Q2 2021 Intuitive Surgical Inc Earnings Call
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And gentlemen, and thank you for standing by welcome to the intuitive Q2, 'twenty 'twenty 1 earnings conference call.
At this time all participants are in listen only mode. Later, we will have a question and answer session feel free to queue up at any time during the presentation by pressing 1 zero on your phone's keypad and and we'll just call you by name and its your turn part of your question. During the question and answer portion of the call and again, that's 1 zero to queue up.
To go on to the question and answer queue. As a reminder, this conference is being recorded and at this time I would like to turn the conference over to our host senior director of Finance Investor Relations for intuitive Mr. Calvin Darling. Please go ahead Sir.
Thank you good afternoon, and welcome to intuitive <unk> second quarter earnings Conference call with me today, we have Gary Goodhart, our CEO.
Marshall Mohr, our CFO and Jeremy Smith, our senior Vice President of Finance Bill.
Philip Kim our head of Investor Relations will not be joining on today's call. As he is currently on maternity leave following the birth of his daughter.
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 and our Securities and Exchange Commission filings, including our most recent form 10-K filed on February 10, 2021, and form 10-Q filed on April 'twenty, 1.2020 1.
Our SEC filings can be found through our website or at the SEC's website and.
Investors are cautioned not to place undue reliance on such forward looking statements.
Please note that this conference call will be available for audio replay on our website and intuitive dot com on the latest events section under our Investor Relations page.
Today's press release, and supplementary financial data tables have been posted to our website.
Today's format will consist of providing you with highlights of our second quarter results as described in our press release announced earlier today, followed by a question and answer session.
Gary will present, the quarter's business and operational highlights Marshall will provide a review of our financial results.
Jamie will discuss procedure and clinical highlights and provide an update of our financial outlook and finally, we will host a question and answer session with that I'll turn it over to Gary.
Yes.
Thank you for joining us today, our second quarter 2021 performance was encouraging with use of our systems for procedures growing beyond pre pandemic levels and healthy capital placements.
Looking at the past 8 quarters and context, our compound annual growth rate for procedures for the period Q2.2019 through Q2.2021 of 16, 5% is approximately the growth we would've expected absent the pandemic.
The pandemic has reordered the quarter and which procedures were performed.
And we believe it has delayed some procedures that are likely to return and the future.
And may cause a small number of patients to permanently forego surgery.
To understand our system placement and capital performance over this period, we look to annual system utilization trends, which have recovered the utilization rates at the high end of our historical averages.
Taken together this combination of a recovery and procedures and healthy utilization supports our solid capital placement trends and rounds out a healthy commercial recovery year to date.
Examining procedure trends more deeply and the United States procedure growth was strong and the quarter driven by growth and bariatric surgery hernia repair and cholecystectomy.
Both gynecology and urology procedures annualized growth strengthened and the quarter as pandemic pressures eased and the U S.
Annualized U S procedure growth rates are returning to historical levels for procedures with longer diagnostic pipelines.
And as patients have started returning to screening and diagnostic testing.
Growth and our second largest market China continued to be strong with multiple specialties contributing.
European procedure growth was generally healthy though varied by country.
Recovery and the U K was healthy and the quarter as NHS increased access to surgeries surgeries broadly.
The pandemic is not behind us and additional infection growth make again strained hospital resources and impact our results and the future <unk>.
Jamie will take you through procedure dynamics in more detail later in the call.
On the capital side, New system placements continued to be healthy with United States, China, Germany, France, and Japan notable in the quarter.
We know that new system placements are closely tied to anticipated procedure volumes and system utilization and mature markets.
We continue to see significant utilization variance by region due to pandemic differences.
And the quarter strong trade ins of older generation systems for our fourth generation products and strengths and multi system deals continue to support our thesis that customers that know us best.
And then continue to invest with us going forward.
We also saw an increase and our IV and customers opening new da Vinci and I on programs and hospitals within their network that did not previously have and intuitive robotics program.
Indicating their interest and diversifying access to intuitive programs across their networks.
Looking to our finances and the quarter procedures recovered nicely in Q2 system placements came in above plan and system, Asps and I and a revenue per procedure track slightly above our expectations together driving revenue of 1.46 billion and Q2.
Our pro forma spending grew over 24% from a year ago, representing increased investment and our business.
However, our expense growth rate was modestly lower than our plan driven by pandemic related factors.
Covid has delayed some work and R&D and clinical trials, leading to some underspending and programs prototypes and some delay and hiring.
We expect these programs to continue their ramp as our labs and develop and programs recover efficiency.
Travel and associated costs and support of our field have also not recover to pre pandemic levels field.
Sales and marketing costs will tick up if the pandemic wanes.
In short our commercial business has recovered more quickly than our spending due to the different ways the pandemic impacts our customers our supply chains and our hiring.
And we will take you through our financial picture later in the call.
Turning to our innovation and commercialization efforts, we are developing and deploying technology enabled ecosystems to support our customers' pursuit of the quadruple aim.
Better outcomes better patient experiences better care team experiences and lower total cost to treat per patient episode.
We are and the execution and launch phase before efforts.
First we are broadening access to our advanced instruments for da Vinci fourth generation Multiport systems through pursuit of additional clearances and launches outside the U S.
Second we are expanding our da Vinci SP offering by broadening its regional and clinical indications and by adding it to its suite of instruments and accessories.
