Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the intuitive surgical Q3 2019 earnings release call. At this time all participants are in a listen only mode. Later, we will conduct a question answer session.
Instructions will be given at that time should you require assistance during the call. Please press Star then zero and as a reminder, this conference is being recorded.
I'd now like to turn the conference over to our host Mr. Calvin Darling Senior director of Finance Investor Relations. Please go ahead Sir.
Thank you good afternoon, and welcome to intuitive third quarter earnings Conference call with me today, we have Gary Goodhart, our CEO and Marshall Mohr, our Chief Financial Officer.
Before we begin I would like to inform you that comments mentioned on today's call may be deemed to contain forward looking statements actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties.
These risks and uncertainties are described in detail in the company's Securities and Exchange Commission filings, including our most recent Form 10-K filed on February 429 team and 10-Q filed on July 22nd 29 team.
All right SEC filings can be found through our website or at the Fccs 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 website and intuitive dot com on the latest event section under our Investor Relations page.
In addition, today's press release and supplementary financial data tables have been posted to our website.
Today's format will consist of providing you with highlights of our third quarter results as described in our press released announced earlier today, followed by a question and answer Sasha.
Gary will present, the quarters business it operational highlights.
For will provide a review of our third quarter financial results, then I will discuss procedures and clinical highlights and provide our updated financial outlook for 2019, and finally, we will host a question answer session with that I'll turn it over to Gary.
Thank you for joining us today.
Intuitive has been enabling customers and their delivery of high quality minimally invasive surgery for 20 years, and we believe the adoption of robotics and cute computer aided interventions is early relative to its long term potential.
We measure our efforts by their ability to positively impact the quadrupling.
Better outcomes better patient experience better care team experiments and lower total cost to treat per patient episode.
This third quarter of 2019 was another solid one for intuitive in pursuit of these gains.
Our performance in the quarter is a reflection of our progress with procedures and system placements showing continued strength.
For the quarter global procedure growth was nearly 20% aided by an increase of approximately a surgery day relative to Q3 of 2018.
Growth again centered on general surgery in the United States with positive contributions to the global growth rate from Germany, Korea and Japan.
China procedure growth continues to be limited by installed base growth.
Total procedure growth in China is responding positively considering the release of system quota in subsequent placements.
In the United States year over year procedure growth for the quarter was 18%.
General surgery again accounted for the largest increase year over year, accompanied by solid growth in urology and stable growth in gynecology.
We also saw strengthened bariatrics and closest stuck to me.
Hernia repair in colon resection growth rates were solid in the quarter improvements in system utilization by customers and alternative capital placement models or having a positive impact on our business.
Our U.S. salesforce productivity improved in the quarter as our new team members gain experience.
Kevin will take you through procedure global procedure dynamics in more detail later in the call.
With regard to our installed base placement of new systems in the quarter was solid with growth in total placements rising 19% from Q3 of 2018.
Out of trade ins and retirements are davinci installed base grew 12% over Q3 2018 to approximately 5400 insects.
The mix of system placements this quarter moved towards our flagship excise system and trade ins were healthy.
The proportion of systems placed under operating leases was 30, <unk>, 33% this quarter compared with 32% last quarter.
As a reminder, total placements in the percentage of systems placed under lease or usage based arrangements can vary substantially quarter to quarter.
Turning to expenses, we are investing and building our capability in international regions launching new platforms, strengthening our computational capabilities and executing projects that support future sale and provide leverage opportunities as we grow.
Our spending is on track with our expectations. It is supported by solid procedure growth capital placements and product cost reductions.
Financial highlights for our third quarter results were as follows procedures grew nearly 20% over the third quarter of last year, we placed 275 davinci surgical systems up from 231 into the third quarter of 2018.
Our installed base grew 12% from a year ago.
Revenue for the quarter was approximately 1.1 billion of 23%.
Pro forma gross profit margin was 72% compared to 71.5% in the third quarter last year.
Instrument and accessory revenue increased to $606 million up 25%.
Total recurring revenue in the quarter was $817 million growing 24% over Q3 of 2018 and representing 72% of total revenue.
We generated a pro forma operating profit of $462 million in the quarter up 18% from the third quarter of last year.
Pro forma net income was $409 million up 21%.
And we repurchased $70 million in shares at an average price of $493 per share.
Turning to our investments and products I'll start first with systems.
We are in our phase one launch of da Vinci SP as we work to expand clinical clearances and build S.P. products at scale.
In the quarter, we proactively held shipments on SP, Endoscopes and limited new system installations for a limited time as we investigated the robustness concern on the S.P. endoscope.
We resumed and shipping endoscopes and systems in the quarter.
Given the slowdown on Endoscopes, we installed for systems to bring our installed base of Espeed at 38.
Customer response in early clinical results using SP remain encouraging.
In addition utilization rates for SP in Korea, where it clinical indications are the broadest or at X. I levels already a testament to surgeons engagement and our teams skill and design for usability.
With regard to additional indications for ASP.
We have been in discussion with FDA regarding data requirements for a colorectal indication.
We expect this to requiring the I'd trial that includes follow up analysis. This implies we do not expect the third indication of ASP in the U.S. in 2020.
While we had planned for us move the launch of SP and product availability and new indication timelines. Our teams are focused on building at scale and satisfying regulatory requirements for additional indications.
Interest in SP is healthy and clinical outcomes are encouraging forming the basis of our belief in the long term potential of the platform to improve care.
The combination of additional indications for SP and our readiness for deployment at larger scale pace the speed of our ASP commercial expansion.
