Q1 2022 Intuitive Surgical Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to Ventura. If Q1 2022 earnings release at this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time should do it.
Higher assistance during the conference. Please press Star then zero and an operator will assist you offline and as a reminder, your conference is being recorded.
Now like to turn the conference over to your host Bryan King head of Investor Relations. Please go ahead.
Good afternoon, and welcome to intuitive first quarter earnings Conference call with me today, we have Gary <unk>, our CEO and Jamie Smith CFO .
Before we begin I would like to inform you that comments mentioned on todays call maybe 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 security and exchange Commission filings, including our most recent Form 10-K filed on February 3rd 2022.
Our SEC filings can be found through our website or at the SEC's website.
Investors are cautioned not to place undue reliance on such forward looking statements.
Please note that this conference call will be available for audio replay on our website at intuitive dot com on the 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 first quarter results as described in our press release announced earlier today, followed by a question and answer session.
<unk> will present, the quarter's business and operational highlights Jamie will provide a review of our financial results and I will discuss procedure and clinical highlights and provide our updated financial outlook for 2022, 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.
In the first quarter procedure demand for our products from Sophie recovering where COVID-19 receded.
<unk> as a procedure performance include a general surgery in the U S and non urology procedures outside of the U S, which are our areas of focus for.
Regardless of the health of procedure demand, we were challenged by environmental stresses.
Adding regional waves of Covid staffing pressure of hospitals component and raw material availability and logistic delays.
While it's difficult to forecast how long these headwinds will persist our teams are working hard to meet the challenge.
In the quarter da Vinci procedures grew 19% compared to the first quarter 2021 use.
Use of da Vinci in general surgery in the United States grew nicely.
By bariatric procedures, cholecystectomy hernia repair and rectal surgery.
Lobectomy growth was also healthy.
Outside the United States, the U K, China, Japan, Germany, and Italy grew above our quarterly average growth rate, but I will note that some countries saw the beginnings of Covid slowdowns later in the quarter.
In particular, China and Korea.
International use of da Vinci is diversifying beyond neurology in several countries with growth in oncologic procedures in thoracic surgery, gynecology and general surgery in.
In Japan, <unk> increased reimbursement for Robotically assisted gastrectomy and added another eight procedures to reimbursement coverage in April bringing the total number of covered da Vinci procedure types of over 25 in Japan.
And our flexible robotics program ion procedures grew approximately 350% in Q1, compared with Q1 2021, reflecting continued strength in adoption and utilization of the platform.
Turning to capital our team installed 311 da Vinci systems in the quarter compared with 298 systems in Q1 2021.
Bringing our total clinical install base to 6920 Vinci systems.
<unk> has varied by region with UK standing out with a strong placement quarter.
Capital placements have been historically lumpy and apples after several quarters of capital strength.
Seeing some near term softening of our capital placement pipeline in the U S.
Contributing factors may include a pull forward of Q1 2022 demand into Q4 2021 due to customer budget utilization at year end.
A reduction in the number of third generation da Vinci systems available for.
For trade ins and an overall tightening of hospital finances.
With a three year CAGR and procedures of 15% from Q1 of <unk> 19 to Q1 of 'twenty, two and installed base growth of 11% over the same period.
Utilization of installed systems continue to climb through the pandemic and in the first quarter.
This is increasing the value derived from the existing installed base for our customers and for us.
Over the mid term capital demand in mature robotic assisted surgery segments is a function of procedure demand moderated by utilization growth.
Jamie will give reasonable capital trends and Brian will give a more detailed procedure review later in the call.
As we exit the first quarter, we continued to invest in global expansion innovation initiatives in our business infrastructure.
Our spending in the quarter was roughly in line with our target.
And instruments and accessories, we receive Chinese N M. P. A clearance for our 45 millimeter and 60 millimeter share form staplers.
Our vessel sealer extend and our endoscope plus these.
These products support the utility of our <unk> systems for several procedures, particularly general and thoracic surgeries.
Turning to Ireland, we submitted our EU medical device regulation application for the platform to allow the entry of <unk> into Europe .
Our teams are also building production capability and the capacity pardon me and making improvements to customer workflow planning software and reprocessing efficiency.
And digital products, the my intuitive App community tripled year over year and is now available in the U S, Japan, Germany, France.
United Kingdom, and Ireland, and Switzerland, with launches set for Italy, Spain, and India in Q2.
Building on our Orpheus technology, our teams in Israel and the U S has created intuitive hub, a unified hardware and software solution for the operating room.
Intuitive hub enables or teams to capture edit and share video clips from clinical procedures and collaborate virtually using existing workflows and intuitive systems.
In the quarter, we launched an upgraded interface to da Vinci systems that allows for automated video capture with integrated procedure agitation for key events.
Creating convenient video storage and review for Vinci cases.
Customer feedback for this integration has been encouraging.
Across the installed base the number of procedures in which intuitive hub was used grew approximately 60% year over year.
To our goal of adding Iris anatomical models, we're in conversations with FDA on how best to characterize some of its core AI technology, which will require a resubmission of our five 10-K for the next set of segmented Oregon models.
Finally, the installed base of our virtual reality training simulators him now grew 33% in the quarter compared with a year ago.