Third we are launching and refining our flexible diagnostic platform island.
By working with early customers to help us stablish high performing sites and by improving our technology and supply chain capabilities.
Finally, we are strengthening our digital capabilities across our ecosystem.
Our fully integrated advanced instruments portfolio has been a strong addition to our multi port ecosystem.
Allowing for high quality tissue interaction control from the surgeon's console, while optimizing workflow.
These system controlled staplers and vessel Sealers and energy instruments support a range of procedures from various <unk> to colorectal procedures to thoracic and gynecologic applications.
Customer appreciation and recurring use of our products has been growing nicely.
And Q2, we launched our share form Stapling line and India, We launched our force bipolar energy energy instrument, along with our extended use instruments program and Japan and.
And we launched our synchronous steel energy and instrument and E 100 energy generator and Korea.
Turning to our single Port system, we placed for SP systems, and the quarter, bringing the total installed base to 79.
S. P procedures grew 133% year over year with much of that growth coming from the United States.
First cases, and our SP colorectal IDE trial were completed in the quarter as we seek to bring SP capability to additional procedures.
We're also working on our regulatory filings to bring SPD Europe under the European Union's new medical device regulation framework.
Our flexible robotics program first targeted towards diagnostic ball cost compete has had a strong quarter.
And we placed an additional 20 ion systems in the quarter, bringing the install base to 70.
And procedures grew 6 fold over Q2, 2020 to nearly 500 procedures and the quarter, reflecting a recovery from the pandemic the growth and new sites and the growth and utilization at existing sites.
Our total iron and clinical experience is approximately 4000 cases to date.
Clinical trial sides completed enrollment for our precise clinical trial <unk>.
On the IR team is making good progress and scaling our operations.
Lastly, we continue to digitally enhance our ecosystem.
And the quarter, we continued to engage customers and data analytics and opportunity analysis for surgical programs cornerstone of our your data your truth analytics efforts.
We have continued the launch of our my intuitive App.
Including launching to first users and Europe.
And my intuitive allows surgeons and care team members to access their data to manage their profile their learning and otherwise interact with intuitive and easy to use mobile app and the palm of their hand.
And our digital learning programs continue to be and important part of our overall learning initiatives.
These programs together trained over 'twenty 200 care team members and the quarter.
Showing organizational strength and localizing programs and responding with agility to pandemic influence demand.
As the phases of the pandemic evolves, we're supporting our team and addressing the opportunities and challenges posed by the pandemic and the way we work.
Intuitive is manage multiple ways of working for many years roughly a third of our team works and the manufacturer test and distribution of our products and.
Another third works closely with customers and the field and the remaining third have traditionally worked and lab and office environments.
We're taking a first principles approach to return to office environments with our team, bringing back face to face interactions for those task best completed and person, while enabling hybrid work environments for tests that are well accomplish by distributed teams.
Most of our offices globally are reopening with this hybrid approach, we anticipate iterating our approach as we learn and the year progresses.
As I conclude for the balance of the year, we're focused on the following.
First agile and flexible support for our customers globally as they needed often addressing the return of surgical patients to treatment.
Second disciplined execution of our launches, including our advanced instruments SP ion and digital efforts.
Third driving depth and excellence and regional performance, particularly in Europe, and Asia, and finally, expanding our clinical and economic and analytical evidence base for key procedures and countries I will now turn the time over to Marshall to take you through our financial performance and greater detail good afternoon.
I will 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.
Covid had a significant impact on da Vinci procedure volumes and the second quarter 2020 that impact was most pronounced in the U S and Europe varied market to market complicate and year over year comparisons.
And the U S. Ex Covid continued to subside and second quarter of 2021, we saw a lower impact on da Vinci procedures.
Procedure growth and the U S was led by Bariatric Cholecystectomy and hernia procedures. We also believe that growth benefited from some procedures that were previously deferred due to delays and testing and patient concern over COVID-19.
While there is likely some amount of backlog that has not yet been address is difficult to estimate the extent of the remaining backlog and when it will affect future procedure growth.
And Europe, the impact of Covid, and the second quarter of 2021, and varied regionally with slower recovery and Italy, and France, while we saw early stages of a recovery and the U K.
While there continues to be Covid hotspots within some of our Asia Pacific markets overall procedures and the region performed well China growth and the second quarter continued to be far higher than our other regions, primarily reflecting the 40% system installation growth over the past year.
Jamie will provide additional procedure commentary later on this call husk.
Hospitalizations.
Of patients due to COVID-19 have negatively impacted da Vinci procedures to the extent that hospitalizations expand significantly due to COVID-19 and its variance like currently being experienced and parts of the world It could negatively impact da Vinci procedures.
Key business metrics for the second quarter were as follows.
Quarter 2021 procedures increased approximately 68% compared with the second quarter of 2020 and increased approximately 13% compared with last quarter.
Compound annual growth between the second quarters of 2019, and 2021 was 16, 5%.
Second quarter system placements of 328 systems increased 84% compared with 178 systems for the second quarter of 2020 and increased 10% compared with 298 systems last quarter.
We expanded our installed base of da Vinci systems over the last year by 10% to approximately 6335 systems. This growth rate compares with 9% last year and 8% last quarter.
Utilization of clinical systems, and the field measured by procedures per system increased approximately 55% compared with last year and increased 11% compared with last quarter.
The compounded annual utilization growth rate between the second quarters of 2019, and 2021 with 6%.
