Q4 2019 Earnings Call
Ladies and gentlemen, thank your for standing by and welcome to intuitive Surgical's fourth quarter 2019 earnings release.
This time all lines are in listen only mode. Later, we will have a question and answer session. If you wish to ask a question on the call. Please press. One then zero once again, that's one zero as a reminder, today's conference is being recorded I'd now like turn the conference over to senior director of Finance and Investor Relations.
Calvin Darling. Please go ahead.
Thank you good afternoon, and welcome to intuitive fourth quarter earnings call call with me today, we have Gary good hard 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 the company Securities and Exchange Commission filings, including our most recent Form 10-K filed on February four 2019, and 10-Q filed that October 18 29 team.
Resi see 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 this conference call will be available for audio replay on our website that intuitive dot com on the latest events section under our Investor Relations page.
In addition, todays 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 fourth quarter results as described in our press released announced earlier today, followed by a question and answer session.
Gary will present, the quarters business. It operational highlights Marcia will provide a review of our fourth quarter financial results, then I will discuss procedures and clinical highlights and provide our financial outlook for 2020, 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.
I had intuitive we measure our efforts by their ability to positively impact the quadrupling.
Better outcomes better patient experience better care team experience and lower total cost to treat per patient episode.
This fourth quarter of 2019 was another strong one for intuitive in pursuit of these names capping a good year for the company.
Our performance was reflected in healthy total growth and customer use of our systems, new capital installations sustain quality service of our customers clinical publications and the launch of new products and services.
For the quarter Global procedure growth was approximately 19% growth was led by general surgery in the United States with positive contributions to the global growth rate from Japan, China, Germany in Korea.
Globally customer utilization of systems increased again in the quarter, indicating greater productivity per installed system.
Leasing and alternative placement models have also helped our customers gain access to additional procedure capacity with lower capital outlays.
In the United States year over year procedure growth for the quarter was 18% general surgery accounted for the largest increase accompanied by stable growth in urology in gynecology.
Within general surgery hernia repair coal suspect me Barry I trick in colorectal surgery showed strength.
Outside the United States. Several markets are early in their transition from growth in urology to other surgical categories, including gynecology thoracic surgery in general surgery with growth varying by country.
Calvin will take you through 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 we placed 336 systems in the quarter, where the growth in total placements rising 16% from Q4 2018.
Net of trade ins and retirements or de Vinci installed base grew to approximately 5582.
The mix of system placements this quarter continues to favor our flagship excise system and trade ins were healthy.
The proportion of systems placed under operating leases was 30% this quarter compared with 33% last quarter.
As a reminder, total placements and that percentage of systems placed under lease were usage based arrangements can vary substantially quarter to quarter.
Over the past several years, we've been working to enable greater access to our products and services.
For example, we believe leasing and uses based models benefit our customers by lowering barriers for them to provide high quality computer aided interventions.
We anticipate continuing to expand access and lower cost for our customers as our business progresses into different procedures and geographies.
Turning to expenses, we believe we're still in the early days of computer aided surgery in acute interventions.
As a result, we're investing and building our capability in several important ways, including deepening internationally launching our new platforms, strengthening or computational capabilities and executing projects that support future scale and provide leverage opportunities as we grow.
Our spending for the quarter and for the year was within the upper end of the spend guidance, we shared with you in 2019.
It is supported by solid procedure growth capital placements and product cost reductions.
Financial highlights of our fourth quarter results are as follows procedures grew approximately 19% over the fourth quarter last year, we placed 336 davinci surgical systems up from 290 in the fourth quarter of 2018.
Our installed base grew 12% from a year ago.
Revenue for the quarter was approximately $1.3 billion up 22%.
Pro forma gross profit margin was 72.2% compared to 71.8% in the fourth quarter last year.
Instrument and accessory revenue increased to $671 million up 24%.
Total recurring revenue in the quarter was $896 million growing 24% over Q4.
2018, and representing 70% of total revenue.
We generated a pro forma operating profit of $506 million in the quarter of 23% from the fourth quarter of last year and pro forma net income was $417 million up 18%.
Highlights for the full year 2019 are as follows.
Procedures grew approximately 18% over 2018, we placed 1119 systems in the year growing the installed base, 12% over 2018.
Revenue for the year was approximately $4.5 billion growing 20% over 2018.
And pro forma net income was approximately $1.5 billion up 17% over 2018.
Turning to progress in our innovation pipeline I'll start first with systems.
We are in our phase one launch of de Vinci SP, and we're working to expand its clinical clearances and build S.P. products at scale.
In the quarter, we installed six systems to bring our installed base of SP to 44.
Customer response in early clinical results using S.P. remain encouraging with over 50 peer reviewed clinical articles on SP today.
With regard to additional indications for S.P., we've been in discussion with FDA regarding data requirements for a colorectal indication.
We expect this to require an I'd trial that includes follow up analysis.
This implies we do not expect a third indication for SP in the U.S. in 2020.
While I would like a faster launch of S.P. The combination of additional indications for ASP and our readiness for deployment at larger scale well pace the speed of RSP commercial expansion.
In flexible diagnostics, our eye on platform is focused on the need for accurate and timely biopsies to support definitive early diagnosis of suspicious lesions.
As of the ended the quarter. There are approximately 16 systems in the field, some commercial and some clinical trial sites with several hundred procedures performed.