And flexible diagnostics our eye on platform is focused on the need for accurate and timely biopsies to support definitive early diagnosis of solicit suspicious lesions.
Since our five 10-K clearance in Q1 of this year, we initiated our first phase of launch focused on clinical use customer feedback in production optimization.
First cases on the cleared system were performed at the end of Q1. There are now nine systems in the field performing cases with a total case experience in the hundreds to date. The rollout is meeting our expectations with a mix of clinical trial sites and commercial sites user feedback. During this initial launch period has been strong.
Four instruments and accessories, our team move to full United States launch of our 45 millimeter sure form stapler and obtained clearance for it in Japan and Korea in the quarter.
We also obtained five 10-K clearance for our new curve temperature form 45 millimeter stapler, and a new gray reload designed to staples and structures.
Recall that surgical stapling is a family of products that help surgeons in a range of procedures covering parts of the body from direct them to the thoracic cavity.
Robotically else staplers, our sophisticated technology and our team is doing an excellent job filling out the product portfolio.
Our experience has shown that procedure adoption occurs when the holistic needs of the care team are met.
When the right system in imaging products come together with the right instruments and accessories.
Stapling is another example of this synergy with surgeon adoption of generation for Davinci systems with sure form staplers gaining momentum.
Turning to imaging and analytics, we are working on computing and real time cloud technologies allow for tasks from tell them entering talk mentored reality.
We now have over 20 active tell him entering sites that together have supported hundreds of cloud enabled real time surgery sessions, as we progress and building our real time cloud capabilities.
Feedback on the utility these sites for case observations and mentoring has been supportive.
Augmented reality, we are working through logistics and installation of our first iris accounts to gather customer and clinical feedback. We expect expect first clinical cases on the Iris system in the next few months.
Lastly, our surgical simulation products have become widely adopted in the installed base with more than 3200 davinci simulators in the field.
Before turning the time over to Marshall, let's step back and consider into his evolution over the past few years.
Over this period general surgeons have increased their adoption of our offerings underpinned by improvements in the quadruple lane and procedures they perform.
From colon and rectal procedures to hernia repair closest ACMI and bariatrics surgery.
General surgery procedures spent a broad range of complexity and economics at the same time, we've extended our reach into key countries to support the adoption of robotic assisted surgery into their health care environments.
We have flexed our company to better serve these customers with the launch of new systems, new instruments and updates to our software along with changes to our sales and support models and pricing structures.
Given the large global opportunity to pursue the quadrupling. We believe the next few years for the company will be dynamic.
We will guide the company to meet our customers clinical and economic needs across this wide range of procedures and geographies.
Doing so will involve continued investment and innovation in for both technology and economic models and we see a path to do both.
For the balance of the year, our focus remains in completing the task we set for ourselves.
First supporting adoption of June Davinci, and general surgery and in key procedures in global markets second launching our da Vinci as I'm, sorry, our SP and iron platforms third driving intelligent surgery innovation, and finally supporting additional clinical and economic validation in our focus procedures in countries I'll now turn the call over to Marshall, who will review.
Financial highlights.
Good afternoon, I would describe the highlights of our performance on a non-GAAP or pro forma basis.
I will also summarize our GAAP performance later in my prepared remarks, a reconciliation between our pro forma and GAAP results is posted on our website.
Key business metrics for the third quarter are as follows.
Third quarter 2019 procedures increased nearly 20% compared with the third quarter 2018, and increased approximately 2% compared with last quarter. There was one more operating day in the third quarter of 2019 compared with the third quarter 2018, excluding the impact of the extra operating day, we would have been inline with our full year average.
Growth.
Procedure growth continues to be driven by general surgery, U.S. and urology worldwide. Calvin will review details of procedure growth later in this call.
Third quarter system placements of 275 systems increased 19% compared with 231 systems last year and increased 1% compared with 273 systems last quarter.
We expanded our installed base of Devinci systems by 12% to approximately 5406 systems.
The growth rate compares with 30% in both the last quarter and last year.
Utilization of clinical systems in the field measured by procedures per system grew approximately 6%, which is higher than a 4% growth last quarter and below the 7% growth last year.
Our revenue overview is as follows third quarter 2019 revenue was 1.1 billion, an increase of 23% compared with 921 million for the third quarter 2018, and an increase of 3% compared with $1.1 billion last quarter.
Instrument and accessory revenue of 606 million increased 25% compared with last year, which is higher than procedure growth, primarily reflecting customer buying patterns, an increased usage of our advanced instruments.
Mr and accessory revenue realized per procedure was approximately $1980 an increase of 4% compared with the third quarter 2018, and an increase of 3% compared with last quarter.
Systems revenue for the third quarter of 2019 was 339 million an increase of 23% compared with the third quarter of 2018, and a decrease of 2% compared with last quarter.
Relative to the third quarter of 2018 systems revenue reflected higher system placements higher ASP fees and higher lease related revenue.
We completed 92 operating lease transactions, representing 33% as total placements compared with 58 or 25% of total placements in the third quarter 2018.
And 88 or 32% of total places last quarter.
As of September Thirtyth, we have 560 operating leases outstanding and realized approximately $27 million of revenue related to these arrangements in the quarter compared with $14 million last year and $25 million last quarter.
Operating leases created a future source of recurring revenue and reduce the volatility of system revenue, while the increased number of operating systems placed in the quarter Dampens short term revenue growth for the quarter in which they are placed.
Operating leases include usage based financings that we provide to certain hospitals with advanced robotics experience.
We believe that our lease financing alternatives aligned with customer objectives and have enabled faster market adoption.
