Q2 2022 Intuitive Surgical Inc Earnings Call
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Ladies and gentlemen, good afternoon, and thank you for standing by today's conference assembled and welcome to the intuitive surgical quarter. Two 2022 earnings release at this time all lines are in a listen only mode.
There will be an opportunity for your questions now if you do wish to ask a question or need operator assistance today. Please if you need if you'd like to ask a question. Please press one followed by zero to place yourself in the queue you could take yourself out of that Q by simply pressing the one zero command again, if you'd like operator assistance. Please press star followed by zero and a T T. Operator.
So as you and as a reminder, today's conference is being recorded.
At this time, it's my pleasure to turn the conference over to our host head of Investor.
Your relations with intuitive surgical Mr. Bryan King. Please go ahead.
Thank you.
Good afternoon, and welcome to intuitive <unk> second quarter earnings Conference call with me today, we have Gary <unk>, our CEO and Jamie Smack our CFO .
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.
These risks and uncertainties are described in detail in our Securities and Exchange Commission filings, including our most recent Form 10-K filed on February three 2022 and Form 10-Q filed on April 22 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 second quarter results as described in our press release announced earlier today.
All led by a question and answer session, Gary 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, our Q2 results for <unk> reflect both environmental and intuitive specific headwinds accompanied by underlying business strength.
Procedures in the quarter grew 14% over last year, despite pressure from Covid, driven lockdowns in China, our second largest market.
Capital placements slowed from a year ago due to a combination of factors, we described last quarter, and which I will review shortly.
Overall pressure from Covid lockdowns impacted procedures in the quarter modestly while reduced trade ins and supply chain timing impacted our capital placements more significantly.
The leading indicator of the health of our business procedure demand remains healthy.
Starting first with procedures I'm encouraged by 14% growth in the quarter, reflecting strength in U S travel surgery, and solid growth extending beyond neurology outside the United States.
U S procedure growth was led by bariatric surgery, cholecystectomy and colorectal procedures with continued growth in hernia repair.
O U S markets procedures grew 22% in the quarter in spite of the Covid Lockdown in China.
Outside the U S. We are seeing strength in neurology now accompanied by diversified growth in other procedures for.
For example, in Japan growth was strong in general surgery, including rectal resection.
In the U K and Ireland growth was strong in gynecology and general surgery, and in France, Gynecology and general surgery experienced solid growth.
Some utilization in several O U S countries has been increasing in recent quarters.
Procedure adoption diversifies, increasing value for our customers and for intuitive.
This is a result of the investments we made in key country markets starting several years ago.
Turning to da Vinci capital placements, we placed 279 systems in the quarter down from 328 in Q2 2021.
In the da Vinci business, we see three causes for the decline in placements relative to a year ago.
As our customers have standardized on generation four da Vinci systems. The installed base with third generation systems has declined lowering the trade in population, particularly in the United States.
Next supply chain disruption continued in the quarter with semiconductor component delays impacting the timing of system builds leaving us challenge to match some customer orders at quarter end.
Lastly, we've seen hospital capital spending pressure grow and are part of the capital equipment space over the past two quarters incentive customers to seek efficiency gains on existing capital before acquiring new capacity.
Component supply constraints remain a risk and our operating teams are working hard to shelter our customers for most of these pressures.
Capital placements in more mature markets are a mix of core demand for procedures and trading opportunities.
The need for high quality robotic assisted surgery remains healthy incremental capital demand at the customer is a function of system utilization and procedure growth on.
When the system utilization side, our compound annual growth rate remains at historic levels of 5% over the past three year period.
System utilization in the U S over the past year was slightly down as procedure growth rate over the past year roughly matched the system installed base growth.
In contrast system utilization in many O U S markets has been rising as procedures diversify.
Overall, we prioritize system utilization growth for customers as it increases the value to them of their investments and is aligned with long term health for intuitive.
Turning to our innovation engines, and new products and services, we placed 41 ion systems up from 20 in Q2 of last year.
Given its stage of maturity high on capital demand proceeds procedure growth as hospitals seek to build initial capability.
With the iron clinical installed base now of 204 systems and utilization has been growing nicely along with encouraging early capital placements.
We received five 10-K clearance for our integration of Ireland with Siemens Sea off spin cone beam C T.
This common this combination improves registration and targeting precision for ion in the long and is being well received by our customers.
We remain focused on strengthening clinical outcomes and lawn care, a fantastic customer experience and operational excellence in the eye and program.
And our multiport ecosystem, we initiated our first phase U S launch of our eight millimeter stapler designed to work in small anatomical spaces for example in thoracic surgery.
Early customer feedback has been encouraging.
In China, we're preparing to launch our share form 45, and 60 millimeter staplers and our latest endoscope endoscope plus.
All three will continue to support growth in general surgery and thoracic procedures.
For da Vinci SP, we have expanded the number of colorectal I D E sites to help accelerate accrual and we submitted another regulatory package for S. P imaging and accessories in Japan as we work on the necessary clearances to support an SP launch in the country.
For our digital tools intuitive hub installs grew nicely again in the quarter and we're focused on ensuring outstanding customer experiences with data capture and media management, along with increasing utilization over time.
On spending we are committed to our innovation programs because we believe the forward opportunity for our products and services are important to our customers and to the company.
We have some natural shock absorbers that decrease some of our variable spending as a result of the slowdown in da Vinci capital placements.
We are also planning for decelerating spend growth after we complete some infrastructure projects, we need to support the companys expansion.
Given our confidence in the future of our business. We have also returned cash to shareholders in the form of buybacks in the quarter.
I'll now turn the time over to Jamie who will take you through our finances in greater detail.
