Ladies and
gentlemen, thank you for standing by. Welcome to the Intuitive Q2 2021 Earnings Conference Call. At this time, all participants are in listen only mode. Later, we will have a question and answer session. Feel free to queue up at any time during Call.
Again, that's 10 to queue up to go into the question and answer queue. As a reminder, this conference is being recorded. And at this time, I would like to turn the conference over to our host, Senior Director of Finance, Investor Relations for Intuitive, Mr. Calvin Darling. Please go ahead, sir.
Thank you. Good afternoon, and welcome to Intuitive's 2nd quarter earnings conference call. With me today, we have Gary Guthart, our CEO Marshall Moore, our CFO and Jamie Samath, our Senior Vice President of Finance. Philip Kim, our Head of Investor Relations will not be joining on today's call as he is currently on paternity leave following the birth of his daughter. Before we begin, I would like to inform you that comments These risks and uncertainties are described in detail in our Securities and Exchange Commission filings, including our most recent Form 10 ks filed on February 10, 2021 and Form 10 Q filed on April 21, 2021.
Our SEC filings can be found through our website or at the SEC's website. 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 Web site@intuitive.com on the Latest Events section under our Investor Relations page. Today's press release The supplementary financial data tables have been posted to our website. Today's format will consist of providing you with highlights of our 2nd quarter results as described in our press release announced earlier today, followed by a question and answer session.
Gary will present the quarter's business and operational highlights, Marshall will provide a review of our financial results. Jamie will discuss procedure and clinical highlights and provide an update of our financial outlook. And finally, we will host a question and answer session. With that, I'll turn it over to Gary.
Thank you for joining us today. Our Q2 2021 performance was encouraging with use of our systems for procedures growing beyond pre pandemic levels and Looking at the past 8 quarters in context, our compound annual growth rate for procedures for the period Q2 2019 Through Q2 2021 of 16.5% is approximately the growth we would have expected absent the pandemic. The pandemic has reordered the quarter in which procedures were performed, and we believe it has delayed some procedures that are likely to return in the future and may cause a small number of patients to permanently forego surgery. To understand our system placement and capital performance over this period, We look to annual system utilization trends, which have recovered the utilization rates at the high end of our historical averages. Taken together, this combination of a recovery in procedures and healthy utilization supports our solid capital placement trends and rounds out a healthy commercial recovery year to date.
Examining procedure trends more deeply. In the United States, procedure growth was strong in the quarter, driven by growth in bariatric surgery, hernia repair and cholecystectomy. Both gynecology and urology procedure annualized growth strengthened in the quarter as pandemic pressures eased in the U. S. Annualized U.
S. Procedure growth rates are returning to historical levels for procedures with longer diagnostic pipelines as patients have started returning to screening and diagnostic testing. Growth in our 2nd largest market, China, continued to be strong with multiple specialties contributing. European procedure growth was generally healthy, though varied by country. Recovery in the UK was healthy in the quarter as NHS increased access to surgeries broadly.
The pandemic is not behind us And additional infection growth may again strain hospital resources and impact our results in the future. Jamie will take you through procedure dynamics In more detail later in the call. On the capital side, new system placements continue to be healthy with the United States, China, Germany, France and Japan notable in the quarter. We know that new system placements are closely tied to anticipated procedure volumes and system utilization in mature markets. We continue to see significant utilization variance by region due to pandemic differences.
In the quarter, strong trade ins of older generation systems for our 4th generation products and strength in multi system deals continue to support our thesis that customers that know us best continue to invest with us going forward. We also saw an increase in our IDN customers opening new da Vinci and ION programs in hospitals within their network that did not previously have an Intuitive Robotics program, indicating their interest in diversifying access to Intuitive programs across their networks. Looking to our finances in the quarter, procedures recovered nicely in Q2, system placements came in above plan and system ASP and INA revenue Track slightly above our expectations, together driving revenue of $1,460,000,000 in Q2. Our pro form a spending grew over 24% from a year ago, representing increased investment in our business. However, our expense growth rate was modestly lower than our plan driven by pandemic related factors.
COVID has delayed some work in R and D and clinical trials, leading to some underspend in programs, prototypes and some delay in hiring. We expect these programs to continue their ramp as our labs and development programs recover efficiency. Travel and associated costs in support of our field have also not recovered to pre pandemic levels. Field and marketing costs will tick up if the pandemic wanes. In short, our commercial business has recovered more quickly than our spending due to the different ways the pandemic impacts our customers, our supply chains and our hiring.
Marshall will take you through our financial picture later in the call. Turning to our innovation and commercialization efforts, We are developing and deploying technology enabled ecosystems to support our customers' pursuit of the quadruple aim. Better outcomes, better patient experiences, better care team experiences and lower total cost to treat per patient episode. We are in the execution and launch phase of 4 efforts. First, we are broadening access to our advanced instruments for our da Vinci 4th generation multi port systems through pursuit of additional appearances and launches outside the U.