Today, the rollout is meeting our expectations and user feedback during this initial launch period has been strong.
We expect several publications reviewing the performance of volume to be presented during 2020.
Turning to instruments and accessories, our team has been making great progress in building out our instrument portfolio with high quality products.
Our experience has shown that procedure adoption occurs when holistic when the holistic needs of the care team are met.
When the right system and imaging products come together with the right instruments and accessories.
Our team initiated our first phase launch in the quarter for our sync Brasil ceiling in transaction device, along with our first integrated energy controller called the 100.
I think we're still provides surgeons with wristed precise and fast ceiling in transaction ability often used in general surgery early feedback on its performance has been outstanding So Brazil joins our portfolio of advanced instruments stapling instruments in advanced energy instruments that customers are now adopting in their davinci cases.
Turning to imaging in analytics were working on imaging computing and real time cloud technologies that allow for capabilities from big data analytics to tell them entering to augment a reality.
Sure alone intuitive surgical simulators had been used for over 17000 hours by more than 5800 surgeons.
Our iris augmented reality system at our clinical use in the fourth quarter of 2019, and we're pleased with our first customer responses.
Over the past several years, our analytical capability has increased and we now routinely engage our customers to help assess the performance of their robotic assisted surgery programs relative to other surgical modalities.
Armed with local comparative analysis of robotic assisted surgery within their institutions.
Hospitals with active programs have been building access to davinci systems and growing their programs.
We expect continued investment and progress in these areas in 2020.
As we move into 2020, let's step back and review the de Vinci surgery universe.
In the past several years general surgeons have increased their adoption of our offerings underpinned by improvements in the quadruple aim in procedures. They perform from hernia repair repair coal suspect me in colorectal surgery to bariatrics surgery.
The surgical procedures span a broad range of complexity and economics at the same time intuitive continues to deepen our capability in key countries to support the adoption of robotic assisted surgery in their health care environments.
We are flexing 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 <unk> pursue the quadruple lane I 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 in innovation in both technology and business models, and we see a path to do both.
Moving into 2020, we are focused on the following.
First supporting adoption of Davinci, and general surgery, including hernia repair colorectal procedures and bariatrics second launching our MSP Island imaging instruments in analytics platforms third extending our depth and Oh, U.S. markets, particularly Asia, Andy you with growth reality urology.
And finally, supporting additional clinical and economic validation in our focus procedures in countries.
Lastly, we are pleased to published today, our inaugural sustainability report, which you can find on our website outlining our multiyear efforts in these areas.
Ill 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.
Revenue in procedures are consistent with our preliminary <unk> press release of January nights.
Key business metrics for the fourth quarter were as follows fourth quarter 2019 procedures increased approximately 19% compared with the fourth quarter of 2018, it increased approximately 11% compared with last quarter.
Procedure growth continues to be driven by general surgery, any U.S. and urology worldwide. Calvin will review details of procedure growth later in this call.
Fourth quarter system placements of 336 systems increased 16% compared with 290 systems last year and increased 22% compared with 275 systems last quarter.
We expanded our installed base of de Vinci systems by 12% to approximately 5582 systems. This growth rate compares with 12% in the last quarter in 13% last year.
Utilization of clinical systems in the field measured by procedures per system grew approximately 6%, which is the same as the 6% growth last quarter and last year.
Our revenue overview is as follows fourth quarter 2019 revenue was 1.3 billion, an increase of 22% compared with 1 billion for the fourth quarter of 2018, and an increase of 13% compared with 1.1 billion last quarter.
Instrument and accessory revenue of 671 million increased 24% compared with last year, which is higher than procedure growth, primarily reflecting customer buying patterns in increased usage of our advanced instruments.
Instrument and accessory revenue realized per procedure was approximately $1980 an increase of 5% compared with the fourth quarter 2018 and was consistent with last quarter.
Instrument and accessory revenue per procedure has grown in the low single digits over the past couple of years, reflecting increased usage of our advanced instruments, partially offset by higher growth and benign procedures, where revenue per procedure is lower than the overall average.
While adoption of benign procedures has been a major contributor to the overall I in a revenue.
To the extent benign procedures grow faster than complex procedures.
Eight per procedure may decline.
In addition overtime as we achieve greater penetration of our advanced instruments in de Vinci procedures the growth rate for advanced instruments will slow and align with the growth rate of underlying procedures, which advance instruments are used.
Systems revenue for the fourth quarter 2019 was 416 million an increase of 22% compared with the fourth quarter 2018, and an increase of 23% compared with last quarter.
Relative to the fourth quarter of 2018 systems revenue reflected higher system placements higher asps and higher lease related revenue.
We completed 126 operating lease transactions, representing 38% of total placements compared with 84 or 29% of total placements in the fourth quarter of 2018 in 92 or 33% of total placements last quarter.
As of December 31st we have 658 operating leases outstanding in realized approximately 34 million, but revenues related to these arrangements in the quarter compared with 16 million last year and 27 million last quarter.
Operating leases create a future source of recurring revenue and reduce the volatility of system revenue by the increased number of operating systems GAAP operating leases 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 provided 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 purchased over the lease period, we are in a small premium reflecting the time value of money in in the case of usage based arrangements the risk that those systems may not achieve anticipated usage levels.
The proportion of operating lease and usage based arrangements will likely increase long term and will vary quarter to quarter.
