Q2 2020 Intuitive Surgical Inc Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by welcome to the primitive Q2 2020 earnings release at this time all participants are to listen only mode. Later, we'll conduct a question answer session instructions will be given at that time should you require assistance during the call. Please press star zero.
As a reminder, this conference is being recorded no like to turn the call over two senior director of Finance Investor Relations for intuitive surgical Calvin Darling. Please go ahead.
Q good afternoon, and welcome to intuitive second quarter earnings Conference call with me today, we have Gary good Hart our CEO.
Furthermore, our chief financial Officer, and Philip Kim, whom I'm pleased to introduce our head of Investor Relations.
Last for me well passing the lead over to Phil I plan to continue on in a support role with our Investor Relations team.
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 our Securities and Exchange Commission filings.
Including our most recent form 10-K filed on February 7th 2020, and form 10-Q filed on April 17th 2020.
Our 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 at intuitive dot com on the latest event section under our Investor Relations page.
Today's press release and supplementary financial data tables have been posted to our website. In addition, this quarter. We have also posted chart illustrating 2020 weekly Davinci procedure trends, which is intended to provide additional perspective in detail regarding the impact of cobot 19 on our business.
Today's format will consist of providing you with highlights of our second quarter results as described in our press released announced earlier today.
Led by a question and answer session.
Gary will present, the quarters business it operational highlights.
Marshall will provide a review of our financial results then Philip will discuss procedure details and finally, we will host a question and answer session with that I will turn it over to Gary.
Thank you for joining us today.
On this call will describe works groups in the quarter the actions, we're taking and our priorities going forward.
Our focus now and in the past because the safety and well being of patient care teams or communities and our employees.
Turning first to global procedures, we ended Q2, 2020 down 19% compared with Q2 2019.
Underlying driver for this decline has been the growth of cobot 19, and the communities that are customer service.
Well, we saw procedure declines in all categories, neurology anthrax or procedures were relatively resilient.
On a college experience the greatest decline.
Rates of recovery from lows by procedure type were more uniform.
We've seen hospitals with adequate supplies of staff P E and physical resources returned to about 90% of pre cobot procedure run rates over a few months period.
Recovery above this number as dependent upon the intensity of code in the region patients comfort to return to the hospital availability of testing and patient outreach.
As we stand here in July we see the continued growth of cobot in some regions, both domestically and internationally, making future predictions on hospital capacity for surgery difficult.
Philip will take you through through some examples of regional differences in procedure trends later in the call.
With regard to capital placements, we installed 178, new systems in Q2 2020.
This compares to 273 installs in Q2, 2019, and 237 installs in Q1 20 Twond.
The new the new installs in Q2 2020 represent a clinical installed base growth of 9% after accounting for trade ins.
While these numbers are lower than prior year in prior quarter, frankly, there are greater than our expectation coming into the second quarter due to strong performance in Asia, and some larger IDN placements in the U.S.
That said, we know the correlation between system utilization in the form of procedure demand and capital availability of hospitals as a strong one.
Hospitals will seek to absorb existing capacity before installing the capital.
So on average globally, we expect a challenging near to midterm environment for future capital placements as cobot 19 wears on and hospital expenditures remain constrained.
Because cobot night, because kogut is impacting locales differently, we see significant variability in procedure growth and new system placement interest by region.
I will take you through capital placement trends and risks later in the call.
Stepping back in evaluating hospital approaches to surgery. During this period, we see some principles that are being applied broadly.
During local rapid growth of cobot in a hospital catchment area. There are initial responses to align and train their workforce stabilize their pp and testing capability and if I see resources are scarce. The first surgeries that can be delayed with a manage risk to the patient.
As staff material are nice your resources free up either by diverting patients to alternative sites of care or within the four walls of hospital program directors Treehouse patients in need of surgery and ramp back up.
It's become less impacted we have observed that outreach education, and diagnostic business and procedures come back.
The surge of Covidien communities that were observed represent or core markets either from initial spread or secondary growth is occurring now.
Add to the significant anecdotal evidence of delayed diagnostic visits for non cobot illness, and we expect that recovery tale of surgery will be a long one likely the last many quarters.
The ultimate timing and shape a recovery remains uncertain.
The drivers of a sustained recovery in surgery will likely very regionally and maybe predicated on the extent and duration of cobot outbreaks, the availability of human material and physical resources to concurrently treat coated and noncovered disease.
Patient comfort and returning to care centers for diagnostics or treatment and finally, the relative health of the broader economy and hospital finances.
Intuitive, we're focused on those activities and priorities within our control.
They are as follows first we're focused on the health and wellbeing of our customers our employees in our communities.
As cobot has ramped in our communities, we instituted employee health and safety protocols and have been tracking our performance in refining or methods.
We're also working with our foundation and others to produce and donate ERP for customers in the communities in which we work in live having delivered today to over 1 million pieces of PPG.
Second we focused on inventory and supply chain management.
So far product availability has been strong thanks to the relentless work of our supply chain teams and our partners.
Third we implemented or customer financial release program in the quarter.
Timeliness and the design of the program has been well received fire customers.