S. 2nd, we are expanding our da Vinci SP offering by broadening its regional and clinical indications and by adding it to its suite of instruments and accessories. 3rd, we are launching and refining our flexible diagnostic Finally, we are strengthening our digital capabilities across our ecosystem. Our fully integrated advanced instruments has been a strong addition to our multi port ecosystem, allowing for high quality tissue interaction controlled from the surgeon's console while optimizing workflow. These system controlled staplers, vessel sealers and energy instruments support a range of procedures from bariatrics to colorectal procedures, to thoracic and gynecologic applications.
Customer appreciation and recurring use of our products has been growing nicely. In Q2, we launched our SureForm stapling line in India. We launched our Force Bipolar Energy instrument along with our extended use instruments program in Japan, and we launched our SynchroSeal Energy Instrument and E100 Energy Generator in Korea. Turning to our single port system, we placed 4 SP systems in the quarter, bringing the total installed base to 79. SP procedures grew 133 percent year over year with much of that growth coming from the United States.
First cases in our SP colorectal IDE trial were completed in the quarter as we seek to bring SP capability to additional procedures. We are also working on our regulatory filings to bring SP to Europe under the European Union's new medical device regulation framework. Our flexible robotics program, 1st targeted towards diagnostic bronchoscopy, has had a strong quarter. We placed an additional 20 ion systems in the quarter, Bringing the installed base to 70, eye and procedures grew 6 fold over Q2 2020 to nearly 1500 procedures in the quarter, reflecting recovery from the pandemic, the growth in new sites and growth in utilization at existing sites. Our total ION clinical experience is approximately 4,000 Clinical trial sites completed enrollment for our PRECICE clinical trial.
Finally, our team is making good progress in scaling our operations. Lastly, we continue to digitally enhance our ecosystem. In the quarter, we continued to engage customers in data analytics and opportunity analysis for surgical programs, Cornerstone of our Your Data, Your Truth analytics efforts. We have continued the launch of our Myintuitive app, including launching to first users in Europe. My Intuitive allows surgeons and care team members to access their data, to manage their profile, They're learning and otherwise interact with Intuitive through an easy to use mobile app in the palm of their hand.
Our digital learning programs continue to be an important part of our overall learning initiatives. These programs together trained over 2,200 care team members in the quarter, showing organizational strength and localizing programs and responding with agility to pandemic influence demand. As the phases of the pandemic evolve, we're supporting our team in addressing the opportunities and challenges posed by the pandemic in the ways we work. Intuitive has managed multiple ways of working for many years. Roughly a third of our team works in the manufacture, test and distribution of our products, Another third works closely with customers in the field and the remaining third have traditionally worked in lab and office environments.
We're taking a first principles approach to return to office environments with our team, bringing back face to face interactions for those tasks best completed in person, while enabling hybrid work environments for tasks that are well accomplished by distributed teams. Most of our offices globally are reopening with this hybrid approach. We anticipate iterating our approach as we learn and the year progresses. As I conclude, for the balance of the year, we're focused on the following. 1st, agile and flexible support for our customers globally as they need it, often addressing the return of surgical patients to treatment.
2nd, disciplined execution of our launches, including our Advanced Instruments, SP, ION and digital efforts. 3rd, driving depth and excellence in regional performance, particularly in Europe and Asia and finally, expanding our clinical, economic and analytical evidence base for key procedures in countries. I'll now turn the time over to Marshall to take you through our financial performance in greater detail. Good afternoon.
I will describe the highlights of our performance on a non GAAP or pro form a basis. I will also summarize our GAAP performance later in my prepared remarks. A reconciliation between our pro form a and GAAP results is posted on our website. COVID had a significant impact on da Vinci procedure volumes in the Q2 of 2020. That impact was most pronounced in the U.
S. And Europe, varied market to market, complicating year over year comparisons. In the U. S, as COVID continued to subside in Q2 of 2021, we saw lower impact on da Vinci procedures. Procedure growth in the U.
S. Was led by bariatric cholecystectomy and hernia procedures. We also believe that growth from some procedures that were previously deferred due to delays in testing and patient concern over COVID. While there is likely some amount of backlog that has not yet been addressed, It is difficult to estimate the extent of the remaining backlog and when it will affect future procedure growth. In Europe, the impact of COVID in the Q2 of 2021 varied regionally with slower recovery in Italy and France, while we saw early stages of a recovery in the UK.
While there continues to be COVID hotspots within some of our Asia Pacific markets, Overall procedures in the region performed well. China growth in the 2nd quarter continued to be far higher than our other regions, primarily reflecting the 40% system installation growth over the past year. Jamie will provide additional procedure commentary later in this call. Hospitalizations of patients due to COVID have negatively impacted da Vinci procedures. To the extent that hospitalizations expand significantly due to COVID and its variance, Like currently being experienced in parts of the world, it could negatively impact da Vinci procedures.
Key business metrics for the Q2 were as follows. Q2 2021 procedures increased approximately 68% compared with the Q2 of 2020 increased approximately 13% compared with last quarter. Compound annual growth between the 2nd quarters of 2019 2021 was 16.5%. 2nd quarter system placements 3 28 systems increased 84% compared with 178 systems for the Q2 of 2020 and increased 10% compared with 2.98 systems last quarter. We expanded our installed base of da Vinci's systems over the last year by 10% to approximately 6,335 systems.