We recognized 34 million of lease buyout revenue in the fourth quarter compared with 20 million last quarter in 17 million last year.
Lease buyout revenue is very significantly from quarter to quarter and will likely continue to do so.
138, or 41% of current quarter system placements involved trends, reflecting customer desire to access or standardize on our fourth generation technology contributing to an x. I installed base growth of 39% year over year. This is an increase compared with 81 or 28% of system placements in the fourth.
Quarter of 2018.
116, or 42% last quarter.
Trading activity can fluctuate and can be day difficult to predict however, given prior true product trade in cycles, we expect the proportion of the installed base traded in future quarters to decrease over time.
81% of the systems placed in the quarter were de Vinci exercise and 16% were de Vinci ex systems, compared with 79% de Vinci exercise in 17% de Vinci axis last quarter.
Six of the systems placed in the quarter fourth quarter were SP systems.
Our rollout of SP surgical system will continue to be measured putting systems in hand of experience.
Davinci users, while we optimize training pathways and our supply chain.
We play seven eye on systems in the quarter.
On system placements are excluded from our overall systems count it will be reported separately procedures and other information associated with Iran are excluded from our prepared remarks, it will be reported separately when they become more substantive.
Globally, our average selling price, which excludes the impact of operating lease revenue and lease buyouts was approximately 1.61 million compared with 1.46 million last year and 1.57 million last quarter.
Our fourth quarter Asps reflect a favorable geographic mix as we sold 39 systems into China, and 26 into Japan, where asps are higher given the higher cost of doing business in those geographies.
Excluding geographic mix ASP for the quarter declined slightly relative to the third quarter, reflecting pricing arrangements associated with a higher mix of multi system contracts.
System, Asps will fluctuate geographic consistent mix and may decline relative to the average total 2019, ASP, reflecting increased multisystem arrangements.
Outside of the U.S. results were as follows.
Yes procedures grew approximately 22% compared with the fourth quarter, 2018, and increased 9% compared with last quarter.
Fourth quarter revenue outside of the U.S. of 422 million increased 37% compared with fourth quarter of 2018 and increased 27% compared with last quarter.
The increase compared with the prior year reflects increased instruments and accessories revenue of 47 million or 39% growth and increased systems revenue of 58 million or 42% growth.
The increase in instrument and accessory revenue was primarily driven by procedure growth and stocking orders associated with China system sales.
The increase in systems revenue is primarily the result of increased placements and increased asps, reflecting favorable geographic and product mix.
Outside of the U.S., we placed 140 systems in the fourth quarter compared with 115 in the fourth quarter 2018, and 90 systems last quarter.
Current quarter system placements included 54 into Europe , 26 into Japan, and 39 into China, compared with 55, and Europe 31 into Japan into into China in the fourth quarter of 2018.
71% of the systems placed in the quarter were davinci exercise and 24% or Davinci X systems, compared with 55% Davinci exercise and 30% de Vinci axis last year.
32 of the system placements in the current quarter, we're operating leases compared with 15 last year and 21 last quarter.
The 39 systems into China included customers, who had begun your tender processes and we believe expedited their purchase cycles to avoid a tariff increase there was expected on December 15th.
The proposed tariff was suspended on December 13th.
We would expect remaining purchases under the quota to be completed consistent with historical timelines and therefore, we expect placement placements to be lower into first quarter in skew more towards the end of 2020 and into 2021.
While overall European system placements were relatively flat in the quarter and for 2019 shipments by country fluctuate significantly.
Placements into the four largest European markets increased 29% in the fourth quarter and 19% for the for the year.
Overall placements outside of the U.S. will continue to various some of the O us markets or early stages of adoption. Some markets are highly seasonal reflecting budget cycles or vacation patterns and sales in some markets are constrained by government limitations.
Moving on to gross margin in operating expenses pro forma gross margin for the fourth quarter 2019 was 72.2% compared with 71.8% for the fourth quarter 2018 in 72% last quarter.
The increase compared with the fourth quarter of 2018 and last quarter, primarily reflects higher system asps in product cost reductions future margins will fluctuate based on the mix of our newer products mix of systems and instrument and accessory revenue system, Asps and our ability to further reduce product costs and improve manufacturing afib.
Currency.
Pro forma operating expenses increased 23% compared with the fourth quarter 2018 increased 19% compared with last quarter.
Spending is consistent with our plan includes an order of magnitude of increase costs associated with expansion of our ROE U.S. markets spending on our imaging and analytics capabilities and investment in our infrastructure in order to scale the business.
We believe we have a unique opportunity to expand the benefits of computer aided surgery and acute interventions around the world and have been and we'll continue to invest in the business Accordingly.
Our pro forma tax rate for the quarter was 21.1% compared with our expectations of 19% to 20% reflecting geographic mix.
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 onetime items.
Our fourth quarter 2019 pro forma net income was 417 million or $3.48 per share compared with 353 million or $2.96 per share for the fourth quarter, 2018, and 409 million or $3.43 per share for last quarter.
I will now summarize our GAAP results GAAP net income was 358 million or $2.99 per share for the fourth quarter 2019, compared with GAAP net income of 293 million or $2.45 per share for the fourth quarter 2018, and GAAP net income of 397 million or $3 30.
Three cents per share for last quarter.