Relative to systems perched purchased over the lease period, we are in a small premium reflecting the time value of money and in the case of usage based arrangements the risk that those systems may not achieve anticipated usage levels.
The proportion of operating lease and use it and usage based arrangements will likely increase long term it will vary quarter to quarter.
We recognized 20 million of lease buyout revenue in the third quarter compared with 27 million last quarter and 8 million last year. Despite revenue has varied significantly from quarter to quarter and will likely continue to do so.
116, or 42% of current quarter system placements involve trades, reflecting customer desire to access or standardize on our fourth generation technology and contributing to an extra installed base growth of 41% year over year.
This is an increase compared with 65 or 28% of system placements in the third quarter, 2018, and 103 year, 38% last quarter.
Trading activity could fluctuate it'd be difficult to predict.
However prior.
Prior product trade insight, however, given private prior product traded cycles, we expect the proportion of installed base traded in future quarters to decrease over time.
79% of the systems placed in the quarter were de Vinci exercise and 17% redevelopment X systems, compared with 74% Devinci exercise and 20% Davinci axes last quarter.
We sold three ions systems in the quarter I in system placements are excluded from our overall systems count it will be reported separately.
Procedures and other information associated with ion are excluded from our prepared remarks, it will be reported separately when they become become more substantive.
For the systems placed in the third quarter SP systems third quarter SP placements were impacted by our decision to holds shipments of Endoscopes as Gary outline.
Our rollout of SP surgical system will continue to be measured putting systems in hands of experienced devinci users, while we optimized trainee pathways in our supply chain.
Globally, our average selling price, which excludes the impact of operating lease revenue and lease buyouts was approximately 1.57 million compared with 1.4 or 5 million last quarter and 1.54 million last last quarter.
Similar to this to the second quarter, our mix of systems and customers in the third quarter was very favorable relative to prior periods. We had a high mix of exide versus X and ESI systems. We also had a low mix of distributor versus direct sales.
Finally in the third quarter of 2019, we had fewer multisystem arrangements, where we provided volume discounts.
The mix of systems customers and the size of arrangements will vary over time, we expect system asps to be in the range of the midpoint of the first two quarters of this year.
Outside of US results were as follows.
Yes procedures grew approximately 23% compared with the third quarter 2018 increased 1% compared with last quarter.
Third quarter revenue outside of the use of $332 million increased 36% compared with the third quarter 2018, and increased 6% compared with last quarter.
The increase compared with the prior year reflects increased system instruments, and accessories revenue of 37 million or 32% growth and increased systems revenue of 40 million or 50% growth.
The increase in instrument and accessory revenue was primarily driven by procedure growth in customer buying patterns.
The increase in systems revenue, primarily as the result of increased asps, reflecting favorable geographic and product mix.
Outside of the U.S. replace 90 systems in the third quarter compared with 75 in the third quarter of 2018, and 80 systems last quarter.
Current quarter system placements included 36 into Europe , 27 into Japan intended to China.
59% of the systems placed in the quarter were de Vinci exercise in 33% were davinci ex systems, compared with 43% Davinci excise in 48% Davinci axes last year.
21 of the system placements in the quarter operating leases compared with nine last year and 12 last quarter placements outside of the U.S. will continue to vary as some of the U.S. markets are early stages of adoption the markets are highly seasonal reflecting budget cycles or vacation patterns in some.
Sales into some markets are constrained by government limitations.
Moving on to gross margin in operating expenses pro forma.
Gross margin for the third quarter was 72% compared with 71.5% for the third quarter 2018 in 71.3% last quarter.
The increase compared with the third quarter of 2018 and last quarter, primarily reflects higher says to me Sps and product cost reductions.
Future margins will fluctuate based on mix of our newer products the mix of systems in instrument and accessory revenue.
System, Asps and our ability to further reduce product costs and improve manufacturing efficiency.
We expect the return of the medical device tax in 2020, which will reduce our gross margin by approximately 70 to 100 basis points.
Pro forma operating expenses increased 31% compared with the third quarter of 2018 increased 7% compared with last quarter.
Spending is consistent with our plan. It includes in order of magnitude of increase.
Cost associated with the expansion of our O us markets spending on our informatics capabilities and investment in our infrastructure in order to scale the business.
We believe we have a unique opportunity to expand the benefits of minimally invasive surgery around the world. It have been and we'll continue to invest in the business Accordingly.
Our pro forma effective tax rate for the third quarter was 16.8%, reflecting 8 million of reserves of reserve release is primarily associated with the expiration of statutes of limitation in certain jurisdictions.
While we expect our tax rate to be between 19, and 20% into fourth quarter. Our actual tax rate will fluctuate with changes in the mix of us and US income changes in taxation made by local authorities and with the impact of onetime items.
Our third quarter 2019 pro forma net income was 409 million or $3.43 per share.
Compared with 337 million or two daughters, and 83 cents per share for the third quarter of 2018.
In 388 million or $3.25 per share for last quarter.
I will now summarize our GAAP results GAAP net income was 397 million or $3.33 for should per share for the third quarter of 2019, compared with GAAP net income of 293 million or $2.45 per share for third quarter of 2018, and GAAP net income of 318.
Billion or $2, a 67 cents per share for last quarter.
The adjustments between pro forma and GAAP net income are outlined in quantified on our website and include excess tax benefits associated with employee stock Awards.
Employee equity and IP charges amortization of intangibles and acquisition related items and legal settlements.
We ended the quarter with cash and investments of 5.4 billion compared with 5.1 billion at June 32019.