We continue to invest in our high priority programs recognizing that high quality am I asked is likely more important in coming years post kogut not less so.
Yes, we are evaluating those activities that should be accelerated in the incurred environment and for which demand is likely to be durable post cobot.
Finally, we're constraining spend where we believe it is sub optimal and the current environment.
Turning to instruments, beginning Q4 this year, we plan to introduce an updated set of select endowrist instruments for use with Davinci ex index on.
That will enable increased use beyond the current tenures lifespan.
Part of our extended use program.
Extended use will vary from two to eight additional uses per instrument and as the result of continuous and significant investment in the design and production of our instrument technologies that have resulted in improved quality and durability.
In addition, we'll concurrently lower the price of some inch other instruments that are most commonly used in lower acuity procedures.
We are dedicated to support our customers pursuit of their quadrupling defined as better patient outcomes better patient experiences better care team experiences and lower total cost to treat patient episode.
The long term opportunity for our products and services a substantial both in high acuity complex procedures and in shorter duration lower acuity cases, where customers are understandably more cost sensitive.
So I'm under risk instruments are used in every procedure. So our extended use program helps all customers and in particular, those performing lower acuity cases, which are among the fastest growing procedures.
As the program rolls out on a cost per customer performing lower acuity procedures will be highly competitive with non robotic am I asked approach.
I have described our commitment to a virtuous cycle of value adjustment for her customers driving volume increases, allowing us to invest in design and manufacturing at scale and giving us the opportunity to share these savings with our customers to allow them to use our products more broadly.
This program is another step in this churn.
Our extended use program has been years and the making and its timing is fortuitous relative to coded we're pleased to bring it to our customers now.
The program will negatively impact our near term revenue, but not substantially in park impact our gross margin per affected instruments.
It is the right decision for our customers and therefore for intuitive long term.
Marshall will take you through financial implications of this program later in the call.
Turning to advanced instruments, our da Vinci energy platform, which includes our next generation energy instrument and system Synchronoss seal Andy 100.
I have made surprisingly good commercial progress in the second quarter in spite of current environmental challenges.
A testament to customer reception to its speed and precision.
He also initiated our first trust commercial cases for you 100 in sync, Brazil in Japan in the quarter and lastly, our 45 millimeter sure form Stapler launched in Europe in this second quarter.
Turning to other programs of interest our eye on program continues to March forward in the face Kogut headwinds.
These systems were placed in the quarter and our clinical trial is progressing.
Design and manufacturing teams continue to make progress on incorporating the learnings to allow us to drive toward water distribution in the future.
While our progress in our precise trial for ion has been slow we're seeing a return to cases as our clinical trial partners come free.
For our SP program, our teams continue to support our early customers average monthly utilization for ASP in Korea continues to exceed that of XR.
A strong positive that speaks to early interest in the platform by surgeons and their patients.
In addition to our learning from Korea, we are working with regulatory agencies regarding expansion of indications.
The regulatory environment in US Andy you has become more complex for north for new systems overtime.
Made more challenging by diversion of resources at hospitals and that regulators to fly kogut.
Which impacts clinical trials and regulatory reviews.
Well update progress on additional indications for ASP as we have greater greater clarity.
In our intelligence and analytics programs. Our teams are performing well and we are leveraging our prior investments in cloud computing training technologies and analytics prowess.
We have focused on our integration of cloud technologies within touch to accelerate access to remote partnering in certain regions.
We had already moved to a network subscription model for our simulation technology platform called Sim now, which is helping us decrease travel for surgeons for some elements of surgical training.
Use of our hospital analytics programs is accelerating even through the turbulence of 2020.
Being hospitals, and us and planning persist and use in dynamic times like these.
Before concluding my prepared remarks, let's step back.
We cannot yet see the end of the covert 19 pandemic.
On the list when the lessons from this event or absorbed I believe high quality minimally invasive share will be more important to the future not less so.
A balanced approach to improving the quadrupling remains our north star.
Our priorities for the next few quarters are as follows.
First continued strong performance on customer employee and community safety, while ensuring supply chain stability.
Second continued support of our customers adapted to their specific conditions different customers are at different stages in this period and well support them according to their needs.
Third advancing our priority programs instruments accessories, endoscopy, CES endoscopy systems and intelligence programs and finally disciplined spend management during a period of change.
I'll now turn the call over to Marcia will take you through financial matters in greater detail.
Good afternoon, I would describe the highlights of our performance on a non-GAAP for 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 second quarter were as follows second quarter 2020 procedures decreased approximately 19% compared with the second quarter 2019, and decreased approximately 22% compared with last quarter.
Second quarter system placements of 178 systems decreased 35% compared with 273 systems last year and decreased 25% compared with 237 systems last quarter.
We expanded our installed base of de Vinci systems over last last year by 9%.
To approximately 5764 systems this growth rate compares with 11% last quarter and 13% last year.
Utilization of clinical systems in the field measured by procedures per system declined approximately 27% compared with last year and declined 23% compared with last quarter.
Let me walk through the impact of Kobin 19, pandemic on procedures and system placements and how it varies by market.