Adjustments between pro forma and GAAP net income are outlined in quantified on our website. It include excess tax benefits associated with employee stock awards employee stock based compensation in IP charges.
Amortization of intangibles and acquisition related items and legal settlements.
We ended the quarter with cash and investments of 5.8 billion compared with 5.4 billion at September 32019.
The cash generated from operations was partially offset by investments in working capital and infrastructure during the quarter.
Capital expenditures for the quarter in the year are higher than historical averages as we invest in our infrastructure, we expect investments in our infrastructure to continue into 2020.
In the quarter, we grew inventory by approximately $16 million to 596 million, representing approximately 142 days of inventory, which is slightly lower than at the end of the third quarter.
We did not repurchase any shares in the quarter and have approximately 1.7 billion remaining under the board buyback authorization.
In summary, I want to highlight certain business dynamics that may impact your models.
First as I noted.
We will grow operating expenses appropriately as we see the substance substantial opportunity to expand the benefits of computer aided surgery and acute interventions Calvin will provide you with operating expense growth guidance.
In addition, as we aligned to our with our customer needs. We believe the percentage of leasing and alternative financing arrangements will increase over time. We also believe the number of trade and transactions will level off into short term and then decline over time.
System Asps will fluctuate with geographic consistent mix. It may decline relative to the average total 2019, MSP, reflecting increased multi system arrangements.
Well adoption of benign procedures has been a major contributor to overall I in a revenue to the extent benign procedures grow faster than complex procedures I in a per procedure may decline.
Lastly is likely we will see elongated negotiation timelines and possibly price pressures as competition gets closer to launching their products.
We will continue doing to manage the business for the long term as we believed that the fundamentals of the business are strong and with that I'd like to turn it over to Calvin will go over.
Procedure performance in our outlook for 2020.
Thank you Marshall our overall fourth quarter procedure growth was approximately 19% compared to 19% during the fourth quarter of 2018, and nearly 20% last quarter.
Our Q4 procedure growth was driven by 18% growth in U.S. procedures.
And 22% growth I know you asked markets overall procedure growth for the full year 2019 was approximately 18% equal to 18% in 2018 comprised of 17% growth in the U.S. and 21% growth and all U.S. markets.
In the U.S. Q4 procedure growth was consistent with recent trends and was largely driven by continued strength in general surgery with substantive contributions from gynecologic and neurologic procedures.
In U.S. general surgery fourth quarter growth and leading procedures hernia repair and colorectal remains solid at rates consistent with last quarter.
Well, it's a steady growth continued to accelerate in the fourth quarter and now represents a significant driver of incremental procedures.
Ill Davinci call is suspected mi adoption has been robust given the high level of lap penetration it is difficult for us to predict the extent and pace of future coli adoption.
Barry Ettrick procedures also showed continued solid growth in Q4 and will become an increasing area of field focus for us in 2020.
For the full year 2019, approximately 421000 U.S. general surgery procedures were performed up 29% from 2018, representing approximately 48% of overall U.S. de Vinci procedures.
Q4, U.S. gynecology procedure growth was largely consistent with the first three quarters of 2019.
For the full year 2019, approximately 282000, U.S. gynecologic surgery procedures were performed up 6% from 2018, representing approximately 32% of overall U.S. procedures.
In U.S. urology fourth quarter Dvp growth rates continued to exceed our expectations, although growth did moderate from Q3.
For the full year 2019, approximately 138000 U.S. neurologic procedures were performed up just under 10% from 2018, representing approximately 16% of overall you asked to Vinci procedures.
As a highly penetrated procedure category, we believe that our U.S. prostatectomy volumes should track to the broader prostate surgery market and will likely grow more modestly in 2020.
Fourth quarter, all U.S. procedure volume grew approximately 22% compared with 24% for the fourth quarter 2018, and 23% last quarter.
Fourth quarter 2019, all U.S. procedure growth was driven by continued growth in urology procedures and earlier stage growth in general Gynecologic anther ask surgery.
In China as in Q3 procedure growth accelerated modestly as new systems installed under the latest system quota began to provide capacity for incremental growth in.
In Q4, the China procedure growth rate slightly exceeded the overall U.S. metric.
As Marshall mentioned 39 systems were shipped into China in Q4.
Note that 35 of these 39 systems went to new hospitals teams and these hospitals will need to move through training pathways and established a vinci procedure processes before these new systems contribute meaningfully to procedure growth in China.
In Japan procedure growth was again strong at just over 40% reflecting growth in procedures granted reimbursement status in April 2018, and continued later stage growth in urology procedures.
Our emphasis in Japan remains on surgeon and team training and building Proctoring networks.
Overall European procedure growth was largely consistent with prior periods with variation by country.
Chairman results were particularly strong while results in the UK lab.
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 a scientific studies that have been published over the years.
Our recent article by doctors Wexner and Emil at all in the journal of techniques in Colo product technology, providing results from a systemic review and Mehta analysis of Intercrop parrell versus extra corporeal anastomosis in minimally invasive right colectomy.
This study analyze data from 25 studies and 4450 patients into our core Parrell and asked them losses was associated with significantly shorter lengths extraction cycle decisions earlier earlier follow recovery fewer complications and lower rates of conversion.
The Nast demotic leaks surgical site infections, and Incisional hernia as compared to extra couple rail and asked to Mosys.