For our single Port program da Vinci SP, We began the launch of our next generation SP Endoscope, which includes our Firefly fluorescence imaging technology and has 65% longer life.
We also launched our next generation core S. P instruments that can apply higher forces during surgery and are more durable.
Feedback on both has been encouraging in.
In Japan, we submitted our da Vinci SP for clearance to P. M D a seeking broad indications.
We continue to pursue additional indications for SP in the U S, which is important for broader for broader adoption with an ongoing IDE trial in colorectal surgery, and an approved IDE E for thoracic surgery.
Covid in some site specific delays have slowed our progress in our Cola colorectal trial, we're working hard to expand the number of participating sites to accelerate its completion.
Stepping back for 2022, our top priority is to support supply and train our customers as they navigate a challenging environment.
We are also focused on helping general surgeons in the United States adopt our technologies in diversifying our business outside the United States beyond urology and in executing on our new platforms and digital tools.
I'll now turn the time over to Jamie Samit, who will take you through financial matters in greater detail.
Good afternoon, I'll 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.
Overall Q1 results reflected approximately 19% procedure growth as compared to the first quarter of 2021 and system placements of 311 systems, resulting in an expansion of the installed base of da Vinci systems of approximately 13%.
As a result of a procedure and capital performance Q1 revenue increased by 15% year over year.
Key business metrics for the first quarter of 2022 were as follows.
Within the 19% procedure growth procedures in the U S increased 16% and O U S procedures grew by 25%.
Procedures in the U S were impacted in January by the significant number of hospitalizations related to the OMA from Varian.
As race of Covid related hospitalizations declined in February and March da Vinci procedures recovered quickly.
On a three year compound annual growth rate basis first quarter procedures grew approximately 15%.
First quarter system placements of 311 increased 4% from the 298 systems placed last year.
The number of systems placed in conjunction with the trade in of an older generation system declined by 18% from the first quarter of 2021.
And that decline was entirely driven by the U S.
Utilization of clinical systems in the field measured by procedures per system increased approximately 6% compared to last year.
Using a three year CAGR first quarter utilization grew 4%.
During the quarter the supply chain environment continued to be challenging and remains dynamic.
In Q1, we continue to experience constraints in our ability to meet customer demand and as a result on time delivery performance to our customers was lower than we've experienced so far during the pandemic.
In Europe recently, we have experienced some geographically limited delays in fulfilling orders for some da Vinci instruments and accessories.
These would these delays were due to a combination of the global supply chain and logistics issues, including our freight forwarders unanticipated shut down of its computer system.
While these constraints did not have a material impact to our Q1 financial results risks associated with potential disruption to our manufacturing operations and our ability to supply certain products to our customers remains significant.
During the call are we also experienced higher logistics costs and manufacturing inefficiencies that impacted our gross margin.
U S procedure growth of 16% over Q1 of 2021 reflected continued relative strength in bariatrics, and cholecystectomy and hernia repair.
In Europe , we experienced strong growth in the U K, reflecting in part the significant adverse impact of Covid in Q1 of 2021.
Procedure growth in the U K also reflected strong early stage growth in hysterectomy, colorectal and thoracic procedures.
Procedure growth in Germany, and Italy was also strong while procedure growth in France was adversely impacted by Covid mitigation measures in the first part of the core.
Overall procedure growth in Asia was solid with growth across a broad set of procedure categories.
Q1 procedures in China, and Korea was slightly lower than our expectations given the impact of the AUM of Chrome variant later in the cooler.
Procedure growth in Japan was strong, reflecting some recovery and urologic procedures and strong growth in rectal hysterectomies and thoracic key procedures that were granted da Vinci reinvestment in April of 2020.
The impact of the Delta there in Q3 of last year and the impact of the Omicron variant and this pascua highlight the continued risk of future Covid waves and the associate significant risks to the number of da Vinci procedures that may be performed.
Brian will provide additional procedure commentary later in this call.
As Gary indicated during the call we experienced a softening in our U S capital pipeline, which we expect to impact system placements in the near term.
In the U S. We placed 186 systems in the first call are lower than the 190 in Q1 of 2021, reflecting a decline of 28 systems associated with trade in transactions, partially offset by increased placements to greenfield customers.
The remaining installed base of <unk> systems in the U S is approximately 268 systems.
Outside the U S. We placed 125 systems in the first cooler compared with 108 in the first quarter of 2021.
Current <unk> system placements included 78 into Europe , 19 into Japan, and nine into China, compared with 59 into Europe .
Get into Japan, and twenty-three into China in the first quarter of 2021.
We placed 30 systems in the U K in Q1, driven in part by the timing of government budget cycles.
We do not expect to play similar levels of systems in the remainder of 2022 in the U K.
Capital performance in Japan was driven primarily by Greenfield accounts in some existing customers, adding capacity in anticipation of the eight additional procedure reimbursement is taking effect on April 1st.
System placements in China were moderately impacted by longer logistics cycle times as a result of Lockdowns in response to increased Covid cases.
As of the end of Q1 2022.
With 55 systems remaining under the current quota in China, which may also be available to competitors that have received local regulatory clearance.
Globally trading transactions represented 35% of placements in the cooler compared to 38% for the full year of 2021 and 48% for the full year 2020.