Moving on to capital placements system placements and the quarter reflected procedure growth and hospitals upgrading to in order to access or standardize on fourth generation capabilities.
Capital placements for the first 6 months of 2021 were in line with procedure and utilization growth.
Looking forward, we see the following capital revenue dynamics procedure growth drives capital purchases and many of our markets to the extent that COVID-19 impacts procedures. It will also impact capital purchases.
The trade and cycle has been a tailwind to system placements. However, as the installed base of older generation product declines the number of trade ins will decline over time.
Leasing and alternative financing arrangements enable customer access to capital while the percentage of systems placed under operating leases fluctuates quarter to quarter. We believe leasing will increase as a percentage of sales over time, which will result, and the deferral of otherwise current revenue into future periods.
Macroeconomic conditions created by Covid could regionally impact hospital capital spending.
And as competition progresses, and various markets, we will likely experience longer selling cycles and price pressures.
Additional revenue statistics and trends are as follows.
Total second quarter revenue was $1.464 million, representing a 72% increase from last year and a 13% increase from last quarter.
The compound annual revenue growth rate between the second quarters of 2019, and 2021 was 15%.
Second quarter revenue reflected growth in both procedures and system placements.
Leasing represented 33% of current quarter placements compared with 29% last year and 43% last quarter.
In the quarter, we completed a number of placements with larger ideas that prefer to purchase rather than lease product.
Leasing as a percentage of total sales lag has and will continue to fluctuate with customer and geographic mix. However, we anticipate more customers will seek leasing or alternative financing arrangements than reflected and historical run rates.
38% of systems placed and the second quarter involved trade ins, which is lower than the 40% last year and a 44% last quarter as.
As customers continued to upgrade to fourth generation capabilities. The population of installed S. Highs is decreasing particularly in the U S were 110 trade ins were completed and the second quarter, leaving and installed base of S size of approximately 500 systems.
As a result, we expect lower trade and transactions over time.
Trade in activity can fluctuate and be difficult to predict.
Second quarter system average selling prices decreased to 1.55 million from $1.65 million for both the second quarter of 2020, and the first quarter of 2021.
The decrease relative to these prior periods reflects geographic mix and volume discounts provided to customers purchasing multiple systems.
We recognized $26 million of lease buyout revenue and the second quarter compared with $9 million last year and $19 million last quarter.
Lease buyout revenue has varied significantly quarter to quarter and will likely continue to do so.
Instrument and accessory revenue per procedure of $1940 increased compared with $1900 per procedure for the second quarter of last year and decreased compared with $1950 per procedure and the first quarter.
Extended use instruments were introduced into the U S and Europe, and the fourth quarter and most other markets and the first 6 months of this year, except China due to regulatory timelines.
And the U S and Europe extended use instruments were nearly fully adapted and the second quarter.
The year over year increase and I and a per revenue per procedure reflects increased usage of our advanced instruments, partially offset by the impact of extended use instruments.
We believe that globally customers have had not completely adjusted their instrument buying patterns to reflect the additional usage per instrument.
Customer adjustment of buying patterns will reduce eye and a revenue per procedure.
For the systems placed and the first quarter were SP systems, reflecting continued measured rollout of SP.
Our installed base of SP systems is now 79, 8 and Korea, and 71 and the U S. We completed first cases associated with our U S colorectal clinical trial and the second quarter.
We placed 20 eye on systems in the quarter, bringing the installed base to 70 systems.
There were nearly 1500 eye on procedures completed and the second quarter.
I on system placements and procedures are excluded from our overall system and procedure counts.
The supply issues, we called out in the first quarter did not impact I and on placements and procedures and this quarter.
Our rollout of iron and will continue to be measured while we optimize training pathways and our supply chain.
Outside the U S. We placed 115 systems and the second quarter compared with 72, and the second quarter of 2020, and 108 systems last quarter.
Current quarter system placements included 63 and to Europe, 16 into Japan, and 19 into China, compared with 18 into Europe, 18 into Japan, and 'twenty, 1 into China, and the second quarter of 2020.
Moving on to gross margin and operating expenses pro forma gross margin for the second quarter of 2021 was 71, 7% compared with $62.4 per cent for the second quarter of 2020, and 71, 8% last quarter.
The second quarter of 2020 included $59 million of service credits issued in conjunction with our customer relief program.
Higher period costs associated with lower production and higher excess and obsolete inventory charges and the.
The first and second quarters of 2021 reflect leveraging fixed costs over higher production levels.
Product and customer mix fluctuate quarter to quarter, which can cause fluctuations in gross margins.
Covid has impacted global supplies of semiconductors and other materials used in our products, while we carry safety stocks of critical components, and our otherwise working to secure supply and necessary to ensure fulfillment of customer demand global shortages could result in higher production costs and production development and regulatory.
Delays.
Pro forma operating expenses increased 24% compared with the second quarter of 2020 and increased 5% compared with last quarter.
The increase compared to prior year reflects costs associated with a higher head count increased variable compensation and increased spending and areas impacted by COVID-19.
Second quarter spending was below our expectations due to activities restricted by COVID-19, including clinical development marketing events and travel costs.
In addition, COVID-19 delayed some R&D work, resulting and understand on prototypes.
We expect spending on activities restricted by Covid to increase as the impacts of the pandemic decline.
We also expect spending to increase as a percentage of revenue as investments and head count infrastructure and other support areas catch up to the growth and the business.