This study highlighted the many clinical outcome advantages associated with intricate oriel and ask the mosys.
Davinci systems instruments, and smart stapling technology, enabling performing and asked and most of the ball inside the body and it is our hope that more patients can benefit from intra proportional and asked and Mosys with continued adoption of our technology.
Intuitive investment in a prospective multi center intra proportional versus extra corporeal anastomosis study.
Pairing robotic versus laparoscopic approaches called the anchor study is timely and the enrollment for this study is expected to be completed this year with results expected in 2021.
The details of the anchor study are available online at clinical trials Dot Gov.
I will now turn to our financial outlook for 2020.
Starting with procedures as described in our announcement earlier. This month total 2019 de Vinci procedures grew approximately 18% to roughly 1.229 million procedures performed worldwide.
As communicated previously during 2020, we anticipate full year procedure growth within a range of 13% to 16%.
We expect 2020 procedure growth to continue to be driven by us general surgery and procedures outside the United States, where we're at earlier stages of adoption.
We expect similar seasonal timing of procedures in 2019, as we have experienced in previous years with Q1 being the seasonally weakest quarter as patient deductibles are reset.
Q1, and full year 2020 will benefit from one extra working day attributable to leap year.
With respect to revenue as we have mentioned previously capital sales are ultimately driven by procedure demand catalyzing hospitals to establish or expand robotic system capacity capital sales can vary substantially from period to period based upon many factors, including U.S. healthcare policy hospital capital spending cycles reimbursement and go.
Permit quotas.
Product cycles economic cycles and competitive factors within this framework, we'd expect 2020 capital placements seasonality that generally follow historical patterns by quarter.
During the fourth quarter of 2019, 126 of the 336 systems shift or 38% or under operating leases. We expect the proportion of systems placed in the operating leases will vary from quarter to quarter and could trend up in the future.
During Q3, and Q4, 42% and 41% respectively of systems placements or upgrades to our Gen four platform.
As we mentioned last quarter, we expect the proportion of trade and transactions to generally trend downwards in 2020.
Turning to gross profit our full year 2019 pro forma gross profit margin was 71.7% in 2020, we expect our pro forma gross profit margin to be within a range of between 70 and 71% of net revenue.
Slightly lower gross profit margin anticipated in 2020 reflects higher sales of newer products and infrastructure investments. 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 in 2019, our pro forma operating expenses grew 27%.
In 2020, we expect pro forma operating expenses to grow between 15 and 20%.
We expect our noncash stock compensation expense to range between 400, and 440 million in 2020 compared to 336 million and 2019.
We expect other income which is comprised mostly of interest income total between 101 hundred 15 million in 2020.
With regard to income tax in 2019, our pro forma income tax rate was 19.5% as we look forward. We estimate our 2020 pro forma tax rate to be between 20, and 21% a pre tax income.
With the increase primarily reflecting the anticipated geographic mix of pretax income.
That concludes our prepared comments, we'll now open the call to your questions.
Okay, ladies and gentlemen, if you do wish to ask a question on the call it's one than zero.
Once again, if you have a question please press one zero.
Our first question will come from the line of David Lewis with Morgan Stanley . Please go ahead.
Great. Good afternoon, just two questions for me Gary I want to start with you first on coli, it's probably your largest procedure said in terms of volume two sequential quarters of acceleration within coli. Obviously, you still very low penetration historically that was tied to sort of training physicians would use coli as we have training a broader general surgery procedures, but just talk about the last two.
What does acceleration is procedure do you think that's simply training a leading indicator of general surgery or do you think something is going on.
From that within broader coli quick follow up okay. On the first one just I'm going to put a posted note on the assumption of that size relative to everything else I'll, let kelvin come back and put in context size wise in terms of current run rate, but the underlying question of what are we seeing in close contact me. We think there's a segment there where we're bringing differentiated.
Clinical value.
Could be underlying political elements like obesity co morbidities a.
The state of disease of the gallbladder, so wallets, a large category as a whole.
Generally well served by a minimally invasive surgery today, there are segments in it that are difficult and.
For which we think current product sets do really well there's also a set of training.
Or people.
A deepening their experience as they go through it so there's a mix of those who we think there is a durable component segmenting out how big that is over time, we're still working through where we think those endpoints are.
We have seen it both grow in the last few quarters and appeared to be sticky not not to have via a transient.
And in terms of kind of setting in context relative to other procedures no I mean, the size of the market you can tell from our commentary it's gotten to the point, where general surgery is a meaningful enough category its a.
At a more and more significant contributor to growth within the general surgery category Thats growing overall again as we mentioned the commentary it's hard for us to gauge given the high lap penetration there too to what extent and what pace. It may ultimately adopt.
Okay and then just curious second question for me is just on the capital environment.
Your fourth quarter U.S. net placement growth as a lower in Europe in 29 team is a lower on a net placement basis.
Maybe just comment an underlying demand for systems in the U.S. and the European markets. It also curious if has in any respect has competitors introducing new systems are talking about their new systems for probably has had in any way impacted demand or change the conversation you're having with large I'd ends in the U.S. or European customers. Thanks, So much.
On the err on the outline of the first question you sort of think about what the installed base growth was so if you think about capital demand underneath there's what's happening to install base. So.
Opening additional capacity in various places or trade ins of older generation systems.