Given the lower number of older generation systems in the field, we expect the volume of trade ins to be significantly lower in 2022 as compared to 2021.
Hospitals continue to experience financial and operational pressures as a result of staffing shortages, the supply chain environment and resulting inflation.
Since the start of the pandemic in 2020, the impact of Covid has placed a significant burden on hospitals.
The financial pressures our customers are faced have been partially mitigated by government funding such as the approximately 178 billion of cares Act and other relief made available to hospitals in the U S.
The rising interest rate environment increases debt servicing costs and may make access to new debt more challenging.
To the extent that hospitals continued to face financial pressures reductions in government funding and high interest rates hospital capital spending may be adversely impacted.
In addition, as competition progresses in various markets, we will likely experience the longer selling cycles and price pressure.
Additional revenue statistics and trends are as follows.
Total first quarter revenue was $1 49 billion, an increase of 15% from last year.
Leasing represented 35% of Q1 placements compared with 37% last year last quarter rather.
The slightly lower first call at least mix, primarily reflected the mix of customers who prefer to purchase systems.
While leasing will fluctuate from quarter to cooler, we continue to expect that the proportion of placements under operating lease leases will increase over time.
So that's cool system average selling prices were 1.54 million higher than the 1.45 million last quarter.
The sequential increase was primarily driven by a lower mix of both by transactions with large customers and a favorable product mix in particular, a higher proportion of <unk> fuel system placements in the core.
We recognized $16 million of lease buyout revenue in Q1, compared with $26 million last quarter and 19 million last year.
Lease buyout revenue has varied significantly call it core and will likely continue to do so.
Instrument and accessory revenue per procedure was approximately $1870 per procedure compared with $1940 per procedure in the fourth quarter of 2021 and down 4% from the $1950 realized in the first quarter of last year.
The year over year decrease primarily reflects the benefit of stuffing orders in Q1 of 2021 associated with the launch of our extended juice instruments program in the U S in Europe , and an unfavorable FX impact from the stronger U S dollar.
The sequential decline primarily reflects lower stocking orders associated with lower system placements.
Hospital ordering patterns and a small unfavorable impact from FX.
We placed 34 ion systems in the quarter as compared to 14 I am placements in the first quarter of last year.
The installed base of Iron systems is now a 163 systems of which 70 are under operating lease arrangements.
First caller I own procedures of just over 3900.
Oh, the forex compared to the first quarter of 2021.
Seven of the systems placed in the first quote S. P systems, including three systems placed at customers in Korea.
Our installed base of SP systems is now a 106.
First quarter RSP procedures grew approximately 36% year over year with approximately 50% growth in trends overall procedures small but high value segment.
Growth of the SP platform will continue to be gated by additional clinical indications and clearances in market beyond the U S and Korea.
Moving onto gross margin and operating expenses.
Pro forma gross margin for the first quarter of 2022 was 69, 8% compared with 71, 8% for the first quarter of 'twenty, 'twenty, one and 71% last quarter.
Pro forma gross margin was lower than last quarter, primarily as a result of higher logistics costs and increased fixed costs relative to revenue as we invest in our infrastructure and manufacturing capacity to serve our long term needs.
While net inventory grew approximately $66 million call or the call. There are still a number of components and products that are below our targeted levels.
Pro forma operating expenses increased 26% compared with the first quarter of 2021 the.
The increase in first quarter operating expenses from a year ago reflected an increase in head count increased variable compensation and higher customer facing costs customer training travel costs and marketing programs.
As of the end of Q1, we had just over 10500 employees an increase of 26% from the first quarter of 2021 or an increase of 20% on a three year CAGR basis.
I'll say approximately 2100 employees, we have added over the last year approximately 900 manufacturing employees.
Capital expenditures in Q1 with $95 million, primarily comprised of infrastructure investments to expand our facilities footprint increased manufacturing capacity and automation of certain production lines.
Our pro forma effective tax rate for the first coil was 23, 3% slightly above our expectations, primarily due to certain discrete tax items.
Our pro forma tax rate was above the 22, 2% for 2021 primarily due to a previous change in U S tax law that became effective on January one 2022.
Our first call of 2022 pro forma net income was $413 million or $1 13 per share compared with $427 million or $1 17 per share for the first quarter of 2021.
I will now summarize our GAAP results.
GAAP net income was $366 million or a dollar per share for the first quarter of 2022.
Compared with GAAP net income of $426 million or $1 17 per share for the first quarter of 2021.
The adjustments between pro forma and GAAP net income are outlined and quantified on our website and include excess tax benefits associated with employee stock awards employee stock based compensation amortization of intangibles and gains and losses on strategic investments.
We ended the quarter with cash and investments of $8 4 billion compared with $8 6 billion as of December 31st 2021.
The sequential reduction in cash and investments in the first call of primarily reflected share repurchases capital expenditures and unrealized losses on interest bearing investments classified as available for sale posh.
Partially offset by cash from operating activities and proceeds from employee stock plans.
During the call, we repurchased 398000 shares at an average price of $268 per share for a total expenditure of $107 million.
And with that I would like to turn it over to Brian who will discuss clinical highlights and provide our updated outlook for 2022.
Thank you Jamie our overall first quarter 2022 procedure growth was 19% compared to 16% for the first quarter of 2021.