The impact of covert 19 varied significantly among geographies to assist in your understanding of this dynamic we've posted a graph showing us China, Japan, and Germany procedures into really Investor relations portion of our website.
In that graph, we compare procedures to the averages. The first two complete weeks of the first quarter, which we've characterized as pre cobot 19 level.
In the US procedure volume started the second quarter at around 30% to pre cobot 90 level.
In grew by the middle of June to nearly the level measured in the first two weeks of the first quarter.
However, with the resurgence of covered 19 regionally in us and related deferrals of elective surgeries procedures began to decline in the last two weeks of the quarter.
We expect to see de Vinci surgeries decline further in July.
As the pandemic continues to spread in hospitals, dedicate human and physical resource to the treatment of cobot 19 and away from other procedures.
Second quarter procedures in China, Japan, and Korea grew well year over year as Cove, It had a lower impact on these markets.
In Europe, the impact of coated varied widely with Germany experiencing year over year single digit growth, while France, UK in Italy experienced large declines.
Capital sales in the us in Europe reflected lower procedures and delayed capital Spendings spending while hospitals revisit their capital budgets given the impacts of coven 19.
On the other hand capital sales in several of our Asian direct markets, including China, Japan, and Korea were better than anticipated.
System placements will likely continue to be pressured by hospital spending reflecting the impact of covert 19, and the results into economic pressures.
Also as system utilization declined by 27% year over year hospitals have excess capacity that they will likely seek to fill before purchasing additional systems.
The extent and duration of Coven 19 in subsequent resurgence is in the U.S. and other parts of the world is uncertain.
The time and extend to which devinci procedures may recover will vary by market.
However, as we believe surgery is durable ended the long term and that the long term worldwide opportunity for robotic assisted interventions remains significant.
Additional revenue statistics and trends are as follows second quarter revenue was 852 million, representing a 22% decrease from last year and a 23% decrease from last quarter.
Under the previously announced customer relief program, we are providing service credits to customers related to lower use of their systems during the second and third quarters as hospital treat coven patients.
Revenue reflects 59 million of certain credits granted the customers in the second quarter.
As procedures in the us than you and Europe recovered more quickly in the second quarter. The credits issued were less than expected.
We are now anticipating the total cost of the customer relief program will be in the range of 80 to 110 million.
Second quarter placements included 21 into China, representing a greater proportion of total placements relative to the prior year in prior quarter.
As leasing is prohibited in China, and most systems are placed within greenfield hospitals, the worldwide percent of leasing and trade ins has declined.
Leasing represented 29% of current quarter placements compared with 32% last quarter.
Trade ins represented 40% of current quarter placements compared with 57% last quarter.
We would anticipate in an environment of covert 19, as economic pressures increase more customers will seek leasing or alternative financing arrangements than reflected in historical run rates.
Trading activity can be fluctuate can be difficult to predict.
We recognized 9 million of lease buyout revenue in the second quarter, compared with 12 million last quarter and 27 million last year.
Lease buyout revenue has varied significantly quarter to quarter and will likely continue to do so.
Instrument and accessory revenue per procedure declined to approximately $1900 per procedure.
Paired with just over $2000 procedure in the first quarter of 2020, reflecting hospital usage of existing inventory as procedures decline.
We expect instrument and accessory revenue per procedure to fluctuate as hospitals adjust inventories to reflect changes in procedure volumes.
Earlier today, we announced our extended used program under which in October we will launch selected ex ANNEXA instruments possessing 12 to 18 uses compared with our existing 10 use instruments.
These extended use instruments represent our higher volume instruments, excluding stapler, Monopolar and advanced energy instruments that are used in a broad set of procedures.
The announcement is posted on our website.
Our ability to introduce instruments with extended uses as the result of significant investments in quality and manufacturing processes over a long period of time.
The extended use instruments will generally be priced higher than our 10 life instruments, reflecting the instruments for the investments we've made.
But the cost per use will be lower for our customers.
In addition in simultaneously, we will lower the price of certain instruments used commonly in lower acuity procedures and or lower reimbursement procedures like closest acmes, Angola, Hernias and benign hysterectomy is in the us.
Combined with the savings associated with extended use instruments.
The results into instrument and accessory costs for these procedures will be competitive with non robotic am I asked approaches.
Overall extended use instruments and lower instrument pricing will result in lower iron a revenue per procedure to intuitive.
For example had the extended use instruments been available in the lower instrument pricing going in place for all of 2019 revenue for 2019 would've been $150 million to $170 million less than reported in a per procedure would have been 7% lower.
The impact of these actions on future revenue will be dependent upon procedure volumes instrument usage mix, it whether cost elasticities will enable greater penetration into available markets.
Five of the systems placed in the second quarter SP systems, reflecting both are measured rollout of SP and the impact of covert 19.
Our rollout of SP surgical system will continue to be measured putting systems in the hands of experienced devinci users, while we pursue additional indications and optimize training pathways in our supply chain.
Koby 19 has delayed the ability to perform a clinical trial associated with an ESP colorectal procedure.
We placed three iron systems in the quarter.
Systems system placements were also impacted by covert 19.
And system placements procedures and related information is excluded from our overall systems and procedure costs.