This growth rate compares with 9% last year and 8% last quarter. Utilization of clinical systems in the field measured by procedures per system increased approximately 55% compared with last year and increased 11% compared with last quarter. The compounded annual utilization growth rate between the 2nd quarters of 2019 2021 was 6%. Moving on to capital placements. System placements in the quarter reflected procedure growth and hospitals upgrading in order to access or standardize on 4th generation capabilities.
Capital placements for the 1st 6 months 2021, we're in line with procedure and utilization growth. Looking forward, we see the following capital revenue dynamics. Procedure growth drives capital purchases in many of our markets. To the extent that COVID impacts procedures, it will also impact capital purchases. The trade in cycle has been a tailwind to system placement.
However, as the installed base of older generation product declines, the number of trade ins will decline over time. Leasing and alternative financing arrangements enable customer access to capital. While the percentage of systems placed under operating leases fluctuates quarter to quarter, we believe leasing will increase as a percentage of sales over time, which will result in the deferral of otherwise current revenue into future periods. Macroeconomic conditions created by COVID could regionally impact hospital Capital Spending. And as competition progresses in various markets, we will likely experience longer selling cycles and price pressures.
Additional revenue statistics and trends are as follows. Total second quarter revenue was 1.4 $4,000,000 representing a 72% increase from last year and a 13% increase from last quarter. The compound annual revenue growth rate between the 2nd quarters of 2019 and 2021 was 15%. 2nd quarter revenue reflected Growth in both procedures and system placements. Leasing represented 33% of current quarter placements compared with 29% last year at 43% last quarter.
In the quarter, we completed a number of placements with larger IDNs that prefer to purchase rather than lease product. Leasing as a percentage of total sales lag has and will continue to fluctuate with customer and geographic mix. However, we anticipate more customers will seek leasing or alternative financing arrangements than reflected in historical run rates. 38% of systems placed in the 2nd quarter involved trade ins, which is lower than the 40% last year and the 44% last quarter. As customers continue to upgrade to 4th generation capabilities, the population of installed SIs is decreasing, particularly in the U.
S. Where 110 trade ins were completed in the Q2, leaving an installed base of SIs of approximately 500 systems. As a result, we expect lower trade in transactions over time. Trade in activity can fluctuate and be difficult to predict. 2nd quarter system average selling prices decreased to $1,550,000 from $1,650,000 for both the Q2 of 2020 and the Q1 of 2021.
The decrease relative to these prior periods reflects geographic mix and Volume discounts provided to customers purchasing multiple systems. We recognized $26,000,000 of lease buyout revenue in the 2nd quarter compared with $9,000,000 last year $19,000,000 last quarter. Lease buyout revenue has varied significantly quarter to quarter and will likely continue to do so. Instrument and accessory revenue per procedure of $19.40 increased compared with $1900 per procedure for the Q2 of last year and decreased compared with $19.50 per procedure in the Q1. Extended use instruments were introduced into the U.
S. And Europe in the Q4 and most other markets in the 1st 6 months of this year, except China due to regulatory timelines. In the U. S. And Europe, extended use instruments were nearly fully adopted in the Q2.
The year over year increase in I and A revenue Per procedure reflects increased usage of our advanced instruments, partially offset by the impact of extended use instruments. We believe that globally customers have had not completely adjusted their instrument buying patterns to reflect the additional uses per instrument. Customer adjustment of buying patterns will reduce INA revenue per procedure. 4 of the systems placed in the Q1 were SP systems, reflecting continued measure rollout of SP. Our installed base of SP systems is now 79, 8 in Korea and 71 in the U.
S. We completed first cases associated with a U. S. Colorectal clinical trial in the 2nd quarter. We placed 20 ION systems in the quarter, bringing the installed base to 70 systems.
There were nearly 1500 ION procedures completed in the Q2. ION system placements and procedures are excluded from our overall system and procedure counts. The supply issues we called out in the Q1 did not impact ION placements and procedures in this quarter. Our rollout of ION will continue to be measured while we optimize training pathways in our supply chain. Outside the U.
S, we placed 115 systems in the second quarter compared with 72 in the Q2 of 2020 and 108 systems last quarter. Current quarter system placements included 63 and 'twenty one into China in the Q2 of 2020. Moving on to gross margin and operating expenses. Pro form a gross margin for the Q2 of 2021 was 71.7% compared with 62.4% for the Q2 of 2020 and 71.8 percent last quarter. The Q2 of 2020 included $59,000,000 of service credits issued in conjunction with our customer relief program, Higher period costs associated with lower production and higher excess and obsolete inventory charges.
The 1st and second quarters of 2021 reflect leveraging fixed costs over higher production levels. Product and customer mix fluctuate quarter to quarter, which can cause fluctuations Margins. COVID has impacted global supplies of semiconductors and other materials used in our products. While we carry safety stocks of critical components and are otherwise working to secure supply necessary to ensure fulfillment of customer demand, global shortages could result in higher production costs and production, development and regulatory delays. Pro form a operating expenses increased 24% compared with the Q2 of 2020 and increased 5% compared with last quarter.