The cash generated from operations was offset by stock repurchases acquisition of shortly fiber optics three D robotic endoscope visit.
And investments in working capital and infrastructure during the quarter.
We repurchased approximately 141000 shares for $70 million at an average price of four to $493 per share.
In the quarter, we grew inventory by approximately 67 million to 580 million, representing approximately 150 days of inventory.
We continue to build inventory to address the growth in the business as well as mitigate risks of disruption that could arise from trade supply or other matters.
In summary, our results for the quarter were solid.
While we while we will provide you with detailed 2020 guidance in January I want to highlight certain business dynamics that may impact your models.
As I noted earlier, we will continue to invest in the business growing operating expenses as we see the substantial opportunity to expand the benefits of minimally invasive surgery.
We also believe the percentage of leasing and alternative financing arrangements will increase over time.
In addition, we believe the number of trade in transactions will level off into short term and then decline over time.
It is also likely we will see increased price negotiations in elongated negotiation timelines as competition get closer to launching new products.
These dynamics could result in profit fluctuations. However, we will continue to manage the business for the long term as we believe that the fundamentals of the business are strong.
And with that I'd like to turn it over to Calvin who will go over procedure performance and our outlook for 2019.
Thank you Marshall our overall third quarter procedure growth was nearly 20% compared to 20% during the third quarter of 2018 and 17% last quarter.
Our Q3 procedure growth was driven by 18% growth in U.S. procedures, and 23% growth and now U.S. markets.
Third quarter 2019 procedure growth benefited from one additional working day compared to last year.
Through three quarters working days are now roughly consistent between this year end last.
Our Q3, 920 19 year to date procedure growth was 18%.
Equal to 18% growth through three quarters of last year.
In the U.S. Q3 procedure growth was largely driven by continued strength in general surgery with substantive contributions from gynecologic and Urologic procedures.
The U.S. general surgery third quarter growth in leading procedures hernia repair and colorectal remained solid at days adjusted growth rates consistent with last quarter.
Call I suspect to me growth continued to accelerate in the third quarter and now represents a significant driver of incremental procedures.
While we remain cautious regarding the size of the addressable coli market for robotics.
Our recent data is encouraging.
Growth in call, we suspected mi represents a healthy mix of new and continuing surgeons.
Shows very little churn and sees increasing firefly utilization.
Geriatric procedures, well still not an area of broad emphasis again accelerated modestly in Q3.
Q3, U.S. gynecology procedure growth was largely consistent with the first half of 2019 and last year in the mid single digit range with hysterectomy for cancer volumes accelerating modestly in the quarter.
We had surprisingly strong growth in us urology and Dvp procedures in the third quarter Dvp growth was just over 10% for the quarter after having moderated to low single digits in Q2.
As a highly penetrated mature procedure category, we believe that our us prostatectomy volumes should track to the broader prostate surgery market.
Third quarter, all U.S. procedure volume grew approximately 23% compared with 23% for the third quarter of 2018, and 20% last quarter.
Third quarter 2019, all U.S. procedure growth was driven by continued growth and dvp procedures and earlier stage growth in kidney cancer procedures general surgery and gynecology.
In China as in Q2 procedure growth accelerated modestly as new systems installed under the latest system quota began to provide additional capacity for incremental growth.
The Q3, China procedure growth rate remained below the overall U.S. metric.
In Japan procedure growth was again strong at roughly 40%, reflecting growth and procedures granted reimbursement status in April 2018.
And continued later stage growth in urology procedures, our emphasis in Japan remains uncertain and team training and building Proctoring networks over.
Overall European procedure growth was largely consistent with prior periods with variation by country.
Chairman results were particularly strong while results in the UK were below our plans.
Now turning to the clinical side of our business.
Each quarter on these calls we highlight certain recently published studies that we deemed 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 I.
Adoption of intuitive systems for surgery is fundamentally based upon the clinical utility they provide for surgeons and positive procedure outcomes they enable for patients.
We are now in the early stages of introducing the da Vinci SP to the market and over 50 clinical articles have been published involving DSP, thus far.
Last month some of the first clinical research related to the de Vinci SP usage and Trans oral surgery was published by Jama Otolaryngology head and neck surgery section.
The research title on next generation single Port Robotics surgical system for trends are robotic surgery results from prospective non randomized clinical trials was authored by Dr. Christopher Holsinger from Stanford at all.
The objective of the study was to evaluate the de Vinci SP in head and neck surgery prospectively through concurrent non randomized clinical trials. The study included a total of 47 patients across four institutions re in the U.S. and one in Hong Kong.
All 47 patients had tumors of the oral pharynx and underwent surgery with the de Vinci SP 40 patients had malignant tumors, while seven more benign.
All 47 patients eight women and 39 men with a mean age of 61 safely underwent transalta section with the de Vinci SP without conversion to open surgery laser surgery or multi port robotic surgery, there were no inter operative complications or device related serious adverse.
Since I.
I mean estimated intra operative blood loss per procedure was 15.4 milliliters with no patients no patients received a transfusion.
Within 30 days 45 of the 47 patients were eating by mouth and without the need for percutaneous endoscopic guest drops to me to.
The Austin Mers. The authors concluded quote the use of the device appears to be feasible safe and effective for trends are robotic surgery of oral fair NGL tumors close quote.
I will now turn to refinance to our financial outlook for 29 team.
Starting with procedures last quarter, we forecast 2019 procedure growth of 16% to 17%.
We're now increasing our forecast and expect full year 2019 procedure growth of 17% to 18%.