Our rollout of eye on will continue to be measured while we optimize training pathways in our supply chain.
The completion of the precise study is delayed due to covert 19, new we cannot predict when the precise study.
The precise clinical study will be completed.
Outside the U.S., we placed 72 systems in the second quarter compared with 80 in the second quarter of 2019 in 55 systems last quarter.
Current quarter system placements included 18 into Europe, 18 into Japan, and 21 into China, compared with 30 into Europe, 24 into Japan, and ate into China in the second quarter 2019.
Moving on to gross margin in operating expenses pro forma gross margin for the second quarter 2020 was 62.4% compared with 71.3% for the second quarter of 2019, and 69.7% last quarter.
The decrease compared with the second quarter 2019, and last quarter, primarily reflects period costs associated with abnormally low production the customer relief program and higher excess and obsolete inventory charges, partially offset by higher system ASP is reflecting a favorable geographic mix.
Second quarter inventory charges were approximately 27 million, primarily reflecting last generation system.
Vision.
And instrument products, which as a result of decreased demand.
We are now able to fulfill customer needs with newer more capable products.
As revenues are pressured by Coven 19 production levels may operate below normal levels, which may result, in higher labor costs and under absorbed overhead and reduced product margins.
Pro forma operating expenses increased 3% compared with the second quarter of 2019 and decreased 11% compared with last quarter.
Spending in the second quarter reflected curtailment of cost associated with the impact of covered 19, particularly training marketing events and travel and related expenses.
Partially offset by cost associated with employee relief programs and other direct cost of coven 19.
Spending during this period of the pandemic will be as follows.
We will work to ensure our employee safety and well being including investing in PPD and employee program.
We will continue to support our customers.
We will continue to invest in innovation focused on the quadruple aim.
We will invest in manufacturing and our supply chain to ensure supply for our customers.
We will ensure that we are prepare for periods once the spread of cobot 19 is contained.
Certain costs will be lower as the underlying activities are restricted by coven 19, including travel and related expenses.
Clinical trials surgeon training and marketing events.
We will eliminate spending that is ineffective due to cover the 19 like surgeon and hospital events.
We will reduce the hiring of volume related rolls like sales reps in manufacturing employees as appropriate.
We continue to believe that we have a unique opportunity to expand the benefits of computer aided surgery and acute interventions around the world and we'll continue to invest in the business for the long term.
Our pro forma effective tax rate for the second quarter was 36.9% compared with our expectations of 20% to 21%.
Reflecting a $37 million or 31 cents per diluted share charge associated with the conclusion of a tax case between an independent third party in the IRS related the charging foreign subsidiaries for share based compensation.
Our actual tax rate will.
We will fluctuate with changes in geographic mix of income changes in taxation made by local authorities with the impact of onetime items.
Our second quarter 2020 pro forma net income was 132 million or $1.11 per share compared with 388 million or $3.25 per share for the second quarter of 2019 in 323 million for $2, a 69 cents per share last quarter.
Well now summarize our GAAP results.
GAAP net income was 68 million or 57 cents per share for the second quarter of 2020, compared with GAAP net income of 318 million or $2 to 67 cents per share for the second quarter 2019 in GAAP net income of 314 million or $2 to 62 cents per share for the last quarter.
The 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 legal settlement.
We ended the quarter with cash and investments of 6.1 billion compared with 5.9 billion at March 31 2020.
Cash generated from operations was partially offset by investments in working capital and our infrastructure.
We did not repurchase any shares in the quarter.
Our current thoughts on capital deployment earned following order, we recognize the hardship the coated places on our customers, who will work with customers to ease the burden of lower davinci utilization, including providing customers with more flexible financing.
We will ensure secure supply chain and build appropriate levels of inventory to ensure customer supply, particularly as procedures resumed.
We will invest in securing our customers.
We will continue our market our open market repurchase program consistent with our prior practice.
And with that I'd like to turn it over to Philip who will go over our procedure performance.
Thank you Marshall.
Our overall second quarter procedure to decrease was approximately 19% compared to growth of 17% during the second quarter of 29 team and 10% last quarter. Our Q2 procedure decrease was driven by a 24% decrease in us procedures and a 7% decrease in all us markets.
On a worldwide basis procedures in the quarter Troughed in April and continue to recover throughout the quarter.
Although worldwide procedure run rates trended closer to pre coven levels in June we caution investors from assuming this trend continues given the dynamics discussed earlier in the call.
In the U.S. procedure run rates also trended closer to pre coven levels in June.
However, future procedure performance may fluctuate us customers in states, like Texas, Florida, and California encountered increased Coca cases.
From a procedure standpoint during the end of Q2, we saw a broad recovery and most procedures, including procedures that had the biggest decline at the end of Q1, such as bariatrics hernia and benign gynecology.
Within the U.S. their geographic differences between states that were hit harder by Covance. Those that were not for example, during the quarter, Florida recover to pre coven lever levels on a run rate basis, while New York did not.
State specific containment strategies impacted procedure growth and the timing of cobot outbreaks will play a role in driving geographic differences.