The increase compared to prior year reflects costs associated with higher headcount, increased variable compensation and increased spending in areas impacted by COVID. 2nd quarter spending was below our expectations due to activities restricted by COVID, including clinical development, marketing events and travel costs. In addition, COVID delayed some R and D work resulting in underspend on prototypes. We expect spending on activities restricted by COVID to increase as the impacts of the pandemic decline. We also expect spending to increase as a percentage of revenue as investments in headcount, Infrastructure and other support areas catch up to the growth in the business.
Finally, we expect to continue to invest in expanding and accelerating our ecosystem of products tax rate for the Q2 was approximately 25%. In the Q2, we modified the useful life of a deferred tax asset, which resulted in a current charge to pro form a income. However, that charge generated that change generated a long term benefit of $6,000,000 that is recognized currently in GAAP income and will be recognized ratably over approximately 10 years in pro form a income. The charge associated with the deferred tax asset and a higher mix of U. S.
Income drove the 25% current quarter pro form a rate. We expect our pro form a rate for the last 6 months of 2021 to be between 21% 22% versus our previous guidance of 20% to 21%, reflecting a greater proportion of U. S. Income for the year. Our actual tax rate will fluctuate with changes in the geographic mix of income, changes in taxation made by local authorities and with the impact of one time items.
Our 2nd quarter Pro form a net income was $477,000,000 or $3.92 per share compared with $132,000,000 or $1.11 per share for the Q2 of 2020 and $427,000,000 or $3.52 per share for the last quarter. I will now summarize our GAAP results. GAAP net income was $517,000,000 or $4.25 per share for the Q2 of 2021 compared with GAAP net income of $68,000,000 or $0.57 per share for the Q2 of 2020 and GAAP net income of $426,000,000 or $3.51 per share for the last quarter. The adjustments between pro form a and GAAP net income are outlined and quantified on our website. We ended the quarter with cash and investments of $7,700,000,000 compared with $7,200,000,000 last quarter.
The increase in cash in the second quarter primarily reflected cash from operations and stock exercises. We did not repurchase any shares in the quarter. And with that, I'd like
to turn it over to Jamie. Good afternoon. Our overall 2nd quarter procedure growth was 68% compared to a decline of 19% during the Q2 of 2020, which reflected a significant Adverse impact from the COVID-nineteen pandemic. The compound annual growth rate between the Q2 of 2019 and the Q2 of 2021 was 16.5%. In Q2, U.
S. Procedures grew 77% year over year, which equates to 16% on a 2 year compound annual growth rate basis. OUS markets grew 51% year over year or 19% on a 2 year compound annual growth rate basis. In the U. S, Q2 procedure results were positively impacted by a continuing recovery from COVID-nineteen, including we believe a number of procedures that had been previously deferred.
Q2 growth was driven by particular strength in benign procedures, including bariatrics, hernia repair, cholecystectomy and benign hysterectomy, reflecting in part we believe a partial catch up in these procedures related to the previous deferral of elective surgeries. General surgery growth in the U. S. Was strong and in addition to the positive impact from patient backlogs reflected increasing access for surgeons to our 4th generation technology. In the U.
S, procedures that are dependent on diagnostic pipelines also grew, albeit at lower rates as compared to benign procedures. Colorectal growth was strong with solid growth in milligant hysterectomy, thoracic and prostatectomy procedures. Based on market data, we believe that diagnostic pipelines in the U. S. Began to recover from the impact of the pandemic in March with a lag in the recovery of associated procedures.
2nd quarter OUS procedure volume grew approximately 1% compared with a 7% decline for the Q2 2020 and 23% growth last quarter. 2nd quarter 2021 OUS procedure growth was driven by growth in prostatectomy procedures and earlier stage growth in kidney cancer procedures, General Surgery, Gynecology and Thoracic. China procedure growth remains strong and broad based as a result of continued expansion of the installed base under the current quota. Growth in Japan was solid, but was impacted by a relatively slow rollout of vaccines and the impact of localized lockdowns as a result of ongoing efforts In Europe, procedure growth varied by country based on the relative impact of and recovery from the pandemic. Growth in the UK was strong with a slower recovery in France, Italy and Germany.
Now turning to the clinical side of our business, each quarter on these calls, we highlight certain recently published studies that we deem to be notable. However, to gain a more complete understanding of the body of evidence, we encourage all stakeholders to thoroughly review The extensive detail of scientific studies that have been published over the years. During the quarter, The group from the Chang Zheng Hospital Naval Medical University in China published a meta analysis in BMC Cancer Comparing robotic assisted thoracic surgery versus video assisted thoracic surgery or VATS for lung lobectomy or segmentectomy in patients with non small cell lung cancer. The meta analysis combined 18 studies across different countries containing over 11,000 patients of which just over 5,000 received da Vinci robotic assisted thoracic surgery and just over 6,000 received VAS. The results of the meta analysis found that robotic assisted thoracic surgery compared to VAS is associated with, among others, the following significant findings: 50.4 milliliters lower blood loss, a 50% lower chance of conversion to an open procedure, a 1.1 day short stay in the hospital and a 10% less chance a patient experienced a post operative complication.
The authors concluded, The results revealed that robotic assisted thoracic surgery is a feasible and safe technique compared with VAPS in terms of short term and long term outcomes. In May of this year, Doctor. Carl LeBlanc from Our Lady of the Medical Center in Baton Rouge, Louisiana Published results from a multicenter study comparing short term outcomes for incisional hernia. Published in the hernia journal entitled robotic assisted laparoscopic and open incisional hernia repair Early outcomes from the prospective hernia study. The study contains 371 patients that underwent an incisional hernia repair procedure across 17 institutions within the United States between May 2016 in September 2019.