Turning to gross profit on our last call we forecast our 2019 full year pro forma gross profit margin to be within 70, and 71% of net revenue.
We are now slightly increasing our forecast and expect full year gross profit margin to be between 71 and 71.5% of net revenue.
Our actual gross profit margin will vary quarter to quarter, depending largely on product regional and trade and mix and the impact of new product introductions.
Turning to operating expenses on our last call, we forecast to grow full year pro forma 2019 operating expenses between 24, and 28% above 2018 levels.
We are now retiring the top end of the range and expect our full year pro forma operating expense growth to be between 24 and 27%.
On our last call, we forecast are noncash stock compensation expense to range between 320 and 340 million in 2019.
We are now refining this estimate to the top half of the range between 330 and $340 million.
We expect other income which is comprised mostly of interest income to total between 125 and 130 million in 2019 compared to 130 to 135 million forecast on our last call we.
With regard to income tax apart from certain non discreet items impacting Q3, we have a consistent view of our tax rate. We estimate our Q4 pro forma tax rate to be between 19, and 20% of pre tax income.
That concludes our prepared comments, we will now open the call to your questions.
And ladies and gentlemen, if you'd like to ask a question. Please press Star then one on your telephone keypad, you'll hear a tone, indicating you've been placed in Q and you may remove yourself from Q at any time by pressing the pound key if you're using a speakerphone. Please pick up the handset before pressing the numbers once again, if you have.
A question. Please press Star then one at this time.
And our first question comes from the line as David Lewis with Morgan Stanley . Please go ahead. Your line is open.
Good afternoon, just a couple of questions for me.
Gary just starting off on procedure acceleration.
Even adjusting for selling that there's still a couple hundred basis points, maybe two to 300 basis points a momentum acceleration to the third quarter I wanted to talk about some of the drivers. There you talked about the gen surge capacity issues last quarter sounds a day been resolved, but I was that the principal driver the momentum improvement or could you just kind of point out other factors that drove this relative momentum acceleration to the third.
Order in the night up quick follow up.
So we in general General surgery was positive for US I would not say that we have resolved all the constraint issues that we have been we talked about last quarter, we moved into right direction.
So I think productivity for the US Salesforce was something we talked about last quarter. I think we took a modest step in the right way, we'll keep working on that likewise convenient access to systems.
So general surgery was was strong for us.
But I think theres more opportunity there over the long term we.
We add in in Calvin and touched on it we were positively surprised in the urology part of the business and we're digging in a little bit to figure out where where that positive surprises come from Calvin and low if you want to add to that.
No. That's it I mean, it was as you saw us kind of settle in the low single digits last quarter and just over 10% this quarter and we are working with our our field team and customers to better understand the dynamics behind that.
Okay very helpful. The maybe just a quick two part question on broader cap accent.
Gary the gross system placements this quarter I know trade ins and retirements, most most heavier but gross system placements in the U.S. looked a little lighter is there anything you've seen from a change in the capital environment. Do you asked are you willing to call out and then related to that you Marshall Your commentary on next year competitive dynamics, maybe could you share with us what you've seen from some of these new systems that have not been displayed in the USA.
In Europe .
Comments, you willing to provide there and how your commercial strategy May change next year as you learn more about these systems. Thanks, so much.
For the on the first front.
I don't know there were a perfect read on the Capex capex environment more broadly.
We do think that.
Procedure growth is in the us the dominant driver of additional systems overtime system capability, but also.
Clinical installed base access.
So I think we saw in this quarter.
That our expectations I I think the second question around.
Spending looking into next year, let Marshall Tech, yes, so you're asking specifically about.
Dynamics around potential competitors and in my comment about.
The impact that might have in terms of elongated negotiations or.
Negotiations with customers, we we know that when new competitors products comes out that will be an impact when it comes out or when it will have an impact.
Is less certain and.
So we're just trying to make sure that you understand that as as those dynamics occur that you're not surprised.
Next question please.
Next we turned your line of Larry Biegelsen with Wells Fargo. Please go ahead.
Hi, good damn good afternoon. Thanks for taking the question just maybe one follow up to Marshall on the operating margin in the Opex spending that you talked about for next year I mean in the past you've talked about not expecting constant deleveraging over time, but how should we think about op margin margin pressure in 2020.
Relative to 2019 as you invest a topline growth and you potentially of new competition coming in I had one follow up I think you its you've heard from us and you've heard from others is that there's a substantial opportunity in front of us in terms of.
Minimally invasive minimally invasive market and so we think about those opportunities we think about the technology as they are necessary to take advantage of those to improve patient outcomes and we and we think about global expansion and so that's where we're spending our money will give you more precise guidance on what spending will do when we get to the January .
Call, So I'm not going to really comment at this point about magnitude of of leverage or not deleverage or whatever.
But but we will continue to spend on on on expansion.
That's helpful and then to stand the 2020 theme Calvin.
On the guidance on the the implied Q4, and it's about that's somewhere about 15% at the midpoint for.
Procedure growth should we be thinking about one of the high NDR confident maybe if you could talk about the puts and takes.
For next year, you have some good growth drivers from general surgery, and international should we be thinking about kind of stability in procedure growth. Thanks for taking the questions. Yeah. I think is as you look at Q4, then further out into 2020 the growth drivers as as you say, Larry our general surgery in the.
United States, a as well as the growth outside the United States and I think thats likely to continue to be the drivers at the high end of the guidance range. I think we're we're seeing consistency with where we are on a year to date basis, but again in the third quarter. We saw benefit from some of the mature categories I think at the lower end a can contemplate some moderation there.