Outside of the U.S. procedure growth in Asia was strong as shown in the chart on our Investor Relations website, China preferred performance was strong, but we would caution investors not to use China as a proxy for global recovery.
Japan growth remained strong at over 30% in Q2, and South Korea also grew in the quarter.
Western Europe saw broad declines with the exception of Germany, which continued to grow in Q2, albeit at a slower rate.
We provide these data points to inform investors of the procedure dynamics in the second quarter, given the uncertain scope and duration of the cobot pandemic and uncertain timing of global recovery and economic normalization. We continue to believe that Q2 procedure results are indicative of forward trends that concludes our prepared remarks.
We will now open the call to your questions.
Ladies and gentlemen, if you'd like to ask a question. Please press one zero at this time, you'll hear tone indicated in place you.
You may or move yourself from that Q, but once again pressing one than zero.
Once again, if you'd like to ask a question. Please press one zero.
And first question will come from line of David Lewis with Morgan Stanley. Please go ahead.
Good afternoon can you hear me okay.
Hi, David Yes.
Great. Thanks, a little choppy there. So couple quick questions from me Gary for you obviously the focus of the call is going to be on the.
At instruments program. So maybe one for you Gary which is luck in most technology industries for you democratize technology sort of lower price to drive the Tam I'm sure you've extensively studied customer plasticity in so Marshall talked about a 7% drop and any revenue can you just give us any sense of a framework around how to think about improving and utilization.
Based on these cost improvements and then also for you given your competitors you've seen JNJ Medtronic timelines slip I think some investors are going to say why take this kind of now and the competitive landscape is getting easier and then I'd a quick follow up from Marshall.
Yes. Thank you appreciate the question on the first question of do we think that it changes the.
Volume of.
Procedures that might the access fire technology to answer that is yes, I think the real question will be timeline.
A little bit hard to predict the timeline to near term just because I think a lot of it will have to do with Covidien recovery. So that will will kind of blur the speed with which it happens, but if you look out over a couple of years, we clearly think that.
Customers want to use our products they want to use them broadly.
Hey, broadly in different procedure domain like general surgery, but also broadly regionally and to the extent that we can help them with economics, we think they have a preference to use our products and we think that will help that's why we did it.
On question too on timeline.
There are we've been working at it for some time these changes and manufacturing process improvements.
I have taken years to get right.
I think being a little too fancy and the timeline doesn't help the company our customers.
We think that it'll be appreciated that we've done it all will be appreciated that we've done it now and over time I think we'll look back on it and be happy that we thought it.
As expeditiously as we could.
Okay very helpful. Then Marcia for you I appreciate the commentary on 29, kian, rather than I apologize if I missed it.
The 7% or 100, and Seventyish million type of revenue impact can you give us a sense of what the gross margin impact gross or EBIT impact.
Maybe gross you more helpful. On 29 can you just trying to get a sense of the gross margin mix shift into 21 on this.
In a steady use program change thanks, so much sure.
The margin on the products will be relatively consistent with current current margins. So the impact is nominal in terms of 2019, it's a slight down only because you have less instrument and accessory revenue.
And from a mix perspective, you wind up with more systems revenue systems revenues have lower margins, but the individual margins on the instruments are not that different.
Our next question will be from the line of Tyco Peterson with JP Morgan. Please go ahead.
Thanks, Gary I'll turn the question on the capital side, if I go back to last quarter, you, obviously talked about using six nine on balance sheet to place more systems operating leases to go down. So can you maybe just talk little bit about that dynamic what you're hearing from customer actually on particularly in the restaurant operating leases.
Today's point before with your competitors delayed a little bit does that change.
For pushing operating leases in this current environment.
Yes, so just standing back to capital.
Really variable regionally so were.
They are not strongly affected by quoted are the recovering strongly.
Then capital of rotates forward again, you saw that in China.
And there we we feel good about.
Leasing systems are selling systems in China, they they buy them. They don't lay some but in other markets where they are interested in leasing we're happy to do that in.
In in regions that are being.
Disrupted bike Bogot, where.
The flow of patience is is changing.
Because of either delays in elective surgery or delays in diagnostic pipelines there they have capacity on the existing installed base.
They may want to move those systems, they may want to upgrade them, but in general what we've seen and we've seen this in years past.
One as an operator of a hospital is to use your existing capacity before expanding it and there.
I don't think leasing is the major issue I think the real issue as them getting back surgery, and getting ready to the extent that they have demand.
Leasing helps us up so I think it's kind of secondary to recovery from Covidien us primarily.
And then on the first to recovery just thinking about working through the backlog patients.
Anyway, what patients currently laparoscopic bar opened as another has it looks.
On robotics, even mediation Debbie just curious about how you think about alternatives to robotics given backlog today.
Yes, we get asked my question periodically, though I don't see a philosophical shift by.
Heads of perioperative services to try to ship share in response to coated.
In a really hard hit area.
Yes, they're doing everything they can and the only thing they have available as something other than.
Hi, My us they might go that way I don't think Thats. Their primary objective of the health system and very quickly they want to return to what they believe as offering that the patient the best the best outcome.
Looking in the evidence we don't see any evidence of share shifts at this time.