Of those patients, 43% were in the da Vinci robotic cohort, 35% in the laparoscopic cohort and 22% in the open cohort. In reporting the results, Adjusted using a propensity weighted approach, the authors noted that during the 2 to 4 weeks standard of care visit period, Fewer patients reported the need to take prescription pain medication for the robotic cohort as compared to the laparoscopic and open cohorts. 65.2% for the robotic cohort as compared to 78.8% for the laparoscopic cohort compared to 79.8 percent for the open cohort. Conversion rates to open surgery were lower in the robotic group compared to the laparoscopic group, 0.6% as compared to 4.9% and reoperation rates in the 30 days post procedure were comparable between robotic and laparoscopic and lower for robotic as compared to open, 0.6% as compared to 3.1%. The authors concluded in part, When compared to open, the robotic assisted surgery group is associated with a comparable The difference in the number of subjects reporting the need I will now turn to our financial outlook for 2021.
We continue to operate in a challenging supply chain environment and have experienced longer lead times and delayed deliveries from our suppliers. While this did not have a material impact to our operating results in Q2, The outlook we are providing does not reflect any potential significant disruption or additional costs related to supply constraints. We also note the increasing number of COVID-nineteen cases in certain geographies associated with the Delta variant. The outlook we are providing on today's call does not reflect risks associated with a significant increase in COVID related hospitalizations to the delta variant or other potential new variants. Starting with procedures.
Last quarter, we forecast 2021 procedure growth of 22% to 26%. Given the stronger recovery of procedures we have experienced so far, particularly in the U. S. And strength in U. S.
General surgery, We are now increasing our forecast and expect full year 2021 procedure growth of 27% to 30%. The high end of the range assumes strength in U. S. General surgery, a return to normalized diagnostic pipelines, The vaccines are effective against any new COVID-nineteen variants and the vaccine rollouts in OUS markets Continue as currently expected by governments around the world. Turning to gross profit, on our last call we forecast our 2021 full year pro and expect full year gross profit margin to be between 70.5% and 71.5 percent of revenue.
Our actual gross profit margin will vary quarter to quarter depending largely on product, regional and trade in mix, the impact of product cost reductions and manufacturing efficiencies and pricing pressure. With respect to operating expenses, On our last call, we forecast to grow full year pro form a 2021 operating expenses between 18% 22% above 2020 levels. We are refining our estimate and expect our full year pro form a operating expense growth to be between 17% and 21%. Consistent with last quarter's forecast, we expect our non cash stock compensation expense to range between $450,000,000 $470,000,000 in 2021. We expect pro form a other income, which is comprised mostly of interest income to total between $50,000,000 $55,000,000 in 2021.
With regard to income tax, we expect the range of our second half twenty twenty one pro form a tax rate to be between 21% 22% of pretax income, slightly higher than the range we provided on the last call, reflecting a higher mix of U. S. Income. That concludes our prepared comments. We will now open the call to your questions.
You will hear a tone indicating that you've been placed in the queue. And for our first question, we will go to Tycho Peterson. Please go ahead.
Hey, thanks. Congrats on the quarter. I guess, first question on guidance. Obviously, you made some comments about variance Not factoring in kind of an increase in I know case rises have been largely decoupled from hospitalizations, but can you maybe just talk through the thought process there And how you're thinking about any potential risks in the back half of the year from the Barrett cases?
Thanks, Tycho. From Tom, I think you said the right thing, which is there's a little bit of a decoupling thus far of infection from hospitalization. The number we're watching closely is hospitalization. Jamie, I'll let you take it from there.
Yes, Tycho, we kind of outlined what was assumed in the high end of the procedure guidance from the Low end perspective, the 27% reflected there is greater summer seasonality that reflects the possibility of an impact Due to pent up demand for vacation, especially for healthcare workers that have worked extensively during this period with COVID. It also reflects lower diagnostic pipelines and perhaps some reluctance for patients to visit hospitals. In there is OUS markets continue to be choppy given the in many cases, those markets are behind the U. S, For example, in their vaccination rollouts and that leaves the possibility of continued resurgences and localized lockdowns. That low end also reflects Some impact of a resurgence in the U.
S, but as you heard in our prepared comments, a significant increase in hospitalizations is not reflected in the guidance
Okay, that's helpful. Shifting to the extended use program, you've been out For around 6 months, smaller rollout in Europe in the Q4. Can you talk about kind of next steps to the program here, particular geographies you're targeting? And then has the elasticity relative to the extended use program and the pricing adjustments played out relative to your expectations or any color you can provide on that?
Yes, sure.
We rolled out the extended use instruments in Europe and the U. S. Back in the Q4 and then now we have rolled it out to most other markets in the 1st 6 months of this year, except for China where there are longer regulatory timelines. It's a short period, but we believe that there is elasticity and we've seen elasticity in markets where reimbursements are very low. And we've received feedback, positive feedback from surgeons who have indicated that system access has been a key driver for increased procedures.