I'll, let Marshall speak to the quantitative nature of your question with regard to us and in Europe , but I'd say there is.
Something theres some trading dynamics that I think the team has been discussing with your last couple of quarters.
In General I think we're feeling like it's reasonably stable on the second piece of what will competitive advertising and conversation do from time to time, we see a delay deals we definitely see.
Increasing conversations as they get closer to market with what they want to do or other companies are we're starting to get some clearances and in other regions.
In general our teams have handled that pretty well.
But I think the noise level will increase.
I think that customers are interested in listening to other pitches I think we're pretty well positioned to have a conversation about that but I do see delay from time to time at kind of comes in waves.
And then it'll settle as the as the world figures out kind of what their offering but Marshall maybe a little bit on will more quantitative answer than that first the capital.
Environment has been approximately the same there haven't been much in terms of change in modems and so forth over the last over the last several quarters.
The the number of systems that we placed in the U.S., which is disclosed on the web web site is is what is healthy and are in our view in fact, which you. The other way we measure how healthy were how well. We're doing is the utilization of systems in utilization systems growth as I said was 6%, which is consistent with where it's been.
And in Europe , we saw as I said, maybe flattish a number of systems placed both in the quarter.
As well as compared to the previous year in total and.
Just be aware of averages and it's going to be lumpy when you're in earlier stages of adoption is less mature markets, you're going to see a lumpiness to placements of capital.
When we look at the four largest markets.
We saw nice growth, which again.
Calvin commented procedure growth in Germany was strong and we saw a nice placements in Germany for example.
That help great. Thanks, so much.
Our next question will come from the line of Tyco Peterson with JP Morgan. Please go ahead.
Hey, Thanks out I'll start with Espeed just curious following your discussions with FDA any color you can provide I'd just when the trials going to start size and what's expected for follow up analysis, and then outside the U.S., you're obviously generating data on SP and thoracic and I was saying create can you just talked about some of the data generations outside the U.S. as well.
Sure on the first one I think we're settling in on of what are the trial will look like in and I'm not ready yet to answer that but I think we're getting close so in the.
Future quarters, we should be able to answer that question.
With regard to what we're seeing elsewhere, we're starting to see in terms of Korea, where we have more oh regulatory room.
And clinical indications are we'll start seeing a whole series of publications coming out.
Talking about where there's opportunity.
Yes, it's I think going to be quite interesting.
And and shows real potential forces the thing that drives our underlying commitment in an excitement.
I don't have the month took my fingers I do know that in future quarters, we will start describing to you what the substance of some of these publications or as they start to release.
And then just sticking with pipeline from it and on can you just comment on Iris, where we are in the rollout. It's obviously early days and then also if you could you comment separately on the Shelly Endoscope acquisition and.
The supply chain headwinds there.
Great I will do so our as a first couple accounts up and running we expect more this quarter.
It's really testing the whole order too.
Delivery pipeline think of that as a digital pipeline that has to go through of.
Feedback is really encouraging.
So this early part of it's one of these things as you described but to do well his heart of making sure. All your cloud connections are right, making sure you have all your your security protocols done getting the turned to turnaround times right getting your all your machine learning algorithms right.
Feedback has been really good about its ability to help surgeons visualize pre case, which is fantastic use in other kinds of ways in terms of patient consultation and then access during the case. So the kind of the core idea I think is being vetted nicely. We've said before we don't think it's a significant revenue driver in 2020.
I think.
Encourage people to think about this as baseline core technology the kinds of things that as you develop systems like this in the future that customers will come to expect a little bit like our Firefly product. It is additive in the way that it's the system itself becomes greater than the some of its parts. So.
Yes, I think books.
Quite strong on the show the acquisition the team's doing a really nice job.
We are right to bring it in we're rights, bringing in when we did.
That is doing a couple of things for us, it's giving us.
A little more alignment around next gen products, which is exciting for us, it's helping us double down on some investments in terms of capacity and efficiency that goes with that capacity.
And it will in the medium term start releasing some profitability and financing with regard to the way we produce our endoscopes that can be turned around and reinvest in the business. So.
So far so good it is real work.
They are in a very good team I think we knew what we were hub of bringing in and acquiring I'm really pleased with the leadership with a group and our team members that have joined us in Germany in Boston or in the Massachusetts.
It's not say there was an work to be done, but so far so good.
Okay, and then one just last clarification from Marshall you called out of China, Paul for dynamic around the tariff changes in the context as a 39 systems are you able to quantify how much of that was tied to the tariff.
Well.
Not a can't quantify specifically I would just tell you that there were a number of us systems that.
The customers decided to expedite the process and we were the beneficiary of that obviously.
Okay. Thank you.
All right. Our next question will come from the line of Bob Hopkins with Bank of America. Please go ahead.
Great. Thank you just to Chris first description bond I inhibitor in case, you highlighted some tailwind.
You'll headwind called out that revenue base could do next year.
Hey.
God, we heard so you understand it's broken the I kind of broken up on the call. So could you repeat the question.
Sorry about that just on instrument revenue just want to make sure I hear the messaging because there's some positive some positives.
Probably thought it could decline by.
Stapling just wanted to share the messaging on the I had a line or up for the next 12 months.
Yes, so what I said, Bob was we've we've really seen good contribution to I in a revenue overall from benign procedures, but as we've described before the the increase in the <unk> per procedure is really a reflection of.