That's not say there arent there. It's just that nothing has really come up and what we do see as as much.
Positive for robotics as anything else.
Okay limited thanks.
Thanks.
Our next question will be from Bob Hopkins with Bank of America. Please go ahead.
Great. Thank you can you hear me okay.
Yes, Great Hi, Gary. Thank you for taking the question first one for me as I'm just trying to understand.
Hospital systems ability to kind of manage through this covis.
Increase in cases that were seeing here.
Of late so I'm just curious as the has that increase in in the United States in particular.
Been disruptive to two surgical volumes or things held steady despite the uptick in cases.
We've seen really depends regionally, so I guess, where we've seen as variance regionally in hard hit areas, we'll see the implementation of deferrals again.
Other places that had kind of round one in it and it is starting to creep back in.
There are serving to manage it concurrently little bit better netting it out the first few weeks in July books, really wavy hard to call. The good trend certainly would not call. It a recovery in July in the United States.
Yeah, Okay, specifically asking about that you asked but it sounds like your response was related to the U.S. too.
Yes, certainly thats certainly true in the us.
Okay.
And then the second question I had was just on on the capital environment and I know you just made a comment earlier.
These results.
It's.
Not obvious that there was a.
Big negative impact from from covert on capital.
But you made a comment about a challenging environment going forward I'm wondering how much of that is the need to absorb capacity versus the impact on Kobe Im just wondering specifically in the us a willingness to.
Kind of purchase capital in this environment, just would love an update there. Thank you.
Sure. So so we did see it.
As we reached the ended the quarter, we did see additional postponements of purchases and we did hear from hospitals that they were back to evaluating their budget thinking about what the ramifications of the cost of care covert treatment, where as well as thinking about you know the longer term impacts of cobot in terms of potential risk.
Action and.
Impact on their funds and so I think the quarter was affected the capital quarter was affected by Covance and in going forward, you're right. There will be first we think the impact of trying to bring backup systems to full utilization, 27% is a pretty steep decline and.
Correct that they will seek to fill that before they go out and buy more capital, particularly when they're already strained on the financial side.
So I think it if we started to see it this quarter and I think we're going to continue to seek.
Pressures on capital spend.
Great. Thank you very much.
Our next question will be for line of Larry de Wilson with Wells Fargo. Please go ahead.
Good afternoon, thanks for taking the questions one one on capital one on the regulatory.
Environment.
Gary obviously systems shipped greatly exceeded street expectations. This quarter can you talk about any new programs, you've introduced us to support new placement. We heard you talk this quarter about a loan or program are there any commitments associated with that and our usage based agreements increasing in it.
As I said I had one follow up on the regulatory environment.
Sure on that on the system shipped in the quarter all start to answer until last Marshall to to jump in and provide a little additional color I.
I think a lot of what we saw in Q2 in the west was.
Around momentum capital.
Pipelines are of multi month.
Engagements or our sales teams and for our customers.
They add long term commitments there fairly far down the pipeline in some cases I think they know they want to do this long term.
Went ahead and closed.
Outside the US we had strength because you're starting to see procedure recoveries and they're looking to build capacity for additional procedures.
With regard to was it a particular sales program or the introduction of longer program and so on that really drove the number.
We're not guide you that way and although I think thats true, but Marshall why don't you step down.
Can you characterize it right I don't think there was any particular program that drove it and I think it really does reflect momentum Gary alluded to a couple larger IDN deals getting done and those were months if not a year into making it takes time to get closed out when you're getting close to even though there is coven virus. They went ahead.
And we do see strength outside the us, particularly in Asia, where cobot has has started to recover.
Thanks, Marshall interest from my followup, Gary you talked about changes to the regulatory environment. Obviously, we all heard JNJ said, saying that they're not going to define about five 10-K for their robot in the us.
I mean, what are you seeing Gary.
At the FDA do you think future.
Robot surgical robots will be like de Novo five 10-K's pm AIDS.
I don't obviously don't expect you to speak for JNJ, but but what can you talk about generally on surgical robots.
Over the last few years, we've seen an increase in clinical data requirements.
And evidence generation per new platform as we come out and we've been talking to you about that over the over the last several years with regard to introducing new platforms us or anybody else I think the pathway depends on.
The details of the claims what what's being claimed what procedures being done and details of the predicates being used and up that that will guide.
Any any of the conversations we would have with FDA or frankly, our competitors would have so I really can't call out what direction that will go for everybody.
We do we do see the discussions being pretty rational and they just have required additional datasets as time goes on and nothing nothing referred from.
Well the last couple of weeks of earnings calls has kind of changed our perspective on what we've seen.
Thanks, so much.
Our next question will go to Larry occurs with Raymond James. Please go ahead.
Thanks, Good afternoon.
Gary I'm, just curious about how are you able to manage your internal R&D development.
Projects that throughout through alcove Ed.
That's really the question is how are you able to keep things going or did you see setbacks. His line I know you talked about the precise trial again, it but I'm really thinking sort of.
Our internal development projects.
Well I think we've seen.
Both heroic efforts on the part of our teams, we're blessed by having a medical office inside the company and surgeons, who.
And medical people, who work for the company.
