But in terms of, you know, making benefit claims, I'll I'll I'll sort of wait and preserve that until we get the product through the FDA and out in the market, we can actually make those claims. And as far as the P and L, there's really not much we can comment on there because the product isn't priced and it's not in the market yet. So we do believe that a vessel sealer in some of the complex procedures which we've become accustomed to, to operating in, we'll add good we'll add value. But that's about as far as I think we can really talk about it.
Okay. And a couple other, pipeline sort of products. There's a single site experience in Europe. Maybe you could comment on the price point of that, the, that technology at this point?
Right now, it's priced at a slight premium to the manual products in the market and a little bit lower than a typical dementia instrument kit. Directionally.
Okay, perfect. And then lastly, you know, early, early, early thoughts on the fluorescence imaging. You know, you're starting to see some press release of some of the hospitals with some initial procedures on that technology. Where do you think potentially could add, the most value, in
that data? Thanks. Good question. You know, it's for us, it's a little bit of a platform technology, and this is really the first indication for it. So the current, clearance is for vascular imaging.
So it's being used in partial nephrectomy and and some colorectal and allows surgeons to understand perfusion. There are some there are other potentials for fluorescence imaging that we're working on that that will have subsequent, follow on clear prices
that would allow us to take it
in other directions. So I think it's, you know, generally speaking directionally, what it does is allow surgeons to see some structures, beyond the tissue surface and do more precise dissection, than they would otherwise be able to do. I think will be a slow build for us, as as we gain experience as the publications come out. So far, the, early use of it is, is encouraging, but but I think it will take some time to get that built into our procedure packages and and into our clinical publications. And we have some follow indications we'd like to pursue.
Okay, great. Thanks.
Thank you.
We'll take last, last set of questions, please.
All right. Our final question today comes line of Mimi Pham with Wheaton Incorporated. Please go ahead.
Hi, good afternoon. Do you have a target in terms of single site do you have a target of how many sites you want to be at by the end of the year?
We don't. And, I would just say that, you know, it's the 1st quarter where we really started to commercialize it in. It would be it'd be difficult for to assess what that number is going to be at the end of the year.
Okay. And then in terms of the U. S. Submission for single site, I mean, I know you're saying Would you have every do you have everything you need to resubmit in the current quarter, or is that something that might take you through year end to get all the FDA all the day with the FDA?
Some of that data we're currently collecting now. So I don't know exactly when we'll have it all in our hands, but it's not all sitting right now on the doctors, we'll have to do some of the work to get it done.
And we say work means additional clinical work?
I yeah. There's clinical work to be done.
Okay. And then in terms of your procedure of being 30% this quarter, but you still kept your guidance for the year, 25% to 28%. Can you just talk about, do you expect that year over year growth through the year to decline throughout the quarters or in terms?
Well, I guess that's implied in the guidance. I mean, mathematically, that that has to be the case. If you look at, you know, acute last year was 35%. Now our Q1, it was down to 30%. So we know this was seasonally lighter quarter in some of our benign procedures, but I still the math is, as you described, I think the year over year gross in the outer cores would be slightly down from here.
Okay. So the so I guess you're, I guess just implied by that where you're not expecting sort of an uptick in the back half of the year from single single site to, you know, to keep that level with the forecast?
Nothing like that would be built into the numbers here. As Alex said, it's just too early to, to forecast if that may be.
Okay. Thank you for the clarification.
Thank you. That was our last question. Focus remains on increasing patient value by improving surgical outcomes and reducing surgical trauma. I hope the following experience gives you some sense what this means in the lives of our patients. One experience comes from Jen in Ohio, who had a da Vinci surgery friend, Demetriosis.
After leaparoscopies that remove some, but not all of the endometriosis she writes, quote. In the meantime, I had lost my job. I had to take medication throughout each day and it just barely touched my pain. I couldn't drive, cook, or clean. Some days I couldn't even drag myself a bed.
I had to rely on my family for everything. I felt absent from my son, my husband, and my entire life. Finally, a friend contact me and told me about Doctor Ross Marchetta and how he helped her after years of being diagnosed by several doctor misdiagnosed by several doctors. The God, she did. He informed me of the dementia robotic assisted surgery and explained that I was a perfect candidate.
He was the first doctor who was confident he could help me. In June of 2010, I had my da Vinci robotic assist at laparoscopy. Using the robot, Doctor. Marchetto was able to remove all of my fibroids and my fallopian tube and cystic heart ovary. My ovary was growing into my kidney.
And if it would have remained untreated much longer, it could have cause serious damage. Doctor Marchetta called my case one of the worst he had ever treated and said he would call it stage 5 if there was such a stage. He was thrilled with the work he was able to accomplish and explained that he never could have achieved this amazing result without the robot. He called my surgery a miracle, was miraculous and gave me back my life. I leaned off my pain medication.
On 4th July, my family and I attended a end party, the first bond I'd had all year. I felt like myself again, my pain was completely gone. I returned to my everyday life as a mom, wife, and writer. On my birthday, I celebrated my health by Paris healing and activity on my bucket list. If people had told me this was possible during those previous dark months, I never would have believed him.
Doctor Marchetta and the dementia robot saved my wife, my family, and I will be forever grateful. Unquote. K. Of FlightGen are the strongest advocates for da Vinci surgery and form the very foundation of our operating performance. We have built our company to take surgery beyond the limit the human hand, and I assure you that we remain committed to driving the vital few things that truly make a difference.
This concludes today's call, we thank you for your participation and support on this extraordinary journey 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 the AT and T Executive Teleconference. You may now disconnect.