Thanks, guys.
And next returns from the line of Bob Hopkins with Bank of America.
Oh, Thanks, and good afternoon, I would just wanted to ask a couple of quick questions on the comments you guys made on SP.
And third remarks, it sounds like the regulatory pathway is moving around a little bit yeah. Gary is that a function of something specific with your process or is it just a tougher regulatory environment generally with the FDA with these new robotic platforms.
Yeah, I think the it's probably the latter as you look at of both our products that are moving into new clinical domains.
And also a little more broadly across the med device industry. It looks like the environment is becoming a more data centric or the data requirements are increasing.
And just also just wondering if you could characterize kind of the demand for SP generally and.
No.
What your comments imply about you know kind of next year's growth opportunity and ASP and should we be thinking it's.
Apparently limited until you get colorectal over to you see enough underlying demand that you know that 20 to 2020, you can keep them some nice sales of that product.
We won't have forecasted for the out on this call I think.
In general there is an opportunity for the indications that we have and more indications or better.
The clinical data that we're seeing and that's building in the database reinforces my support for the product line long term and I think Theres also a set of indications beyond the colorectal that'll be interesting to us.
That said, we'll we'll work with regulatory bodies to meet the requirements and that May take some time.
That will pays us.
So near near term as we get closer to 2020 and get into it will look we'll talk a little more about.
Thanks, so much.
And we have a question from the line of Tyco Peterson with JP Morgan. Please go ahead.
Hey, Thanks, I want to go back to some of the procedure commentary. The coli secondly recovery can you comment on what you think might be driving that and then your comments on that as you step up any early view on what might be behind that is that patients dropping out a watchful waiting or is there another dynamic here.
Yes on the coli side Tiger you talked about the acceleration being driven by a healthy mix of the new new surgeons and existing surge is not a lot of churn and and increasing firefly utilization. So that feels a lot different than say our earlier experience with a with single site set of tools or was more of a cosmesis oriented van.
You proposition and what's interesting is while in the past Colima may have been up a popular training procedure and it's still can be that now it's not necessarily the first procedure. It's more a lot more often that it's a say a hernia repair that's the first procedure and as general surgeons are applying robotics across their practices call is obviously a big.
Part of what they do so there you know the reasons for optimism given the what we see in the data, but we continue to monitor and analyze the growth tenants closely and remain conservative about the overall opportunity.
On prospects.
Yeah, you know prostatectomy I think we pretty much the stated on that we were surprised and then we're kind of dig into what the root causes maybe.
Okay, and then honesty it sounds like you work through the endoscope issues in relatively short order should we think about any sort of catch up effect in the fourth quarter and firms and installations and then any comments you want to make on the trial, how big you think that might have to be.
On a on the FCC and disclosed yet on the SPM scope.
We we have.
Really supply and we but we still have some work to do and.
And we will work through it.
Really for SP and endoscopy at scale. So we can support the scale, we're at today, but as we we get bigger and what our long term plans are I want to see improvements in that product line.
So we will see we're not ready to describe what the outlines the trial yet are indeed, if it's a finalizes the 90 that'll get published in the public database and you'll be able to look it up and low point you to it.
Alright, and then lastly, any comments you can make on ASP is I think last quarter. There was a view that they would maybe step down but then obviously they didn't so just curious how we should be thinking about you know system ASP going forward.
I think.
As for specific.
Remarks actually for various piece this quarter, we just saw a really favorable mix just like last quarter in terms of.
Of X X size versus.
Axis and as highs we also saw.
Really favorable mix in terms of distributor Latin lower distributor and higher direct sales.
As far as what you should expect going forward I think what I said was for the for the remainder. This year you should look at Sps more similar to the mix between Q1 in Q2.
And.
That's where we see a coming out and that that will reflect a higher mix of district distribution sales in Q4, which is typical if you go back and look at our history.
Okay. Thank you.
Our next returns line of J.P. Mckim with Piper Jaffray. Please go ahead.
Hi, good afternoon. Thanks for taking the question I just wanted to touch on just the uplift in instrument Asps can you talk about maybe the aided sustainability there and just.
What's really driving more advanced procedures or just more than dance instruments at the stapling and vessel sellers.
Yes, Hi, JV its Calvin Yeah, we saw this and this quarter revenue per procedure was approximately $980 and that's the highest we've seen in quite some time Marshall mentioned in his comments that you know we did see a benefit relative to the last quarter, just due to timing of orders, but obviously higher usage of the advance stapling and.
Vessel ceilings also contributed to the growth.
Going forward clearly the favorable timing out of the order should offset but theres a number of factors that are going to kind of impact that trend going in different directions, including the anticipated continued growth any advanced instrument usage offset by an increasing proportion of lower complexity cases like always the sector.
Hey that we've talked about.
So.
I in a revenue per procedure is going to have variability quarter to quarter and I don't have a long term direction to to give you.
Okay. That's helpful. And then maybe just on you've got the Cats conference coming up this weekend, maybe what can we or should we expect from from you guys in terms of eye on any single site data and then maybe what investors should be looking for in terms of the right way does sort of compare systems or what.
What really is going to drive adoption in certain interests.
Yes, Sir the conference I think what you're going to see is a lot of but we've talked about on this call. You know you were going to talk about just qualitatively I think some of the early experiences a in the field well be doing a lot of test drive and talking about a the system at its capabilities I don't think I'd Theres no.
No new data that I think is going to be you know a groundbreaking at the event in general I think you'll see from both sides relatively early data I think the larger market in Ireland in and a robotic assisted bronchoscopy will be.