And we think that The extended use instruments lowers barriers for purchases of systems. Having said all of that, it's been a short period since they've had extended use instruments. Even though we've seen growth in the procedures that were specifically targeted by extended use instruments, It's hard to discern what is COVID related versus what is not. And so we'll see over time, we'll be able to measure a little bit better over time and we'll monitor.
Okay. And last one on SP. I know last quarter you kind of brought up the concept of going after thoracic and Some additional other areas. Can you maybe just talk a little bit about the roadmap? And I think you've alluded to adding additional instruments and accessories.
So can you talk on the hardware side as well?
Sure. So right now we talked in the script about adding our work or IDE around colorectal. We're excited about that. That'll play out over the next several quarters As we accrue patients and then given that it's cancer procedure, in some cases, it's a little bit longer follow-up. So that's a multi quarter conversation.
We're doing what we call the procedure development and the trial development around other indications. We think there'll be an opportunity in thoracic as well as well as other ones Beyond it. The instrumentation updates, there are other things, imaging updates and software updates They're really all focused around right instruments, right features for the right extension or right extension. So Customers are asking us for advanced instrumentation, so energy and stapling and other things. We think that is possible.
So we're making those investments To move that forward, we think we can bring some outstanding imaging capabilities, including fluorescence imaging into that space. And we're building into the broader digital ecosystem for SP. Our focus right now is Not rapid expansion of the installed base. Our focus is in clinical capability and productivity of the installed base we have. In other words, Happy, very satisfied customers and sequential growth and what they can do with the system remains our focus on SP for now.
Okay. Thank you.
Next, we'll go to Bob Hopkins with Bank of America. Please go ahead, Mr. Hopkins.
Great and good afternoon. So first question for me is, just trying to dissect your procedure results So a little bit more, because it's a really interesting comments that you saw strength in benign cases, some catch up cases and then on a 2 year compounded basis, you're kind of where you thought you might be pre pandemic. I'm just curious from what you see out there, is this broadly reflective of what you think is going on in the marketplace for surgical procedures? Or is this simply and primarily just something about the pandemic accelerating the use of da Vinci and robotic surgery broadly?
I'll speak To my impression, but I'll caveat it, it's one person's impression. So not a scientific study, just my view. I think what we're seeing Is that the longer diagnostic pipelines have had this kind of double effect from the pandemic. Partly it's Delays in getting in and getting tested and starting the journey and then getting in and having a procedure or treatment, whatever that might be. So From a core demand point of view or disease state, that's clearly out there and accumulating and it has to get processed through.
On the benign side, often the diagnostic pipelines are shorter. You go from an issue to identification to Closure more quickly. And I suspect that's most of what we're seeing at least in the United States in terms of that. But I don't have scientific evidence. I think That's anecdotal.
Jamie, any any
any any? Okay.
Terry. I would just add, Bob, as you saw the COVID hospitalization rates in the U. S. Come down in March and into Q2. That frees hospital resources to Increase the level of surgery that we do.
And we also see, I think, increased patient confidence as a function of the improving vaccination rates And those two things come together. They also allow hospitals to start to address the backlog that's accumulated. And I think A subset of the benign procedures that have been kind of deferred elective procedures, hospitals can recover those pretty quickly.
Okay. And then just one quick follow-up and thanks for those comments. Just to be clear on your answer to Tycho's question, just On the recent spread of COVID and variance and the potential impact on demand and hospitals' ability to do procedures, are you starting to see that impact now? Or is it too early and you're just saying that might happen in the future?
We've seen that in some OUS markets. We've Clearly seeing that in markets like India, Taiwan, there's been an impact in terms of how they've handled that from a healthcare system perspective and The resulting impact on our procedures. From a U. S. Perspective, I think it's early and I think we're simply acknowledging the risk.
I think the thing that we'd call out is, it's not the case rates per se to monitor, it's the impact on hospitalizations.
Lockdowns decrease patient mobility and willingness to go get their tests and then Hospitalization diminishes ICU capacity. Those are the drivers we watch.
Makes sense. Thank you.
Next, we will go to Amit Hazan with Goldman Sachs. Please go ahead.
Thanks. Maybe start with Marshall on the first one and then go to Gary for the second one. Marshall, the operating margin coming in at the 43%. I'm just wondering how much we can extrapolate here. We heard your comments, but just kind of thinking a little bit longer term than just the next couple of quarters.
You've got COVID, I'm just curious what the net effect there is from the savings and expense perspective and R and D, whether This is maybe the beginning of you starting to see some leverage off of the 10% you've been at for the last couple of years. And then SG and A kind of same You've been spending a lot there. Are we starting to see leverage potentially that could enable a little bit better margins as we think about next year, the year after?
I think there's elements of our spend that have been restrained because of restricted because of COVID and its impact. And I kind of articulated what those were, travel and so forth. And we expect those to come back as COVID goes away and the restrictions on travel and the restrictions on other activities go away. We also the business came back faster than we had anticipated. And so we have some catch up to do in terms of infrastructure and support necessary to support the overall business.