And finally, we expect to continue to invest and expanding and accelerating our ecosystem of products and capabilities.
Jamie will provide spend guidance later in this call.
Our pro forma effective tax rate for the second quarter was approximately 25%.
And the second quarter, we modified the useful life of a deferred tax asset which resulted in a current charged to pro forma income however.
However that charge generated that change generated a long term benefit of $66 million that is recognized currently and GAAP income it will be recognized ratably over approximately 10 years and pro forma income.
The charges associated with the deferred tax asset and a higher mix of U S income drove the 25% current quarter pro forma rate we expect.
Our pro forma rate for the last 6 months of 2021 to be between 21, and 22% versus our previous guidance of $20 to 21%, reflecting a greater proportion of U S income for the year on.
Our actual tax rate will fluctuate with changes and the geographic mix of income changes in taxation made by local authorities and with.
The impact of onetime items.
Our second quarter pro forma net income was $477 million or $3.92 per share compared with 132 million or $1.11 per share for the second quarter of 2020, and $427 million or $3.52 per share for the last quarter.
I will now summarize our GAAP results GAAP.
GAAP net income was $517 million or $4.25 per share for the second quarter of 2021, compared with GAAP net income of $68 million or <unk> 57 per share for the second quarter of 2020, and GAAP net income of 426 million or $3.51 per share.
For the last quarter.
The adjustments between pro forma and GAAP net income are outlined and quantified on our website.
We ended the quarter with cash and investments of $7.7 billion compared with $7.2 billion last quarter.
The increase in cash and in the second quarter, primarily reflected cash from operations and stock exercises, we did not repurchase any shares and the quarter and with that I'd like to turn it over to Jamie.
Good afternoon, Ara the world's second quarter procedure growth was 68% compared to a decline of 19% during the second quarter of 2020, which reflected a significant adverse impact from the COVID-19 pandemic.
Compound annual growth rate between the second quarter of 2019, and the second quarter of 2021 was 16, 5% Inc.
And Q2 U S procedures grew 77% year over year, which equates to 16% on a 2 year compound annual growth rate basis.
U S markets grew 51% year over year on 19% on a 2 year compound annual growth rate basis.
And the U S Q2 procedure results were positively impacted by a continuing recovery from COVID-19, including we believe a number of procedures that had been previously deferred Q.
Q2 growth was driven by particular strength and benign procedures, including bariatrics hernia repair cholecystectomy and benign hysterectomy, reflecting in part we believe a partial catch up and these procedures related to the previous deferral of elective surgeries.
General surgery growth and the U S was strong and in addition to the positive impacts on patient backlogs reflected increasing access for surgeons to our fourth generation technology.
And the U S procedures that are dependent on diagnostic pipelines also grew albeit at lower rates as compared to benign procedures.
Rental growth was strong and solid growth and malignant hysterectomy thoracic and prostatectomy procedures.
Just on market day, we believe the diagnostic pipelines and the U S began to recover from the impact of the pandemic in March with a lag and the recovery of associate and procedures.
Second core O U S procedure volume grew approximately 51% compared with a 7% declines and the second call of 2020, and 23% growth last quarter.
Second quarter 2021 O U S procedure growth was driven by growth and prostatectomy procedures and earlier stage growth and kidney cancer procedures general surgery, gynecology and thoracic and.
China procedure growth remained strong and broad based as a result of continued expansion of the installed base under the current quota.
Growth in Japan was solid but was impacted by a relatively slow rollout of vaccines and the impact of localized lockdowns as a result of ongoing efforts to prevent resurgence of COVID-19.
And Europe procedure growth varied by country based on the relative impact of and recovering from the pandemic.
And the U K was strong with a slower recovery and France, Italy and Germany.
Now turning to the clinical side of our business each quarter on these calls we highlight certain recently published studies that we deem to be notable however to gain a more complete understanding of the body of evidence we encourage all stakeholders to thoroughly review the extensive detail of scientific studies.
And that's been published over the years.
During the quarter a group from the channel Zheng Hospital, and Naval Medical University, and China, published and meta analysis, and BMC cancer, comparing robotic assisted thoracic surgery versus video assisted thoracic surgery or vas for lung lobectomy or segment Tech to me and patient.
And with non small cell lung cancer.
The macro analysis combined 18 studies across different countries containing over 11000 patients of.
Of which just over 5000 seat da Vinci robotic assisted thoracic surgery, and just over 6000 and received fats and.
The results of the Metro analysis found that robotic assisted thoracic surgery compared to vats and associated with among others. The following significant findings.
Ft, formerly as lower blood loss are 50% lower chance of conversion to and Oakland procedure.
A $1.1 day short stay and the hospital and a 10% less chance of patient experience to post operative complication.
The authors concluded to quote the results revealed that robotic assisted thoracic surgery is a feasible and safe technique compared with vast in terms of short term and long term outcomes.
In May of this year Delta color block from a Lady and the medical Center and Baton Rouge, Louisiana published results from a multi center study comparing shorts and outcomes for institutional hernia.
Published in the hernia journal entitled Robotic assisted laparoscopic and open and decisional hernia repair.
The study contains 371 patients underwent and institutional hernia repair procedure across 17 institutions within the United States between May 2016, and September 2019.
All of those patients.
And 3% were and the da Vinci with volume cohort.