Data oriented and broader settings, looking at safety and efficacy and.
As that develops I think we're feeling pretty good.
There have been systems in the market in the past as you've no and I think a fair number of accounts will wait to see what the data says so there's the feature benefit kinda conversations that happened in the early market I think a lot of the market, we'll wait to see what what that expresses like in in clinical use.
Thank you.
And our next question comes from the line of Richard Newitter with SVB Leerink. Please go ahead.
Hi, Thanks for taking my questions just wanted to just follow up on call. Lee. So I know that I believe coal is a faster procedure relative to some of the more complex areas, where the robot gets used so I'm just curious to the extent to which you know do you think is.
No acceleration trend as staying power could that help alleviate some of the capacity and training issues that you outlined in the past with respect to the mix and the types of procedures getting done.
Bob I think it can change the certainly the euro utilization rate for systems in the field.
It's a it's still it can it can still create.
Access challenges as different people Viper time, but as you just described if they're faster through it.
With regard to training I think that high volume procedures allow surgeons to move through their early experiences more quickly.
And that has a generally positive net effect.
Great and.
I was hoping thanks for the color on the on the China procedure growth metrics relative to the overall you Ash I was just curious you know as you have more systems getting placed each quarter.
Many quarters, you think it might take again and you know, but approaching the international average and I think it would be helpful. Just to know where was the where was the growth rate trending in the last two quarters. Thanks relative to this quarter.
Right. So the overall U.S. growth rate is roughly 23% and in the last two quarters. We've seen some modest acceleration a up you are probably approaching that rate now so successful scenario in the next quarter. Two we may we make crossover.
Thank you.
And next returns from the line of Enron's, thus far with Deutsche Bank. Please go ahead.
Hi, good afternoon, Thanks for taking my question.
Gary you highlighted in your prepared remarks, the stapling franchise.
Can you talk a little bit more about I guess, the 60 millimeter in particular and the impact you're seeing in terms of specific procedures, where are you seeing the uptake is in colorectal versus gastric sleeve and then also how much cannibalization are you seeing him to 45 millimeter in cases like bowel resection et cetera.
Pause sixtys, mostly used in the in the lower Abdomens for you definitely have us stomach in and then colorectal others modest.
Exchange for the 40, fives, where 60 will do fewer fires.
But in general I think.
That mix and surgeons selection in that space is pretty well understood from.
Prior experience with laparoscopy, we're not overly stressed about it.
Okay, and then in Japan, I know last quarter, you talked about.
Some sequential slowdown, but the metrics you gave today, the 40% plus a procedure growth and healthy placement setting 27 can you just talked about the contributors to procedure growth there as it.
Is it still.
Urology, and then on DBP urology or general surgery, mostly.
And then you'd expect the more procedure reimbursement approvals in April 2020.
Yeah. So as we mentioned on the call a the growth it moved back to 40%, where we had been a prior to last quarter last quarter. I think we largely felt the effect of a number of holidays or fewer workdays in the quarter than Ah then this quarter with that recovered. So that was the main thing we're seeing a increasing numbers of the 12 procedures they were granted.
Reimbursement status in April of 2018, as well as continuing to see adoption of the urology procedures.
We don't think that the.
The.
Of the 12 that they'll adopted equal Reagan and we'll see some.
Start to break out from the pack whether it's in.
Colorectal or threatsync relative to some of the others.
With regard to reimbursement opportunities going forward, but it's something we track and we discuss with surgical societies for their support as needed.
We will see nothing to communicate with you at this time.
Thank you very much.
Next we turn to line of Craig be issue with Cantor Fitzgerald. Please go ahead.
Thanks for taking the questions just a couple of quick follow ups.
Gary on SP, I think you you mentioned that.
You might be looking at other indications. So I guess I just wanted to get a sense or given the I'd that will be required for colorectal could we see another indication come in before.
Foreseen colorectal I can give you no reason to be optimistic for that.
Okay.
Okay fair enough.
And then Marshall just your comments on the med device tax I. Just wanted to you said that you expected to come in and I. Just wanted to get a is that just you being conservative we're assuming that it will come in in 2020 or is there anything else behind that comment.
Space at this point that that is what is supposed to happen.
I know theres lobbying efforts to try to change yet but.
So we're just we're just telling you the way it is.
Also fair enough. Thanks for taking the questions guys. Thank you.
We have a question from line of Jason Mills with Canaccord Genuity. Please go ahead.
Hi, Thank you for taking my question wanted to follow up.
On the revenue per procedure.
You give me some being fairly consistently so but on a regression line things would have to change.
Hi significantly across several different procedures for that trend line to change over let's say the next three years. So it's been on a nice.
Fairly decent upward slope, what what would you say I guess over the longer term with respect to that trend line. Given you have so much data, but it is a dynamic business.
It would seem like it could continue to trend upward with some volatility quarter to quarter without board over a longer period of time, Let me tell me what I'm missing if that's incorrect now it has been increasing and low single digits. The last a couple of years anyway, Yeah were and I tried to mentioned that that we do expect to see a country.
Tribute continued contribution from the advanced instruments or as a tailwind to the metric, but that's being offset by a number of factors I mentioned, increasing proportion of lower complexity cases and back as people are just becoming all the more efficient as time goes out as well wasting less doing less with more and we help them to do that with some of the analytics we provide.
So yeah those are the offsets and so you have to give them. The takes so at this point I'm not ready to say, whether the trend is going to continue upper or be flatter or our trend down.
Okay sure thing and.