The three year compound annual growth rate was 15% between the first quarter of 2019 and first quarter of 2022.
First quarter 2022 procedure growth benefited by 140 basis points from one additional workday in the quarter.
In the U S first quarter 2022 procedure growth was 16% year over year compared to 14% for the first quarter of 2021 and 16% last quarter.
On a three year compound annual growth basis U S procedure growth was 13%.
In the U S first quarter growth was again driven by growth in procedures within general surgery, Bariatrics, and cholecystectomy and hernia repair were the largest contributors to procedure growth while growth in forgot and rectal recession were also strong contributors.
Outside of the U S first quarter procedure volume grew approximately 25% compared with 23% for the first quarter of 2021.
And 28% last quarter on a three year compound annual growth basis procedure growth was 20%.
In Europe , we experienced strong growth in the U K, Italy, and Germany, partially reflecting the disruption caused by Covid in the first quarter of 2021.
In the U K procedure growth was strong in general surgery, and gynecology categories supported by early stage growth in hysterectomy, colorectal and thoracic procedures.
Procedure growth in Germany, and Italy was also driven by procedures outside of urology with growth driven by colorectal hysterectomies and thoracic procedures Cal.
Capital placements were also strong in the U K with the placement of 30 systems. The highest number of systems placed in the U K in a single quarter driven in part by government funding and the trade ins of older generation systems.
In Japan growth in general surgery, Gynecology, and thoracic continued to be strong with robust growth specifically in benign hysterectomy gastrectomy and lobectomy.
In addition, urologic procedures, specifically prostatectomy and partial nephrectomy, both experienced solid double digit growth, reflecting a recovery when compared to the prior year, which was constrained by COVID-19 .
In China, and Korea first quarter procedure growth was solid but slightly below our expectations as we saw a resurgence in march of Covid infections regional Lockdowns, and hospitalizations, which negatively impacted procedure volumes.
In China growth in urology was solid in particular with growth in prostatectomy, and nephrectomy and partial nephrectomy.
We continued to see broad based growth in general surgery, thoracic and gynecology as well.
As we enter the second quarter of this year, we are seeing the negative impact on procedure volume as a result of continued regional lockdowns.
Now turning to ion a robotic assisted and aluminum platform focused today on minimally invasive lung biopsy procedures.
First quarter 2022, I am procedures totaled just over 3900 in Q1 2022.
And approximately 350% increase over the prior year and 34% over the prior quarter.
Ion system placements were also strong and in Q1 'twenty two with 163 installed systems growing approximately 225% over the prior year.
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 should thoroughly review the extensive detail of scientific studies that have been published over the years.
During the quarter Doctor pressure, along with colleagues from the Robert Grossman School of Medicine at New York University and in collaboration with intuitive published a real world body of evidence assessing open conversion rates during minimally invasive surgery, using laparoscopic erotica, scopic or da Vinci robotic surgery across 10.
Common procedures for benign or malignant conditions utilizing the premier healthcare database. This study included over 275000 adult patients who between January 2013, and September 2015 underwent a minimally invasive procedure, including hysterectomy sigmoidectomy right collect.
Mi ventral and inguinal hernia repair partial nephrectomy went back to me or low anterior resection.
Overall, a 5% conversion to open right for the Mis approach was observed across all procedures with a range of 1% to 24%.
Inverted to open patients were associated with a 1.8 day longer length of stay 1.7 times greater risk of readmission within 30 days of the procedure and a significantly higher in hospital or Perioperative 30 day total cost, adding approximately $2900 to the in hospital cost and 3400 <unk>.
As to the total of 30 day cost.
The researchers also compare differences in conversions between the laparoscopic the rocker Scopic and da Vinci cohorts after performing propensity score matching conversion rates for da Vinci procedures were significantly lower than lap or vats across all procedures.
The volume weighted conversion rate for da Vinci was approximately two 8% corresponding to a total relative conversion reduction for all study procedures of 58, 5% compared to the laparoscopic or that <unk> cause scopic procedures.
The researchers concluded in part quote from the standpoint of population health or a hospital system. These high level data indicated that a cumulative effect of conversions can be a significant burden.
And that reduction of conversion has major benefits and leads to increase value for the patient the hospital and society at large.
Use of robotic assisted surgery is associated with a significant decrease in the conversion rate for all 10 operation studied in a multi disciplinary robotic program encompassing several specialties could result in significantly decrease conversion rates with an improved ability to deliver successful minimally invasive surgery to its patients.
And quote.
I will now turn to our financial outlook for 2022.
Starting with procedures on our last call, we forecast full year 2022 procedure growth within a range of 11% to 15%.
We are now increasing our forecast and expect full year 2022 procedure growth of 12% to 16%. This range continues to reflect the uncertainty associated with the course of the pandemic.
Low end of the range assumes ongoing COVID-19 and staffing pressure at hospitals and assume some continued choppiness with COVID-19 throughout the year.
At the high end of the range, we assume COVID-19 related hospitalizations around the world decline throughout the remainder of 2022 and there are no additional significant impacts from further resurgence is.
As noted last quarter the range does not reflect significant supply chain disruptions.
A steep increase in infections and subsequent recovery in the quarter from the <unk> in the U S and the trend in procedure volumes, we have seen exiting the quarter in China highlight the risk to the number of procedures that may be performed.