And so we'll spend there. And so I think you're going to see this quarter was extraordinary in terms of the operating profit margin and that we'll It'll be lower in future quarters given what I just described. In addition to that, we still think this is a great opportunity Continue to invest in ecosystem of products and capabilities at this point in time before competition really gets any kind of toehold. And so we're We're going to continue to invest. So I wouldn't start building lots of leverage into your models.
I think that would be a mistake.
I'll add one bit of color to that. I think that when you think about our product cycles, I would just have you look back Earlier in the da Vinci experience and that these are long development cycles. The time you receivables, the time you're at Market penetration rates that are significant and that is both painful and The painful part is the investment troughs are deep in the early and middle years of those product cycles. And we are early in the Ion product cycle and we're early in the SP or early mid in SP. So it takes a while, but once you develop a really capable ecosystem, then it has a lot of platform use and that investment can be recovered over time.
So It's hard to time it out and it doesn't time out over 1 or 2 quarters, it times out over years.
Hey, Gary, just with you, just thinking through the My Intuitive and what you're doing at the surgeon level, and I'm actually curious more what's going on with service and software at the hospital wide kind of department of surgery level. I don't know how much of an update you can give us, but just Something on what's happening at that level in terms of software tools and services you're developing, trying to increase efficiency, DP costs, that kind of thing. How close we are to maybe seeing something that you can monetize? Just anything you could talk to there would be helpful.
We think about digital as enabling and accelerating a lot of different parts of the ecosystem. So when we talk about My Intuitive that really is putting the power of interaction and data at the surgeon level in their hands Or at the robotics coordinator level in their hands. So we're excited about that because it gives them fast and easy access. It links into some of the other things you're talking about. We are building Tools and capabilities that allow hospital departments and departments of surgery to manage their program and look across Programmatics for efficiency, for learning, for outcomes and these things interlink.
So Short answer there is just kind of a reminder of what we're trying to do. We think there is an opportunity to accelerate learning and to drive Increased insight for a surgeon into their own progress, we're doing that. That's a combination of My Intuitive plus Some of the simulation work that we do plus some of the machine learning and video analysis work that we do. We think there's an opportunity to look at correlations between surgeon performance and outcomes. And that has Implications for the kind of imaging we do, there's implications for task analysis and training and we're doing those things and those can be aggregated across The surgical platform and there's a lot of opportunities for OR efficiencies and standardization, controlling operating costs, controlling consumables costs, Those things are ongoing now.
So several of those things are in the markets, the very first kind of Gen 1, some of them are on Gen 2. Some of them are included in our service contracts, some of them are on a per use basis, some of them are fully included, because we feel like To make us more efficient and to make them more efficient. So we don't really call them out as individual revenue lines. I think they are Ecosystem enablers and can result in very high customer satisfaction
Great. Thank you.
Next, we go to Larry Biegelsen with Wells Fargo. Please go ahead.
And a nice quarter. 1 on procedures, 1 on competition. So I apologize for the short term oriented question, but you're the 1st large cap company to report here. So I'd be curious to hear from you on any Procedure trends through the quarter in the U. S.
And international. And regarding the backlog, how do you know there was catch up and Why won't that continue for the next few quarters? And I had one follow-up.
Yes. Just in terms of intra quarter procedure trends, If you're asking, Larry, month by month, there was nothing notable actually that we would call out. There was the usual impact of seasonality from vacations like Easter, but nothing notable within the quarter. In terms of procedure categories, Bariatrics continued the strength that we've seen for some time. China continued the strength that we've seen over the last couple of quarters And U.
S. General surgery in particular performed well. So I think those are the key kind of procedure highlights. What was the second part of your question again, Larry?
Yes. I mean, how do you know there was catch up from the backlog in Q2? And I guess, why won't that continue? It doesn't It seemed like the backlog would be exhausted just after 1 quarter.
Yes. So here's kind of where we stand with backlog. We don't actually know how much backlog was resolved in the quarter, how much backlog is left or the timing of the recovery That might be, we have a broad range of estimates. Frankly, the lack of precision in that estimate is such that it's probably not useful for us to share. And so we have some indications that we saw backlog reflected in the Q2 results, but at this point it's just too difficult to estimate and therefore Kind of give you any additional color
on? Yes, I hear your question is asking us how much is left, how much of the catch up is left. There appears to be some. It's hard to have a precise measure on it. And I think we're going to have to let it play for another few quarters to see.
Add to that the uncertainty of Wave 4, possibility of Wave 4 makes it tough to put a number on it for now.
That's helpful, Gary. And just On competition, it does seem like the noise is increasing. We could see 1 large competitor approved in the second half of this year. How are you thinking about competition? Are you seeing any impact thus far?
Thanks for taking the question.
Yes. A couple of things. I think all of us know and we as consumers know that customers like choice, perfectly fair. We've seen a few Teams come out and in field systems that are alternatives to ours. TransEnterix was out a few years ago and CMR has been out and now Medtronic.
Yes, a couple of things I'd say. One is we are focused on making sure that Our ecosystem, our products, our systems and everything goes around it really delivers against the quadruple aim all the way through. It's not just the robot. Building a great robot is a hard first step. You have to do it.