<unk>, 5% and the laparoscopic cohort and 22% and the Oakland cobalt.
And reporting the results.
Adjusted using a propensity weighted approach the authors noted that during the 2 to 4 week standard of care visit period.
Fewer patients reported and need to take prescription pain medication for the robot and cohort as compared to laparoscopic and open totals 65, 2% for the rebel and coastal as compared to 78, 8% for the laparoscopic cohort compared to 17.9 8% for the Oakland cohort.
Conversion rates to open surgery were lower and the replay whose compared to laparoscopic group.
6% as compared to 4.9%.
And Reoperation rates and 30 days post procedure with comparable between robotic and laparoscopic and lower for robot as compared to open.
6% as compared to 3.1%.
The authors concluded and PA.
Quote when compared to open.
On a bottleneck assisted surgery group is associated with a comparable operative time shorter length of stay and lower re operation rate to 30 days.
The difference and the number of subjects, who are caught and the need for prescription pain medication favorite the robotic assisted group and both comparisons and quote.
I will now turn to our financial outlook for 2020.1.
We continue to operate and a challenging supply chain and supply chain environment, and an experienced and longer lead times and delayed deliveries from our suppliers and while.
While this did not have a material impact to our operating results and Q2 and the outlook. We are providing does not reflect any potential significant disruption or additional costs related to supply constraints.
We also know the increasing number of COVID-19 cases, and certain geographies associated with the Delta Varian.
And the outlook, we are providing on today's call does not reflect risks associated with a significant increase and COVID-19 related hospitalizations in relation to the Dell ovarian or other potential.
And show New variants.
Starting with procedures.
Last call, we forecast 2021 procedure growth of 22% to 26%.
Given the stronger recovery of procedures, we have experienced so far, particularly in the U S and strengths and U S. General surgery, we are now increasing our forecast and expect full year 2021 procedure growth of 27% to 30%.
The high end of the range assumes strengthening U S general surgery.
A return to normalized diagnostic pipelines.
And the vaccines are effective against any new COVID-19 variance and the vaccine Rollouts and O U S markets continuous currently expected by governments around the world.
Turning to gross profit on our last call we forecast our 2021 full year pro forma gross profit margin to be within 70 and 71% of revenue.
We are now slightly increasing our forecast and expect full year gross profit margin to be between 75 and 71.5 percentage of revenue.
Our actual gross profit margin will vary quarter to quarter, depending largely on product regional and trade and mix the impact of product cost reductions and manufacturing efficiencies and pricing pressure.
With respect to operating expenses on our last call.
The full cost of growth full year pro forma 2021 operating expenses between 18, and 22% above 2020 levels.
We are refining our estimate and expect a full year pro forma operating expense growth to be between 17 and 21%.
Consistent with last quarters forecast.
We expect on noncash stock compensation expense to range between 450 and $417 million in 2020.1.
We expect pro forma other income, which is comprised mostly of interest income to total between 50 and $55 million and 2021.
With regard to income tax we expect the range of our second half 2021 pro forma tax rate to be between 21, and 22% of pretax income slightly higher than the range. We provided on the last call, reflecting a higher mix of U S income.
That concludes our prepared comments, we will now open the call to your questions.
Ladies and gentlemen to ask questions. Please press, 1 and then zero on your phone and keep them.
And you will hear and it's a whole a tone, indicating that had been placed in the queue and per our first question will go to Tycho Peterson. Please go ahead.
Hey, thanks.
Congrats on the quarter I guess first question on guidance. Obviously, you know your you made some comments about variance and not factoring and kind of increase and I know you know piece rises have been largely decoupled from hospitalizations, but can you maybe just talk through the thought process there and.
And how youre thinking about any potential risks and the back half of the year from friends and bear cases.
And just thanks, Tycho from the top I think you said the right thing, which is there's a little bit of a decoupling, thus far of infection from hospitalization and the number and we're watching closely is hospitalization.
Jamie I'll, let you take it and then yes.
Tycho, we kind of outlined what was assumed in the high end of the procedure guidance from the low and perspective, the 27% reflected there is great and summer seasonality the.
Flex the possibility of an impact due to pent.
Pent up demand and vacation, especially for health care workers on the worked extensively during this period with Covid and also.
And it reflects lower diagnostic pipelines and perhaps some reluctance of patients to visit hospitals.
And there is O U S markets continued to be choppy given the in many cases those market behind the U S. For example, and their vaccination rollouts and that leaves the possibility of continued resurgence is and localized and lockdowns.
And that low and also reflects some impact of a resurgence in the U S, but as you heard and up in AR.
Comments, and a significant increase and hospitalizations and is not reflected in the guidance range.
Okay. That's helpful shifting to the extended use program you've been out there for for around 6 months, you know smaller rollout and in Europe, and the fourth quarter and can you talk about kind of next steps for the program here at particular geographies, you're targeting and then here's the elasticity.
Relative to the extended use program and the price adjustments played out relative to your expectations or any color you can provide on that.
Yes sure.
We rolled out to eat the extended use instruments and.
And Europe and the U S back in the fourth quarter and then now we've rolled it out to most other markets and the first 6 months of this year.
Except for China, where there are longer regulatory timelines.
It's a short period, but.
We believe that there is elasticity and we've seen and elasticity and markets where reimbursements are very low.
And we've received feedback positive feedback from surgeons, who have indicated that system access has been a key driver for increased procedures and we think that the day.