In the second quarter of 2022, our year over year procedure growth rate will likely be lower than recent quarters. As Q2 2021 results reflected a strong recovery in procedures as COVID-19 began to subside.
Turning to gross profit on our last call we forecast our 2022 full year pro forma gross profit margin to be within 69, 5% and 75%. We are now slightly expanding the range of our pro forma gross profit margin to be within 69% and 75% of net revenue.
The lower end of the range was updated to reflect the impact on input costs related to supply chain inflation and some impact from a stronger U S. Dollar.
Our actual gross profit margin will vary quarter to quarter, depending largely on product regional and trade in mix and the impact of new product introductions.
With respect to operating expenses on our last call, we forecast pro forma operating expense growth to be between 21% and 27%.
We are refining our estimate and now expect our full year pro forma operating expense growth to be between 23% and 27%.
We continue to expect our noncash stock compensation expense to range between $510 million and $550 million in 2022.
We expect other income which is comprised mostly of interest income to total between $50 million and $60 million in 2022.
On last quarter's call, we forecast 2022 capital expenditures within a range of $700 million to $1 billion.
We are now refining estimated capital expenditures for 2022 to be in the range of 700 million to 900 million based primarily on the current timing of planned facility construction activities.
With regard to income tax we continue to estimate our 2022 pro forma tax rate to be between 22% and 24% of pre tax income that concludes our prepared comments, we will now open the call to your questions.
Thank you and ladies and gentlemen, if you wish to ask a question. Please first London zero on your Touchtone phone you will hear an acknowledgement town that have been placed in the queue and you may remove yourself from queue at any time by repeating the ones Naval command, if you're on a speakerphone. Please pick up your handset before pressing the numbers.
Once again, if you have a question. Please pass a one zero at this time.
And our first question is.
Sorry from the line of Amit Hassan.
Please go ahead.
Oh, Thank you hey, good afternoon.
Maybe I'll ask my first question on your comments on the U S system side and the capital spending environment would just love to have more color on that and obviously we were focused on the same.
Numbers that you mentioned, which is just the Greenfield unit placements and if we kind of look back just as context to what we have is just over the past four or five years those tend to increase by about 10% a year and it is pretty choppy year to year, just using that as a proxy how much help can you give us on whether that's a good.
Target for this year for the non trade into the U S. And then just color on what you're seeing here in the near kind of just immediate term that you mentioned it sounded like a lot of risk factors and I'm wondering if it's risk factors that you're citing or something that you're actually seeing in your customers delaying planned purchases.
Yes, let me take the second question first and then I'll I'll ask Jamie to step in on the a little bit more on the trading side. So what we're seeing now of where we're at is.
A little bit less delay of planned purchases a little bit less what we're signaling more around.
Q4 demand looks strong.
Q1 in terms of the early parts of the pipeline process and some of the contracting some of the later parts, we're seeing in the U S. Just a little bit lower volume.
It may clear itself. It may entirely be that this was just a pull forward of a little bit of demand in some budget flushing.
As hospitals got ready for the retirement of some of the government support for Covid.
But it's not clear we don't know yet we know for sure that.
Oh getting toward the end of the <unk> trade in cycle in the United States. So that will soften some of the U S capital.
The final point and then there is.
Forecasted additional pressures on hospitals and finances.
Short answer that is we're gonna have to see we'll see if those come to fruition or not.
So that's a little bit of where that that lays out.
With regard to kind of what is the trade in ratio look like let me turn it to you.
Yes.
Back at last year 2021, and it was about 500 ish trade ins done globally.
Of that about 80% while transactions in the U S. So you can just kind of get a sense of the degree to which the U S has driven the trading cycle as I said in my prepared remarks as of the end of Q1, there's about 260, a size left in the U S. In the installed base and so you can kind of use those two data points to.
To some estimate of how that will play out over time as you start to get towards kind of the end of the tail of remaining size that they probably lost rather longer than kind of the average when you were at the middle of the distribution.
But that's what I would say with respect to trade ins.
Thank you.
You had a question on Greenfields.
I would think about it in the U S is you kind of have your procedure estimate that you can take from a range you can apply the usual model with respect to utilization that gives you some sense of how the installed base might expand.
And so you can kind of do that calculation that obviously it is a mix of greenfields and Incrementals and I would just.
Reflecting that model then what is the potential risk from what we highlighted with respect to the softening U S capital pipeline that we saw in Q1.
Just a catheter remark on that final thought is the core driver in our mature.
Multi port market segment in a country like the United States. The core driver is procedure demand.
We felt like procedure demand is healthy.
Healthy in our target areas are our major focus is making sure that we can supply the customer with what they need.
In a way that is high quality and timely so it's really managing the supply chain.
If that goes well and we were successful in closing those those gaps I think our capital demand will will work itself out it will play through because it ultimately in those markets is driven by corporate shipment.
Thanks for that color and EM.
Second question I always hate to ask this question, but I feel like an investors want me to and at this time at this point in time just to get you to reflect on our niche we always believe and as you stated that youre working on at least one if not two new platforms. We know you have that in the background. We see your R&D spend that's that's obvious to everyone I think the big.
It's always about timing and right.
What we wanted to ask is you know.
Is this a situation at this point in time, where.