And right now, I think that remains to be seen how strong those other systems are. Even then, it's not enough. Instruments and accessories, training programs, support staff, analytics capability, publications, scientific publications demonstrating what you've done, The analytics and evidence base, Bill, are all, I think, important. So I'd encourage those folks on the call, it's Likely to be a comparison of ecosystems in delivering the Quad AIM over time. That said, other teams are out.
They're calling on customers. They're giving their PowerPoints about what they think is going to happen next and some other things. And our posture to that has been it may delay some sales as we may have some competitive conversations and tenders And we'll lose some. What we've seen though is that what happens in the PowerPoints and what happens a year later is different. And that if it hasn't delivered against the Quad AIM, if these systems can do some cases well, but not all cases well or They have stability issues or other things, that wears thin pretty quickly.
We also find that our economic offerings with DaVinci X and EUP, we have choices that we ourselves can offer our customers. So I think all of you on the call, you should expect Increased alternatives for the customer base, I think the noise levels will go up. I think our customers will take their time to evaluate new things as they go. We're okay. We're not frightened of that.
We think we stand up pretty well to those comparisons and we're ready to help them pursue their aims as
it proceeds. Thanks so much.
Next, we're going to the line of Rick Wise with Stifel. Please go ahead, sir.
Good afternoon, everybody. Hi, Gary. Maybe just at the beginning of your comments, I was struck that you emphasized that DaVinci utilization rates are, if I understood you correctly, at the high end of historical averages. Gosh, that's awfully encouraging sounding. Just wondered, are you suggesting or should we be thinking That we could be in the front of a new wave of capital acquisition, again, capital or leased Because of the need to add additional systems to accommodate the expanding number of procedures?
The reason I mentioned it early is, I think when we've had pretty strong capital quarters the last few, One of the things we want to look for is, are we building unused capacity into the field that were procedures Software that would stall us out. And so we watch that number because we know it's highly sensitive. And We're pleased that again, if you look across that 2 year period, try to look through the pandemic kind of ups and downs, What we're seeing is that procedure demand is there and the capital to support that demand has not run ahead of the procedure demand. In fact, Our commentary is a little bit the opposite that these are being highly utilized. That's great.
That says that we're not putting out more capital than folks need, Even though it's been healthy capital quarters, it means our customers are getting good benefit out of what they're using those systems for. Jamie in his commentary said that a lot of those procedures are benign procedures. Many of them are shorter duration then longer or more complex disease states, that means that utilization will go up kind of naturally, that that mix moves Short of higher utilization mix. All of that to me indicates that the business feels in balance. I'll caution that, what the next Couple of quarters or next 4 quarters looks like in terms of hospital access to capital and their decision making.
Capital is always lumpy. It has been. Just so I'm really speaking backward looking so far, Subbu.
Got you. Gary, a separate topic. I've had the privilege of seeing Intuitive develop the use of robotics in multiple clinical indications over the years. And recently, we've had a series of very encouraging conversations on the adoption of bariatrics, very encouraging and Basically still underpenetrated, big opportunity, doctors talking to us about Further expansion of utilization. And I'd just be curious to since you all are calling it out repeatedly as An important incremental growth, Robert.
Where are we now in your view in that, I'm sure, multiyear long term adoption process? What's left to do from maybe a product or procedure or instrument point of view? Where are we going with this one? Thank you.
Let me start with why I think it's adopting and I'm going to turn to Jamie as to the where are we again. What inning of the baseball game are we in? I'll let Jamie take that. On the Y side, it's bariatrics has been a little different than other procedure for us. It's Highly penetrated laparoscopic indication in the United States.
Having said that, it's a difficult procedure for surgeons to perform. Physically demanding. And as we've said in the past, if we can bring the right system with the right instruments, the right imaging in the right usability, the right ease of use. We think that surgeons will care. And we've seen both good clinical outcomes, but also high surgeon satisfaction and better ergonomics.
I think that's what's been driving Our success in the early market. It's taken getting the advanced instruments together as a set, getting Our workflows and our clinical pathway is right. And I think that's been powerful to date. And Jamie, as to kind of where we are.
Yes, just a couple of comments. So bariatrics obviously has been highly laparoscopically penetrated historically. From a market perspective, about 60% -ish or So sleeves, about 15% are revisions. In terms of our underlying numbers, we're growing at a little faster rate in the revision section. Sleeves and bypass grow about the same rate.
I think the product ecosystem with Xi with a 60 millimeter stapler Is in good shape and we're getting good feedback from surgeons in that regard. It is a physically taxing procedure as Gary described. And so We see that as a benefit also with respect to feedback from surgeons. In terms of penetration or adoption, we're in the early to mid innings kind of range is What I'd say in the U. S.
Market.
Got you. Thank you very much.
Okay. Well, thank you and our moderator, that was our last question. In closing, we continue to believe there is a substantial and durable opportunity to fundamentally improve surgery and acute interventions. Our teams continue to work closely with hospitals, physicians and care teams in pursuit of what our customers have termed the quadruple aim, Better more predictable patient outcomes, better experiences for patients, better experiences for their care teams and ultimately a lower total cost to treat. We believe value creation in surgery and acute care is foundationally human.
It flows from respect for and understanding of patients and care teams, their needs and their environment. Thank you for your support on this extraordinary journey. We look forward to talking with you again in 3 months.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT and T event conferencing. You may now disconnect.