Directly so we implemented protocols that allowed us to stay at leading edge of where safety protocols ought to before.
Infectious disease, and do our best be able to keep making work on making progress our engineering teams have been really creative and thoughtful about getting work done.
So we have seen some delays for sure I wish I would say otherwise, but it's just a reality that that said I think that the teams have.
Talk pretty art.
To keep.
Our our programs progressing in and to not just except slips because cobot exists.
Where we we are where those things are a little bit out of our control tend to be on things that are in clinical trials as you mentioned.
Where you're you're going back and forth between hospital institution on the front lines. They are using deploying their resources.
In ways that are important to them to manage coated we fully understand that.
So they are sometimes it's it's really awesome to support mode, where we can control. It we can control our environment, we can relay out our our spaces, our labs and so on and we can make a little more progress. So we see some slips, but we also see great effort to to manage this looks okay terrific and then the other question is.
You know.
Certainly there's a sense out there that.
Co that well.
One of accelerate trend that we've already been seeing in a move to some sort of ambulatory surgical setting.
Just curious.
The last quarter's call you sort of mentioned that.
You know that intuitive organization was ready be helpful. In any way and certainly sounds like what was implied if robots need to me moved.
Either cesar or other care areas that you'd be prepared to do it.
Do you actually see any of that occur and do you think that there is going to be an accelerated trend to to move things that you can into.
Non acute care settings.
I'm going to ask Marshall answer the first part of that question around have we seen acceleration in the datasets dominant in the I'll answer the second part of the question around what do we think might happen going forward. So Marshall if you will jump in on though.
What are we seeing so far.
In terms of esses.
Hey, again, if he is.
They.
The number of Davinci type procedures procedures. The davinci addresses SCC is actually not all that significant which which you really if you're talking about ATRIO pds or if these that are owned by.
That are owned by.
Hospital idea and then we have a large presence and we are addressing.
Procedure to their presented there we haven't seen.
I Havent im not aware of.
Movements of large large patient quantities to.
Eastern during this period I think hospitals are struggling to meet all needs in terms of coded so.
I don't think I have anything else dead there.
Yeah, I'll I'll jump in on my side.
I think that.
Surgery in those environments, what actually happens in the operating room.
Is well understood and and robotics and our robotics can play a role there what really determines whether something is and then.
Ambulatory setting.
Hospital owned outpatient department setting or inside a hospital.
And and book does the same day surgery. The differences there are largely driven by.
Reimbursement.
Reimbursement policy.
To the extent that reimbursement policies stays as is then I don't think yet you will see a huge move up the kind of procedures that intuitive does into the Cds, but if reimbursement policy were to change in the future than that will change with it.
And and go there.
So there's a lot of same day surgery or outpatient surgery thats done on davinci.
Devices.
Where they where they live as lots to do with reimbursement so for us it's.
Where does it make sense to be performed.
Logistically, where doesn't make sense to be perform for reimbursement perspective, and then they have the right tools technologies and training and I think we can adjust to that overtime. Okay. Great. Thank you.
Next we'll get a line of meat Hassan with Goldman Sachs. Please go ahead.
Oh, Thanks, Hey, good afternoon, just a couple of quick ones.
On the Davinci ESP, if I heard your comments right about Korea utilization being higher than next site that was a little bit surprising.
Yes, if you can give some color behind that and whether that suggest for you that types of procedures being done on SP are kind of more on that on.
Lower acuity side of the spectrum and whether that kind of paints for you how you might be marketing product here as it evolves.
Yes in Korea. The nice thing is that regulatory clearance allows broad clinical application.
As a result, they can do procedures in.
Urology.
Thoracic and gynecology.
And.
Head and neck.
And they're also looking at.
Procedures in the breast.
There are I think it's less about low acuity I think they're really exploring where does the single incision or natural office approach.
It really drive clinical value.
The surgeons are I think thoughtful and innovative here and that's exciting to us.
In the U.S., we need to run trials and get additional data as we've said before for colorectal applications for some of the other things that we have an pipeline. So that will take us sometimes we look to Korea to say, okay. What does demand look like when not constrained by the regulatory setting.
The nice.
Utilization or high throughput sort of tells US two things one is there's a real interest and exploring the hypothesis that this creates better outcomes. We can also look at the data there and start to see where it does indeed, that's exciting the second thing is it puts the products through the tests.
Hi, throughput high turnaround is a well designed in that setting in can they use it as much and that's been powerful for learning, but also encouraging for us as to the maturity of the product even at this early stage. So that's how we're looking at created to help inform our regulatory strategy out of course.
And then my follow up would be on just the Doctor training and that was that they still quite strong for you recall the here in the U.S. and obviously being a key element for use of procedure growth.
Looking forward, so just qualitatively able to just give us a sense of the impact on training that you saw in the quarter and how you're thinking about the rest of the year.
Just two levels of normal even like you did for procedure with the Super helpful. Just get a sense of where you are with being able to train new doctors.
Yes, I'll start and Marshall help you asked about jump in and add some color.
It's clearly challenged and one of the things that that.
We're working on.
First.
Why don't Brian as particularly in the United States doctors are focused on other things.