Additional advanced instrument revenue.
And then a per person per procedure offset by benign procedure growth. So all in calling out as if were successful in growing benign procedures much faster than complex procedures than you will see than that it will win the tug of war and therefore your eye on a per procedure might decline.
The advanced instruments we've.
We've enjoyed further penetration into.
The procedures in which advanced instruments are used and as that has occurred then our revenue associated with procedures. Our revenue per procedure has grown disproportionately to the number of procedures over time as you penetrate that then you will revert to Europe advanced technology growth.
We will be consistent with the number of additional procedures you add versus adding also incremental procedures that were previously not not including it. So so overall, we're saying is that there's the potential that the growth rate will decline, we still expect growth just just a lower rate.
Okay. Thank you and then quick question on U.S. capital over the last couple of years, the growth and procedures to our average system has been remarkably consistent at about 5% and especially in the U.S. is there a reason in your view why that number might change meaningfully in 2020 or is that Oh that trend line expected to continue.
No I think Directionally, a continued growth and procedures per system is something we would expect something that we're actively working with customers sharing analytics and data to help them or to make their practices programs as efficient as they can be so I think the.
Trend I don't know if at all going to continue at exactly the same race, but increasing a utilization is something we would expect.
[laughter].
Thank you.
Our next question will come from the line of Larry Biegelsen with Wells Fargo. Please go ahead.
Good afternoon, and thanks for taking the question hopefully you guys can hear me. Okay. Just no one on eye on and then one on the Pinedale how should we think about the ramp of eye on in 2020 is it still going to be a controlled launch should we just expect a steady increase in placements and I had one follow up.
As we've said in our prepared remarks.
It is in the early stages of a have a measured launch and so you should expect that it will grow slowly overtime.
It slowly through 2020 in and then more rapidly thereafter.
I got it and gross margins came in better in 2019 versus your original guidance what are the puts and takes on the gross margin in 2020 and separately Gary R&D as a percentage sales has been increasing steadily it's almost 10% of sales in 2019, where do you see that going over time, thanks for taking the questions guys.
Sure so for gross margins.
The gives and takes our as I outlined in my prepared remarks.
Pricing on systems.
Reductions in cost manufacturing efficiency.
And.
And mix mix of both customers and and and types of product and I think that were messaging for next year is that.
Gross margins will decline slightly reflecting.
Primarily product mix.
And and and a shift.
Effect of new product.
And investments in the infrastructure.
And R&D Marshall as a percent of sales.
Maybe I'm just curious if you know you expect that to continue to increase sorry, Gary Yeah, I know I can jump in and take that one I think about.
We have grown R&D is presented to sales a pretty consistently over the last three years and in our messaging to has been a we're going to bring a couple of new platforms to market and in parallel with some of our multiport efforts SP an island being those to.
That we think that.
Next Gen imaging in non optical imaging is important non non white light imaging is important than we've been investing that domain.
We have been.
Investing for scale, we've talked about the fact that I think there's a virtuous cycle here, which is utilization goes up in volumes go up.
It allows us to start taking advantage of automation opportunities in changing the way we manufacture that has taken the company to be a little more capital intensive than in years past, but some of the things you were just talking about the linkage to your prior question on gross margin or.
Enabled by these capital investments on multiyear timelines that allow us to to get production scale advantages and that allows us to share some of that cost savings with our customer and be able to be into.
Lower complexity procedures I'd, good economics, and good economics for the company as well as the customer so we've been doing that as well and then lastly, it's been building in digital infrastructure. So those are the major buckets that have been taking the R&D spends side.
I think.
We are not thinking that that number of world leap going forward, but we also think we're still.
In the early innings of a baseball game here that that have real opportunity long term for growth for the market and we think that we can position ourselves really well by making sure that those four buckets or adequately staffed.
Marshall and his we're taking the question.
Okay.
Our next question will come from the line of Rick Weiss with Stifel. Please go ahead.
Hi, good afternoon, Gary everybody.
Thank you you talked about Marshall mentioned that I think Kevin mentioned that.
That system trade ins may slow may trend down and I just wanted to make sure that I'm understanding the reasons why is it.
The lack of a major new Nexgen system launch into you you seem to trade in the quote the easy trade in and.
And maybe just as part of that.
Gary just reflecting back on R&D and innovation, obviously, you're launching.
A lot of new products and innovation, but should we be thinking that.
There you don't need to launch.
Next Gen Big Iron ore.
Or how do we think about that those two aspects of our.
Trade ends and the pipeline.
So trade ins, we've been in the middle of a fairly strong cycle of trade ins and you've seen it go up quarter over quarter last two quarters kind of flattening out.
And what we commented on at the end of third quarter, Rick was that.
The total population of Esa eyes that are out there that can be traded in obviously is decreasing as as.
Customers trade in their systems and so the population is <expletive> decreasing and when we look back at historical patterns for previous generation products. We think that were at the peak of how much of that remaining.
Base will be traded in any particular quarter in so that the two of those things lead us to the conclusion that you'll see a decrease in the number of trade ins.
As we go forward.
The second half of the the question I might I made quibble with food description is big aren't so I'm not going on that but I will.
Who oh well talk to.
Innovation Multiport, we're not done in innovating and multiport, we're often asked.
Are you, but are you buy CSP I see ion is.