Technology, just need more time to incubate.
Whether.
Maybe what we're seeing is more something that's related to F D E and the process.
That you go through and how that's evolved.
How much color can you give us on just the process for getting new technology to market and where you are.
Yeah, that's a good question.
What I'd say here is a couple one is as the technologies have matured in the installed base has gotten bigger we've made the intentional decision to invest a lot in upgrading the capabilities of Gen. Four platforms that are out there. So the first thing has been that the <unk>.
Sigh that somebody purchases today.
Is more capable than the side that they had and.
When it was first launched and we keep doing that.
In part that's easier or those kind of incremental adds to our platform architecture, it's pretty mature are easier for the customer base to absorb and they also compounded utilization they they allow them to get more utility out of the capital they have they get higher throughput through it and they do more procedures with it and in Gen. Four we're not done with that we have continued to do it.
And whether it's instruments and accessories or <unk>.
Endoscopy or software and we have some things up our sleeves for that too.
So that was intentional we were doing more kind of.
Structural changes early on in that product and we have intentionally move some things into more incremental changes on gen. Four we do think that there are bigger structural changes that will make sense. We are working on them. They are interesting I think they have a long term implications for.
The surgical market segments, we participate in and I'm excited about them some of those things or around technology development some of them around manufacturing and supply chain development and some of them around.
Clinical pathways and regulatory pathways. So all of those things play out I will reinforce what you said we work on incremental changes we work on structural changes and we work.
Kind of multiple generations ahead and that remains true we continue to do that.
Timing wise, sometimes a little bit hard to predict perfectly based on both supply chain readiness and how FDA thinks about those things.
For us I want to make sure that every time, we make a step that the customers value that that it's done it with them in mind, rather than with us in mind and we continue to have that philosophy, and we will pursue it.
Yeah.
Thanks for the color.
Thank you. The next question is from Rick Wise from Stifel. Please go ahead.
Hi, good afternoon, everybody Hi, Gary.
Maybe I.
We could talk about you could expand on your comments on ion.
It just.
A couple of things you said I'd be curious to hear more about.
Submitted for EU approval maybe.
If you could give us a little more color on the timing of the opportunity.
And I'm wondering whether impacts 22, but.
Maybe you could also talk a little bit about.
You know what.
You've been kind enough to describe in the recent past is sort of an inflection point for ion.
Maybe broadly speaking what's your early.
Whats the feedback youre getting from how the devices using.
And maybe talk a little bit about.
What's next and it seems more like an execution kind of story at this point.
Thanks, Rick.
<unk>.
Submission for Europe .
We just submitted our dossier.
Europe has changed over there the framing of their medical device regulation that call. It U M D R.
It's relatively new for the world.
As a result projecting exact timing to get those clearances is a little different relative to historical norms.
We don't anticipate it at completing.
Completing in 2022.
It's just it's a little bit of what's the odds game, but we think it's several quarters to finish out mostly because it's new for the regulators and it's new for us.
On the point of how as I ongoing it's being driven right now on the single indication of of biopsy and bronchoscopy.
I think it's driving well because it meets a need I think alternative technologies are manual and robotic are less capable and we see a lot of peer to peer word of mouth that is driving interest and that's backed by data like the precise trial. So that's been helpful for us.
A lot of our focus here has been developing our manufacturing capacity continuously improving the product in terms of usability quality robustness and efficacy and the teams are doing a great job in working extremely hard to do all of those things make sure that we can maintain supply and improve.
Just delighted with what Theyre up to they are they are both increasing capacity and improving robustness and quality simultaneously. So that's been wonderful and I think we have room, we're seeing the combination of high on.
Bronchoscopic.
Evaluation combined with robotic surgery thereafter, sometimes people do it on the same day and that has seen some real value for patients. It's not every part of the patient population, but there were some patients for whom that's a good solution and we see a lot of excitement so that tie through of high end diagnostics with follow through.
Treatment is creating patient value, it's shortening the time to definitive answers and.
And then a surgery for surgery as indicated.
It's been great. We think ion has has a platform has multiple of future indications that it can provide clinical value that it can bring and we're pursuing them.
Assertively in various places.
We are not yet publicly describing what those things are in part because we have some technology to develop in part there are some regulatory pathways and.
It's a competitive space and so we're working down those elements as we get a little closer to have a little bit better visibility into which ones when that well will be sure to share them.
Gotcha.
Yes.
Procedure demand.
Clearly stated was healthy this quarter it seems like it's it feels like it's likely continue so hopefully.
Hopefully the COVID-19 headwinds settled back a little bit around the world.
You do have always used to talk about.
Let's see if I can say this correctly, Gary the percentage of utilization for average utilization for our <unk> systems, and I'm sort of making this up from memory, but it used to be like when you got to 60 or 65% of our.
Procedure capacity of <unk>.
The Vinci capacity it would start to drive new discussions about new systems.
Is it.
Forgetting the specifics of my question.
Where do you feel you are with the current installed base utilization in.
Is that a consideration that we should reflect on as we think about it.
System placements going forward.
There is absolutely a relationship between procedure growth in demand and increased utilization on capital.
Right and it's inversely related if you have lower utilization you sell more capital to do the same number of procedures.
We have believed and have pursued sort of.