And the extended use instruments lowers barriers for us.
For purchases of systems.
And he said all of that it's been a short period since they've had extended use instruments, even though we've seen growth and the procedures that were specifically targeted by extended use instruments. It's hard to discern what is COVID-19 related versus what is not and so we'll see over time, we'll be able to measure and little bit better over time and we'll monitor.
Okay and last 1 on SP and last quarter, you kind of brought up the concept of going after thoracic and and some additional other areas can you maybe just talk a little bit about that.
And the road map and I think you've alluded to adding additional instruments and accessories.
Can you talk on the hardware side as well.
Sure. So right now we've talked on the script about adding our work or I E. Around colorectal. We're excited about that that'll play out over the next several quarters as we accrue patients and then given that its cancer procedures and some cases, its a little bit longer follow up so that's a multi quarter conversation, we're doing what we call the procedure development and.
On the <unk>.
Trial development around other indications, we think there'll be an opportunity and thoracic as well as well as other ones beyond it.
And the instrumentation updates are there are other things imaging updates and software updates there on.
And they're really all focused around right right instruments right features for the right ex.
Extension or right expansion so.
<unk> are asking us for.
Advanced instrumentation, so energy and and stapling and other things, we think that is possible as we're making those investments too.
Move that forward, we think we can bring.
Some outstanding imaging capabilities, including for us and synergy into that space and.
And where we're building into the broader digital ecosystem for S. P.
Our our focus right now is not rapid expansion of the installed base, our focuses and Ah clinical capability and productivity of the instrument installed base. We have in other words happy very satisfied customers and.
And sequential growth and what they can do with the system remains our focus on those for now.
Okay. Thank you.
Next we'll go to Bob Hopkins with Bank of America. Please go ahead and shrunk.
Oh, great and good afternoon.
So first question for me is I'm, just trying to dissect your procedure results a little bit more COVID-19. It's really interesting comments that you saw strength and benign cases, some catch up cases, and then on a 2 year compounded basis Youre kind of where you thought you might be pre pandemic and I'm just curious from what you see out there is this.
Broadly reflective of what you think is going on in the marketplace for surgical procedures or is this simply and primarily just something about the pandemic accelerating the use of of of da Vinci and and robotic surgery broadly.
I'll speak.
And my impression, but I'll caveat it hits, 1 person's impression and so not a scientific study just my view.
Think what we're seeing is that the longer diagnostic pipelines have had this kind of double effect.
The pandemic, partly it's a delays and getting in and getting tested and starting the journey and.
And then getting in and and having a procedure or treatment or whatever that might be.
From a from a core demand point of view or disease States, that's clearly out there and accumulating and it has to get processed through on the brine side are often the diagnostic pipelines are shorter.
And you go from and issue 2 identification to closure and more quickly and <unk>.
I suspect that's most of what we're seeing at least in the United States in terms of that but I don't have a scientific evidence I think that's that's anecdotal Jamie.
Jamie and Okay Terry.
And I would just add Bob as you saw the.
David hospitalization rates in the U S come down and in March and into Q2 that freeze hospital resources to increase the level of surgeries that we do and we also see I think Inc.
Increased patient confidence is a function of the improved and vaccination rates and those 2 things come together. They also allow hospitals to start to.
Address the backlog has accumulated and I think for a subset of the benign procedures that have been kind of deferred elective procedures.
Schools can come and cover those pretty quickly.
Okay, and then just 1 quick follow up and and thanks for those comments just to be clear on your answer to the Tyco's question just on the recent spread of Covid and variance.
And the potential impact on demand and hospitals and ability to do procedures are you are you starting to see that impact now.
Or is it.
It's too early and you're just saying that might happen and the future.
We've seen that in some O U S markets, we've clearly seen that and markets like India, Taiwan and there has been an impact in terms of on how they've handled that from a health care system perspective, and the resulting impact on and off procedures from a U S perspective, I think it's early and I think with simply acknowledging the risk I think the thing that we'd call.
Now is not the case rates per se and mono or its the impact on hospitalizations.
Locke Lockdowns decreased patient mobility and willingness to go get their tests and then.
And the hospitalization diminishes ICU and capacities.
Drivers we watch.
Makes sense. Thank you.
Next we will go to.
And with Golden Goldman Sachs. Please go ahead.
Oh thanks.
And maybe start with Marshall on the first 1 and then go to Gary for the second 1 Marshall the the operating margin coming in at day, 43% and just wondering how much we can extrapolate here and I heard your comments, but just kind of thinking a little bit longer term than just the next couple of quarters, you've got COVID-19 and just curious what the net effect there is from the savings and <unk>.
Fence perspective, and R&D, whether you know this is maybe the beginning of you're starting to see some leverage off of the 10 per cent you've been at for the last couple of years, and and and SG&A kind of same kind of question you've been spending a lot there and we starting to see leverage potentially that could that could enable a little bit better margins as we think about next year you're after.
I think theres elements of our spend it had been restrained because of restricted because of Covid and.
And its impact and I kind of articulated with those who are you know travel and.
And so forth and and we expect those to come back as Covid goes away and and the restrictions on travel and restrictions on other activities go away.
We also the.
Business came back faster than we had anticipated and.
So we have some catch up to do in terms of infrastructure and support necessary to support the overall business and so we will spend there and so I think youre going to see.
This quarter was extraordinary in terms of the operating profit margin and.
And it will.