Obviously, the big revealed one of the 11 years recently well the number that they continue to hard one was 2% robotic surgery relative to procedures done whether it'd be general laparoscopic I was wondering if you could probably security comment on.
Number two year with respect to obviously much more broad.
If you could comment on that number or just give me any general commentary as it relates.
Two vaccines repatriation and maybe talk qualitatively about being early in the state.
Just specific to that currency to figure out like your thoughts and then specifically to Japan as relates to the penetration robotic surgery. It would seem to be lower than Walton like your commentary with respect to by geography, specifically if you don't mind. Thank you.
So, let's let's zoom out for a second and then we can swing back in <unk> I think the opportunity for computer aided in Robotically assisted surgery.
And acute intervention more broadly is clearly substantial and clearly durable.
And that's going to draw in new entrants, which it's doing I think those new entrants will help accelerate a broader adoption more generally.
And customers will appreciate that choice and I think they'll look at that.
Our strategy over this period has really been understand our customers deeply and understand the quadrupling.
It's really hard to do the a total accounting of what the total available market will be and what I'd ask you to look at is overtime.
What does it look like in the next couple of years would it look what does it look like in the next for what does it look like in the next 10.
I think some of our competitors as they as they speak about these opportunities are looking out pretty far.
And OK, that's that's a forecast hard to have an exact crystal ball, but clearly even speaking with our most.
[noise] candid critics, the idea that computer AIDS and.
Robotics, we're going to make an impact more broadly and in surgery is pretty well accepted so I think we're early innings.
Japan, I think likewise, we have little bit different healthcare system. The single payer system that that runs through NHL W. Are the predominantly single payer system means that their requirements and negotiations using data with government early are much more important and getting those right open the market overtime and Thats what.
We've been working on so clearly that's an in early a set of opportunities for us as well our methodology. When we think about a total available market is to be conservative in the early days show that we can bring real value and then revises, we see greater depth other companies take a different statistical approach.
To that.
Thank you so much.
Next we turned in line or Vijay Kumar with Evercore ISI. Please go ahead.
Hey, guys. Thanks for taking.
My question, maybe actually stop you know tacking on that last question Gary.
I just look at the medium term outlook right, just given where we are in the capex cycle given the amount of five product cycles or did you guys have on a number of different platforms up where you know I know historically you looked at utilization rates as being up on on the system utilization rates the growth in system utilization as being a leading indicator for says.
Adams.
Is this now given the given the acceleration, we're seeing and procedures is that a leading indicator for us systems. Like can you just give a sense for what drives that systems next year I'd. Because obviously you have competition I'm. Just curious given you know why we're seeing based procedures accident reading a is that an indicator for how we should be modeling systems.
Was it does.
Draw a broader picture I'll, let kelvin speak to a little bit of the modeling.
And the in the broader sense, we know that in a mature market.
That has experienced with robotic surgery that that procedure demand will drive the underlying system demand and there's two ways that they go about a one is capacity and they can get additional capacity by more efficient utilization of their systems.
We have designed our systems with that in mine, we worked closely with them and in the inverse arrangements to help them get improved efficiency that will have to buy index system. If they don't want to.
The other thing is feature content does the there's the product out of the feature content that's required to do the procedures. They want to do and so we work with them on those things.
Clearly competitors will enter the market in May claims and I guess, what I would say for.
Both customers and for shareholders.
Due diligence is really important oh, it's really easy to make claims on trade show floors, and it's pretty hard to back them up in real life and the our experience in the world has been that Theres a lot of noise in the beginning.
As those claims are made and then it takes a couple or three years and the in the actual clinical market in clinical use.
To see what the broad market thinks about that.
That will have an impact for us in the next few years I don't know if its next year the year after and and I think that's what marshals commentary was signaling is that the customers will evaluate and we'll take their time and that that may change capital acquisition cycle timelines or otherwise and they changed the nature of negotiations for us.
But we're planning and thinking for the long term and we're focused on enablement of the quadrupling that will will be here for our customers as we go through that.
Calvin anything you want to help with on modeling no I mean, clearly procedures are the the catalyst for driving the demand for systems. When we look at our models. We would expect to can see a continuation of the trend of increasing utilization overtime VJ. If you have a short follow up this is your chance.
One quick follow up by Gary I'm going head count is up 30% up from 5000, <unk> Cross 7000, I'm. That's an impressive phenomenal number I'm just curious and now you know where Ah that is going thank you.
Yeah, we we try to balance our growth in our investments.
By both the opportunity and we think the opportunity is enormous and durable.
And then we balanced it by what we think we can achieve and do well and that really is what caps or or growth in our spend.
Absorbing training selecting developing a staff during rapid growth is really the challenge and Thats, what we were focused on.
As we get into 2020, 2021, and we'll we'll share with you in future quarters, what our plans are but we try to balance those two things.
Being agile and pursuing the opportunity at the same time, making sure we're not over extended and losing our ability to execute and be efficient.
So thank you that was all last question in closing we believe there is a substantial and durable opportunity to fundamentally improve surgery in acute intervention.
Our teams continue to work closely with hospitals physicians and care teams in pursuit of what our customers of term the quadrupling.
Better more predictable patient outcomes better experiences for patients that are experiences for their care teams and ultimately a lower total cost of treatment.
We believe value creation in surgery in acute care as Foundationally human it flows from respect for an understanding of patients and care teams their needs and their environment.
Thank you for your support on this extraordinary journey to improve surgery, we look forward to talking with you again in three months.
Ladies and gentlemen that does conclude or conference for today. Thank you for your participation and for using 18 T. Executive teleconference Service you may now disconnect.