That while higher higher utilization decreases the number of systems that we sell it increases the utility the economic value derived by our customers to get higher throughput and so we put programs in both in terms of design and workflow as well as consulting services to help them get higher utilization, we've been doing that for years, it's a number.
That you.
You can move in a sustained way, but it's hard to move quickly and I'll turn it over to Jamie shortly you'll talk a little bit about what the trend line in utilization growth has been.
But from an <unk> 10 point of view.
We are happy to see increased utilization, even this stat pressures near term capital because it creates better ROI conditions for our customers.
And from a pure marginal economics point of view at intuitive the marginal economics work out well for us too. So it's a win win even though at the topline and placements.
It may look like pressure. So then you had asked the question you know kind of what is peak utilization and how do you think about that.
I'll also turn it over to Jamie that has a lot to do with mix and operating conditions in the hospital. It's it's a little bit less a technology question, a little bit more how they use it so jamie perhaps a little bit on utilization.
If I just go back to pre Covid for a second Rick if you look at 2019 average system utilization grew by 5% over 2018, if I look of recent times and use the CAGR approach to kind of normalize for Covid last year on a two year CAGR basis in 2021 utilization grew by four.
Percent this past quarter on a three year CAGR basis again back to 2019 grew by 4%. So you can see some relative consistency there with respect to looking forward I think that.
There is some dependency on the institution the procedure mix within the institution general surgery in combination with <unk> gives you the opportunity to drive utilization differently than a different procedure mix, particularly given the lower procedure times and some of the benign low acuity procedures.
But it also reflects the number of surgeons trained and the commitment of the hospital to drive asset utilization. If you look at the distribution of utilization today, it's relatively wide I think there are a number of <unk>.
<unk> and hospitals on a medium term basis see opportunities to continue to drive utilization up and we are supportive of that.
Thank you so much thanks Robert.
Thank you and our next question is from Larry <unk> from Wells Fargo. Please go ahead.
Good afternoon, and thanks for taking the question just one on China for me and one on inflation and supply constraints. So on China. What have you guys seen so far from the Lockdowns and what are your expectations for the second quarter or do you think you can still grow year over year in China and related to that Gary whats the process and timeline for the <unk>.
Quota you are about to finish this quota is it possible. The next quota could be larger or eliminated entirely and I have one follow up.
Ill turn those both Jamie.
With respect to what we saw was in procedures in Q1.
As you saw the Covid cases rises in places like Shanghai.
As the authority is locked down and they look down pretty strictly we saw procedures impacted in March that has continued so far into into April although it's obviously early.
I think that there's risk in and proceed procedures in Q2 relative to what you would expect without COVID-19 and those lockdowns.
<unk>.
China is our second biggest marketplace, but it's still a relatively small proportion of overall procedures U S is still about 70% of global procedures.
But certainly the way things look right now you would have some impact in Q2.
That ends up being really depends on how long the lockdowns last and how long COVID-19 persist in China.
Think a separate risk is.
Kind of the impact to logistics and supply chains, as we deliver product to China and from a more macro perspective.
The port closures and the broader impact that we could see in China, given the degree of exports. They have just generally across the economy.
With respect to the China quota.
Difficult to predict the last couple of times now.
<unk> has been issued in the third year of the quota period, which would be next year, we don't have great visibility into when that might be.
And we don't have honestly, great visibility into what the number would be.
I don't think we are expecting or planning on.
A situation, where we are exempt from it.
But again, we don't have great insight as to how that will play out.
And in general there's a brownfield.
If the quota is responsive to demand we think demand is high and the question is how responses to that demand as the central government quota when they do it sorry.
Sorry about that.
No I'm sorry to interrupt you. Thank you <unk>.
Jamie on inflation and supply constraints are you able to quantify the impact on the gross margin that you are expecting from inflation and on supply constraints. How are you addressing there's a lot of companies are buying forward inventory and what are your expectations for when it gets better I know you've talked about and to hand combat you've used that phrase almost on.
Our last few calls.
So thanks for taking the question.
Yeah, I would just maybe ground the impacts of inflation a couple of ways. If you look back at history. Our gross margin has been in let's say the 71% ish range.
Versus what we just guided 69 to 70 unit.
And there's really two drivers in the gap between our history in that range, one and all the investments we're making in fixed costs.
In infrastructure and manufacturing capacity, that's being invested effectively.
Long term needs of some of that is ahead of when we will need it but the lead times require that we put that in place ahead of time. The second impact is this impact from the supply chain and inflation in the form of logistics costs high component prices et cetera.
I can't give you a perfect kind of delineation between the two I would say roughly.
Lately more of that the impact of that gap is on the fixed cost side. The remainder is in inflation so supply chain impacts.
With respect to how we're managing through the supply chain. There are significant efforts by our operations team, Jeff just to respond to the whack a mole that you described is a constant balance issue resolution.
Our number one goal as Gary described is to ensure continuity of supply to customers, So thats, where our efforts and focus is.
As the supply chain.
Environment Rebalance is and what other point that is in the future certainly we will we kind of refocus our operations teams to.
Focus on cost reductions getting on manufacturing efficiencies back to our targets, but that's going to be really be a question of when will that be on the inventory side you saw us actually increase inventories I referenced in my prepared remarks, almost $70 million sequentially.