Is that at the answer is categorically no. We think there's room for additional innovation.
Beyond or or Gen. Four multiport products and we're working on those things.
And just.
Two other quick when.
I'd be curious to hear more.
About salesforce productivity you highlighted.
Gary the improved productivity in third quarter it seems like.
Thats part has to be part of the equation I am guessing in the fourth quarter, how do we think about bat factors that driver in 2020.
Just asked my second when your competitors there.
There's potential robotic competitors are talking about digital surgery, and we've talked about this before but I just wonder if if if you have competitors marketing something called digital surgery.
How do we imagine.
Intuitive answering that kind of.
A functional or marketing push thank you so much.
Okay on the first question is Salesforce productivity, Oh, we saw a move in the right direction in the fourth quarter as some of the underlying dynamics in terms of.
Rapid procedure growth are healthy procedure growth driving.
The need for new territories as still exists so.
So I I'd like credit our.
Sales leadership team is doing a really nice job a bolt.
Managing growth and.
And helping the organization become more productive while thinking through a territory opportunities as well as efficiency opportunities. That's a long way of saying we made a step in the right direction I think they have opportunity to keep moving into right direction in terms of productivity. So far so good.
With regard to some of the commentary around digital surgery I. The short answer is a welcome to the to the party I think that we've been working these issues of for more than a decade as I said before.
The initial response is it's it's a valuable thing to be working on and that's why we've been doing it.
We've been the internet of things in surgical robots for a decade cloud cloud enabled for a decade, we are quite deep.
As you go out and talk a little more than the tag line. You know you talk about what tag ones are what's the substance.
So dig down a little bit and the substance comes down to I think for opportunities one opportunity is in the use of big data.
For analytic power and that says that as you look across a large sets of customers doing various things can you help establish benchmarks that people can improve upon and we have done that it's been something we've been working on so I think we're becoming quite skilled and will become more so.
That's one category. Another category is the use of computing power in real time to aid the surgeon or interventional list during a case to get a better outcome.
And Oh, absolutely interesting there are many many companies in the world that or thinking about that in making progress and we are one of them.
Hi on is fundamentally powered by computing to help you make good decisions Iris is fundamentally a real time computing capability. In addition to big data. So thats one the next bucket is around education, and the and the reduction of variation team. The team, we know that care team variation.
In any acute intervention be it.
Surgery robotic surgery laparoscopy is highly variable and the use of computing and analytics to help that process is clear and you know I've talked to a little bit about.
How much we haven't simulation.
A 200000 simulated.
Tasks done by surgeons as last year 17000 hours of simulation capability. These are things that we can help turn into better learning environments and reduction in care team variation and last bucket is efficiency improvement.
The use of computing technologies and networking to help hospitals become more productive and to help our company become more productive and we're leveraging those opportunities on both to help our customers and otherwise.
So I look forward to the conversation I think it will win the winter won't be the tag line I think the winner will be those who deliver real value that's validated against those four categories.
Thank you so much.
We'll take one more question operator.
Okay that final question.
One moment here.
That final question will come from the line of Richard Newitter with SVB. Please go ahead.
Hi, Thanks for taking the questions just two quick ones. The first a an awesome. Both just just right up front the first one or the.
The comments on call. It secondly, as a training procedure and kind of what you're seeing there as a spillover into again a couple of other channels or they are you seeing that same dynamic increase in the usage or are they utilization within hernia as kind of like a training ground for.
Other types of general surgery, or as hernia kind of also equally as sticky and then the second question.
Just a marshall on the on the eye in a per per case, if the benign growth does accelerate relative to the advanced.
<unk> type cases, what's the impact to gross margin there. Thank you.
Paul All take the first one let Marshall take the second one one thing I would just to be clear on general surgery is a general surgery is a quite a diverse set of procedures with quite a diverse set of practice patterns amongst a general surgeon practitioners are practices.
I'd first of all I think they choose procedures to do not simply to retrain, because but because they think they end the patient can be benefited by that procedure. So I don't think they run off in train for the sake of training I think paid to decide that theres. Some value here they will seek once their way into a practice.
And that would make sense, both by patient selection and by the type of procedure. They do.
You had asked does the same kind of effect of we'll let start with the right patient population for causes secondly, also apply to something like hernia.
The answer that is yes, some surgeons will elect to go into a hernia set first.
Then if they find value in the product find value in the process. They may elect to move from there to a different procedure interestingly we found that.
Theres not a one size fits all way that a practice adopt the they may choose a different entry point, depending on their interest in experiences.
Second question Marshall I in a per case, if a benign procedures where to grow faster than.
More complex procedures, it's a very slight improvement in gross margin in the advance instruments have just as a slightly lower gross margin than our other instruments. Okay that was our last question in closing will believe we believe there is a substantial and durable opportunity to fundamentally improve surgery and acute interventions. Our teams continue to work close.
See with hospitals physicians and care teams in pursuit of what our customers have term their quadrupling.
Better more predictable patient outcomes that are patient experiences better experiences for care teams and ultimately a lower total cost of care per patient episode, we believe value creation in surgery and acute care as foundationally human it flows from respect for and understanding of patients and care teams their needs in the environment in which they operate.
Thank you for your support on this extraordinary journey, we look forward to talking with you again in three months.
Good day, ladies and gentlemen that does conclude todays conference. Thank you for your participation.
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