We will and it'll be lower and the future quarters, given given what I. Just described and in addition to that we still think this is a great opportunity to continue to invest and ecosystem of products and capabilities at this point and time before competition really gets any kind of toehold and and so where we're going to continue to invest so I wouldn't start.
And building lots of leverage into your models I think that would be.
In the states.
I'll add 1 bit of color to that I, I think and when you think about our product cycles I would just.
Have you looked back earlier in the and the da Vinci experience and that these are long development cycles and the time you conceivably.
On your at.
And market penetration rates that are there are significant and that is both of them.
Painful and and and opportunity the painful part is the investment troughs are deep and the and the early and middle years.
Over those product cycles, and we were early and the high on product cycle and we're early in the S. P or early mid and S. P.
It takes a while but once you develop a really capable ecosystem and then.
It has a lot of platform use and and net investment can be recovered over time.
It's hard to time, it out and it doesn't time out over 1 or 2 quarters at times out over years.
Hey, Gary just with you did just thinking through the my intuitive and and what you're doing at the surgeon level and I'm actually curious more what's going on with services and software at the hospital wide kind of department of surgery level that I don't know how much of it and update you can give us something on you know what's happening at that level.
In terms of those he now and software tools and services youre, developing and trying to increase efficiency because that kind of thing.
And how close we are to maybe seeing something that you can monetize it and he can talk to there would be helpful.
We think about digital is enabling and accelerating a lot on different parts of the ecosystem.
So when we talk about my intuitive that really is putting the power of interaction and data at the surgeon level and their hands or at the robotics coordinator level and their hands.
And at about that because it gives them fast and easy access.
It links into some of the other things you're talking about we are building tools and capabilities that allow.
On a hospital departments and the departments from surgery to manage their program and look across our programmatic for efficiency for learning.
For outcomes and these things and a link so.
Short answer there is just kind of a reminder, what we're trying to do we think there's an opportunity to accelerate learning and to drive.
Increased insight for a surgeon into their own progress we're doing that.
Combination of my intuitive plus some of the simulation work that we do plus some of the machine learning.
And and video analysis work that we do.
We think theres an opportunity to to look at correlations between search and performance and outcomes and.
And that has implications for the kind of imaging, we do and its implications for for task analysis and training and we're doing those things and those can be aggregated across the surgical platform and there's a lot of opportunities for or efficiencies and standardization.
Controlling operating cost control and consumables cost and those things are ongoing now so several of those things are in the markets. The very first kind of gen..1 and some of them are on Gen..2.
Some of them are included in our service contracts some of them on a per per use basis. Some of them are fully included because we feel like they make us more efficient and to make them more efficient. So we don't really call them out as individual revenue lines I think they are.
Ecosystem enablers and and can result in very high customer satisfaction.
Great. Thank you.
And I should go to Larry Bagels Sun with Wells Fargo. Please go ahead.
Yeah.
On a nice quarter, 1 on procedures 1 on competition.
Apologize for the short term oriented question, but you are the first step large cap company to report here. So I'd be curious to hear from you on and a procedure trends through the quarter and the U S and and international and regarding the backlog. How do you know there was catch up and you know why won't that continue for the next few quarters and I had.
1 follow up.
Yes, just in terms of intra quarter procedure trends, if you were asking Larry and month by month that was nothing notable actually the and we would call out and those are the usual impact of seasonality from from vacations like Easter, but nothing no within within the core and.
Terms of procedure categories, and bariatrics continue and the strength that we've seen for some time.
<unk> continued the strength that we've seen on the over the last couple of quarters and U S General surgery, and particular performed well.
So I think those are the key kind of procedure highlights on.
What was the second part of your question again Larry.
I mean, how do you know there was catch up from the backlog and Q2 and I guess you know why won't that continue with it doesn't seem like it was the backlog would be exhausted just after 1.1 quarter.
Yes.
And his kind of where we stand with the backlog, we don't actually know how much backlog was resolved and the cool and how much backlog is left on the timing over the recovery of that might be and we have a broad range of estimates frankly, the lack of precision in that net and that estimate is such that it's probably not useful for us to share.
And so we have some some indications that we saw backlog reflected and in the Q2 results, but at this point, it's just too difficult to estimate and therefore kind of give you any additional color on.
And I hear your question is asking us how much is left how much of the catch up is left there appears to be some it's hard to have a precise measure on it and.
We're going to have to let it play for another few quarters to see add to that the uncertainty of.
The weighted for possibility and wait for it makes it makes it tough to put a number on it for now.
That's helpful Gary and just.
On competition.
It does seem like the noise is increasing and we could see 1 large competitor approved and the second half of this year how are you thinking about.
On competition are you seeing any impact thus far and.
Thanks for taking the question.
Yeah.
Couple of things I think all of us know and we as consumers and other customers like choice perfectly fair.
We've seen a few teams come out and infield systems that are alternatives to ours.
<unk>.
Transit tourists was out a few years ago and.
<unk> has been out and now and now Medtronic.
A couple of things I'd say, 1 is we are focused on making sure that our ecosystem our products our systems and everything goes around it really delivers against the quadruple aim all the way through.
And it's not it's not just the robot building a great robot is a hard first step you have to do it and and but right now I think that remains to be seen how strong those other systems or even then it's not enough.
Instruments, and accessories training programs and support staff and.
Analytics capability publication, and scientific publications, demonstrating what you've done.