The mix of that though is clearly not perfect. We're replenishing inventory, where we can fnf's supply lasts but we haven't.
Imbalanced currently.
So certainly if you look at the medium to long term, we're going to look carefully at what levels of inventory, we want to hold as one risk mitigation I think the other thing we will look at us.
How do we make ourselves less dependent on sole suppliers.
Thanks, So much Dave just a tiny bit of color on that capping sentence. The the current situation.
It's a little bit hard to predict the future because of there's enough moving parts that.
Determining what were forecasting exactly how it will move.
Difficult at this moment currently the number of parts that are under stress has decreased but the intensity of the stress around a few parts has increased so the issue of the number of things that are a challenge is narrowing but the ones that remain are more stubborn and.
Jamie Your your point of we use various tools, whether it's buying ahead buying safety stock or.
Redundancy in supply chain.
Any and all of those if we can to help mitigate the risk.
Thank you Gary.
Thank you. Our next question is from Joe <unk> from Morgan Stanley . Please go ahead.
Hi, Gary and Jamie Thanks for taking the question Gerry.
Gary just for you.
Intuitive has like 'twenty 200 U S hospital customers, that's more my guess and I think what you've laid out but can you maybe talk about what it takes to get the remaining 4000 hospitals really off the sidelines and using robotics, just maybe how are you thinking about that in the U S. I mean do you necessarily have to go everywhere are there.
Really kind of still opportunities to get into the high volume surgery centers hospitals.
Given some of the commentary about the trade in cycle dynamics.
And your push for some higher utilization of the systems.
The.
I will speak to the.
Quantitative approach and perhaps Jamie you have a perspective, but just to give you a little bit of a qualitative view.
Many of the hospitals out there that are greenfields, while they may not have one of our programs today are part of an integrated delivery network that somewhere in the system they have our products and knowledge.
The way, we work with that as collaboratively collaboratively with Audi and leadership as they start to understand what the value of the programs are they will start to move within their own system.
Our products into locations that care about them and so we've seen a really nice move and collaborative expansion with our customer base into those spaces.
Increasingly we have conversations about moving into different sites of care, especially as.
Benign general surgery procedures, and some other procedures that are benign and often done in smaller ambulatory environments become more prevalent in our in.
In our workspace, we see that.
Improving over time, so we think we can follow our customers where they want to go.
There is the concentrating effect of robotics and capital investment as capital investment when that happens. It does concentrate regionally are those patients and procedures into centers of excellence. We think that's good for our customer they get higher utilization. We think it's good for surgical outcomes because they get more practice so.
I think it's a combination of the two I don't think we just look at it and think we have to go to where every patient is today. We do think consolidation helps it works, but it will expand from where it is in this moment.
Jamie I don't know if you want to add anything to that.
The only other thing I would say is the remaining greenfields.
Tend to be it is not always the case that tend to be more in the rule, saying smaller number of beds.
So.
What I think we've seen over the last three four quarters as Gary described is actually increases in the number of placements Greenfield accounts. These are hospitals as Gary said within existing IV ends and that's largely a function of the success <unk> experienced those IV Ns have had with benign procedures, particularly in general surgery, which tend.
To be a higher mix in these rural hospitals and so they see the opportunity for effective robotics programs in that saying, whereas before maybe those more skepticism motive financial picture was was more challenging.
We'll do that carefully and in conjunction with our IDM partners.
Has to be when it makes economic sense for us and for the customer.
On the ASC side.
We have a relatively small but growing installed base.
Procedure growth in the U S is accretive.
Probably because.
The number of systems that we have a hospital or ASC is relatively low.
<unk> generally.
<unk> affiliated in some way with our idms that kind of gives us greater confidence in those accounts.
Drew I'll give you a fast follow up here at the end.
Thanks, just on Japan.
You talked about adding more procedures youre getting reimbursement for a more procedures can you maybe just put that in context of how you expect that ramp to maybe look like versus the prior with a wave of reimbursed procedures in Japan. Thanks.
Drew hi, this is Brian .
I guess I would say really the opportunity for adoption on those eight newly reimbursed procedures.
It's a bit difficult to estimate at this time right. I mean, if you were to take procedures like colon resection resection as an example.
It's a high pendant, it's highly penetrated by lap today. So I think adoption of da Vinci will actually be dependent on say, demonstrating clinical and economic benefits, which I think is going to take some time and I think it can take some time to develop our training and procter and capabilities and really to establish key opinion key opinion leaders.
So I think it's just going to take some time, it's really hard to estimate.
How quickly.
Da Vinci will adopt locally.
Hi.
Call It a little color on that I think over the midterm, we're really excited about it over the near term it takes some work.
Thank you drew.
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 in pursuit of what our customers have termed the quadruple aim.
Better more predictable patient outcomes better experiences for patients better experiences for their care teams and ultimately a lower total cost to treat.
We believe value creation in surgery, and acute care is foundational to human.
It flows from respect for and understanding of patients and care teams their needs and their environment.
Intuitive, we envision a future of care that is less invasive and profoundly better where diseases or identified earlier and treated quickly. So patients can get back to what matters most.
Thank you for your support on this extraordinary journey, we look forward to talking with you again in three months.
This concludes the call.
Okay.
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