And.
Travel, which some.
Training requires.
His strength so for us to things that thing going on one of them is to see if we can forward deployed our training assets to make travel.
Easier or or extremely convenient.
Probably by car for example, rather than by plane or use of digital tools and and cloud technologies to be able to get access to some of the materials that they might use actually encouraged on that front I think we have some investments we've made over the years that we can leverage to help and we're seeing the beginnings of that so I think that side looks good.
That said training requires demand generation requires interactions with our sales teams.
In addition to training.
But once they get going so it's substantially below prior levels, we're starting to see the beginnings of it coming back, but I'll, let Marshall give you a little better color there.
Yes, it has been below our historical levels and in.
And the importance of it varies depending on the geography as well. So we're in let's say in Japan, where you have newer procedures that you're trying to adopt training becomes a more important element and let's say in the United States for people can otherwise be trained.
In their institutions or.
What we're talking about mature procedures were proctoring and so forth is more readily available. So I think in United States. The contribution of new surgeons is much lower than let's say.
And.
Geography like like Japan.
And so we didnt see quite a drop off in training earlier.
In.
In the United States because of reluctance to travel and other covance related reasons and and as Gary said, we're finding other ways to perform their training and it could have some impact on us, but again, it's not as big a contributor in the United States has as as our existing surgeon.
Yes.
Thank you.
Next we will go to line of Rick Hi is with Stifel. Please go ahead.
Good afternoon, Gary Hi, Marshall.
Yes, because you're talking again about the delayed JNJ program and about I think you said that marginal Senate.
When its unique opportunity to invest.
I think about this.
I have to imagine that in some way, perhaps many wayne.
It has been.
The actively aggressively thinking about the.
The challenge preparing for near term and long term or the possibility of.
Competition.
Challenge, what seems to be meaningful delayed for the moment.
Talk with you in any way.
Options salary offline or accelerate spending.
In some Conway.
Does this window present, an opportunity does present, some kind of unique opportunity enough that you can do something different now.
What has.
Hey, Mark imminent.
Thanks, Rick.
For us we've really focused on.
Being.
Tightly focused on really making measurable improvements to the quad aim.
Really looking forward looking through the windshield rather than in the slide mirrors as to what we think is important.
The the I guess, what I'd say the greatest limitation for us. So far has not been opportunity I think to do interesting things that there's an enormous amount of opportunity out there to make improvements and there is enormous technology opportunity I think the biggest challenge and the rate limiting step for us has really been to.
Can continue to deploy our or programs with excellence.
So that's been the rate limiting step on growth.
I think that.
Other companies out there or investing in things that make sense that are interesting I think the vision about where the world might be in 10 or 15 years is not a complicated one I think it's reasonably shared and I think what will differentiate.
Intuitive and and other companies is really the ability to deliver these complex technologies.
At a very high quality level and in ways that customers can really use access to resources.
So I look around.
What's going on out outside and and I think they're engaging some of the both opportunities that are out there in the world than some of the challenges of doing this well and delivering it so for us it's.
I guess I Didnt wake up.
This week and make that the world has changed because somebody else's conference call.
Yes.
Just the second question for me on Monday, we presented a 100 plus.
Robotic surgeon survey and of those who said they had wanted to buy LNG, 40% said that they were.
Hey decision to now plus phone not a big shop and corroborating that of course.
How are you thinking how would you help us think about.
That phone volume.
Are you concerned at all that these orders on loss then.
Could we see.
The sharp resurgence in capital.
Normal demand continues.
No.
And on top of that we see these.
Postponed volume that's the right way to think about it thanks again.
Okay, I think theres two drivers of.
Additional capital one of them is the need for additional capacity driven by.
Surgeon and patient demand for.
Davinci procedures.
To the extent that that demand is suppressed because of cobot fears about cobot or delays in diagnostic pipelines that will pressure the capital pipeline.
That varies regionally so were cobot as well managed we see not unusual types of sales activities, where cobot is very intense not surprisingly they were focused on other things. The second thing that can drive capital demand is.
New features a product that they want access to because they have older technology and in that case, if they have.
The.
Attention span to pursue it in the capital or leasing dollars to do something about it than we can continue to make progress.
The prior one of the issue of.
Absorbing existing demand in the field procedure demand in the field will be the dominant one in my opinion of the next few months, how long that last has lots to do with coded and really none of us know how long that will be so we'll be ready we'll react.
We are.
Strong position from an organization point of view I think we are able to run the business for long term and so we'll do our best in that period, and we'll see it see it as it as it plays out.
I appreciate all that ones are that was our last question. Thank you.
In closing we can we continue to believe there is a substantial and durable opportunity to fundamentally improved surgery and acute interventions. Our teams continue to work closely with hospitals physicians and their teams in pursuit of our customers of term the quadruple play.
That are more predictable patient outcomes that are experiences for patients that are experiences for their care teams and ultimately a lower total cost of care.
We believe value creation in surgery, and acute care as foundationally human that flows form respect for an understanding of patients and their teams their needs and their environment.
Thank you for your support on this extra ordinary journey, we look forward to talking with you again in three months.
Yeah.
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