Analytics and evidence based build are all I think important so I'd encourage those folks on the call. It it's likely to be a comparison of ecosystems and delivering a quad and overtime.
That said other teams are out there, they're all calling on customers, they're giving their powerpoints about what they think is going to happen next and some other things and and our our posture to that has been it may delay some.
Sales and we may have some competitive conversations and tenders.
And we'll lose some.
And what we've seen though is that what happens on the powerpoints and what happens a year later is different and.
And if it hasnt delivered against the Quad aim on it.
These systems can do some cases, well, but not all cases, well or they have oh.
Stability issues or other things.
And that worse than pretty quickly, we also find that our economic offerings with.
Da Vinci X and E P.
Have choices that we ourselves can offer our customers. So I think all of you on the call you should expect increased alternatives for the customer base I think the noise levels will go up.
I think our customers will take their time to evaluate and do things as they go.
Okay. We're not we're not frightened of that we think we stand up pretty well to those comparisons and and.
And we're ready to help them pursue their aims as it proceeds.
Thanks, so much.
And thanks for going into the line of Rick Wise with Stifel. Please go ahead Sir.
Hi, Good afternoon, everybody, Hi, Gary and maybe just.
And at the beginning of your comments.
Truck that you emphasize that.
Da Vinci utilization rates or if I understood you correctly at the high end and historical averages.
Gosh, that's awfully encouraging sounding.
And just wonder are you suggesting.
Or should we be thinking that we could be in the front book, but new wave of capital acquisition, what again capital and released.
Because of the need to add additional systems to accommodate.
And the expanding number of procedures.
The reason I mentioned it early is I think when we've had pretty strong capital quarters last few 1 of the things. We want to look for is are we building on your unused capacity into the.
And the field that that where procedures are softer there.
All this out and so and we watch that number because we know it's highly sensitive.
And.
We're pleased again, if you look across that 2 year period tried to look through the pandemic kind of ups and downs. What we're seeing is that procedure demand is there and the capital to support that demand has not run ahead of the procedure demand and in fact, our commentary is a little bit the opposite that these are being highly.
Utilized that's great.
That says that we're not putting out more capital than folks need even though it's been healthy capital quarters. It means our customers are getting good benefit out of what they're using those systems for.
Jamie and his commentary he said that a lot of those procedures are benign procedures many of them or shorter duration.
And then.
Longer or more complex.
And the disease states that that means that utilization will go up kind of naturally that that mix moves toward a harder utilization mix all of that to me indicates that the business feels and balance.
I'll caution that.
What the next couple of quarters or next 4 quarters looks like in terms of hospital access to capital and their decision making.
Capital is always lumpy it has been.
Just so I'm really speaking backward looking so far so good.
Gotcha.
Gary its a separate topic.
And I had the privilege of thing and intuitive.
Develop the use of robotics and multiple clinical indications over the years and.
And recently, we've had a series of very encouraging conversations on.
The adoption and bariatrics.
Very encouraging and.
You know basically go underpenetrated and big opportunity doctors talking to us about it.
And further expansion.
Utilization and I'd just be curious to know since you're on you are calling it out to repeatedly as an important incremental.
Gross driver where are we now and your view and then.
I'm sure multiyear long term adoption process.
What's left to to do maybe a product or procedure or instrument point of view.
Where are we going with this 1 thank you.
Let me start with a Y I think it's adopting and I'm going to turn to Jamie as to the where are we and what inning of the baseball game, and we and I'll, let Jamie take that.
On the 1 side, it's it's very <unk> has been a little different than other procedure for us.
And it's a highly penetrated laparoscopic indication and the United States.
Having said that it's a difficult procedure for surgeons to perform its physically demanding.
And as we've said in the past if we can bring the right system with the right instruments right imaging.
And the right usability ease of use and we.
Think that Oh.
Surgeons won't care and we've seen both good clinical outcomes, but also high surge and satisfaction and better ergonomics I think that's what's been driving our success and the early market.
And it's taken getting the advanced instruments together as a set getting our our and workflows and our and our clinical pathways right and and I think that's been powerful to date and Jamie as to kind of where we are.
Just a couple of comments. So so bariatric, obviously has been highly laparoscopically penetrated historically.
From a market perspective about 60% ish or so.
Leaves about 15% on revisions on it too.
<unk> of our underlying numbers with growing a little faster rate and and the revisions section.
And bypass grow about the same rate I think the product ecosystem with ex side with the 60 millimeter Stapler is and has and is in good shape and we're getting good feedback from surgeons in that regard.
And is physically taxing procedures and as Gary described and so and we see that as a benefit also with respect to feedback from surgeons in terms of penetration and adoption. We're in the early and mid innings kind of ranges what on what I'd say and the U S market.
Got you. Thank you very much okay, well, thank you and and our moderator that was our last question.
In closing we continue to believe there's a substantial and durable opportunity to fundamentally improve surgery and acute interventions. Our teams continue to work closely with hospitals physicians and care teams and pursuit of what our customers have termed the quadruple aim.
And are more predictable patient outcomes better experiences for patients better experiences for their care teams and ultimately a lower total cost per tree.
We believe value creation and surgery and acute care is foundational and human it flows from respect for and understanding of patients and care teams and their needs and and their environment.
Thank you for your support on this extraordinary journey, we look forward to talking with you again in 3 months.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using AT&T event conferencing you may now disconnect.
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