Good afternoon, I will describe the highlights of our performance on a non-GAAP pro forma basis.
I will also summarize our GAAP performance later in my prepared remarks I.
A reconciliation between our pro forma and GAAP results is posted on our website.
Q2 procedure growth of 14% reflected an increase in U S procedures of 11% and O U S procedure growth of 22%.
As a reminder, procedures in the U S. In the second quarter of last year included a recovery of procedures that were delayed as a result of the significant impact of the omicron variants, Brian will provide additional procedure commentary later and Nicole.
We placed 279 systems in the second quarter as compared to 328 systems in the second quarter of 2021, and 311 systems last quarter.
Q2 system placements were 15% lower than the second quarter of 2021, primarily due to a significant decline in trade in transactions.
There were 56 trading transactions in the quarter as compared to 125 in Q2 of 2021, reflecting the decline in the number of <unk> remaining in the installed base.
The supply chain environment continues to be challenging and during the call are we experienced delays in the supply of certain semiconductor components that caused manufacturing output da Vinci systems to be later in the call than historical norms.
As a result, the number of systems that we would've expected to place in the latter part of June experienced minor delays and was shipped and installed in July .
We indicated on last call is called the we had experienced a softening in the U S capital pipeline that softness persisted in Q2.
Financial pressures have increased on hospitals, given higher inflation, increasing interest rates supply chain challenges and continued staffing shortages.
Some of the larger idea ends.
We have indicated that as a consequence of the financial pressures they face they are lowering their capital investment plans and tightening operational budgets.
We expect that demand for capital, particularly in the U S will be impacted while macro conditions remain challenging.
Where a particular hospital requires additional da Vinci capacity given growth in that programs, we will leverage our flexible acquisition models to meet the financial objectives of our customers.
Given the system placements in Q2, the installed base of da Vinci systems grew approximately 13% year over year.
Utilization of clinical systems in the field measured by procedures per system.
Increased approximately 1% compared to last year.
Using a three year compounded annual growth rate.
Second quarter utilization grew almost 5%, which is in line with historical averages.
In more mature markets like the U S capital demand is sensitive to procedure growth and therefore, we monitor changes in system utilization closely.
As a result of a procedure and capital performance Q2 revenue was $1 five $2 billion, an increase of 4% from the second quarter of 2021.
On a constant currency basis second quarter revenue grew approximately 6% over last year.
It is worth highlighting the recurring revenue grew 14% year over year to $1, two $4 billion, representing 81% of total revenue.
Additional revenue statistics and trends are as follows.
In the U S. We placed 150 systems in the second call are lower than the 213 in Q2 of 2021.
Reflecting a decline of 59 systems associated with trading transactions.
A softer demand environment.
And the delay of some system placements into July .
The remaining installed base of <unk> systems in the U S is approximately 230 systems.
Outside the U S. We placed 129 systems in the second quarter.
Compared with 115 in the second quarter of 2021.
Current core system placements included 78 into Europe .
<unk> 18 into Japan, and 15 into China, compared with 63 into Europe , 16 into Japan, and 19 into China in the second quarter of 2021.
As of the end of Q2 2022.
With 48 systems remaining under the current quota in China, which is also available to competitors that received local regulatory clearance.
Globally trading transactions represented 20% of placements in the core.
Compared to 38% for full year, 'twenty, 'twenty, one and 48% for full year 2020.
As we have previously indicated 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 last year.
Leasing represented 42% of Q2 placements compared with 35% last quarter and 33% in the second quarter of 2021.
The higher lease mix, primarily reflected an increase in the proportion of O U S customers that lease to system in the core of US is purchased.
Driven in particular by customers in Europe .
While leasing will fluctuate from quarter to quarter, we continue to expect that the proportion of placements under operating leases will increase over time.
Second cooler system average selling prices, a $150 million slightly lower than the $154 million last quarter.
Although system Asps were roughly flat.
Trading volumes benefited Q2 asps.
Offset by an unfavorable impact from the stronger U S dollar and a higher mix of lower priced X systems, primarily driven by customers in Europe .
We recognized $22 million of lease buyout revenue in the second quarter comp.
There was $16 million last quarter and $26 million last year.
Lease buyout revenue has varied significantly quarter to quarter and will likely continue to do so.
Instrument and accessory revenue per procedure was approximately $1900 per procedure compared with $1870 last caller.
$1940 in the second quarter of 2021.
The year over year decrease primarily reflects the benefit of stocking orders in Q2 of 2021 associated with the launch of our extended use instruments program and an unfavorable FX impact from the stronger U S. Dollar.
The sequential increase reflects a higher proportion of stapling and advanced energy revenue.
Revenue for these categories combined grew 22% as compared to the second quarter of last year.
We placed 41 ion systems in the core as compared to 20 I am placements in the second quarter of last year.
The installed base of ion systems is now 204 systems of which 90 or under operating lease arrangements.
Second core I own procedures of approximately 5200 increased 251% compared to the second quarter of 2021.
Ion is in the new M D. A regulatory review process in Europe , and our efforts to pursue a submission in China continued to make progress.
Five of the systems placed in the second call with S. P systems.
Delving into an installed base of 111.
Second core S. P procedures grew approximately 28% year over year.
One of the areas of potential clinical differentiation for S. P.
Narrow access surgery.
For example in trends or rule robotic surgical tools procedures.
For malignant tools procedures based on the last four cool is we estimate S. P market share in the U S to be just under 20%.
Growth of the SP platform will continue to be gated by additional clinical indications and clearances in markets beyond the U S and Korea.
Moving on to the rest of the P&L.
Pro forma gross margin for the second quarter of 2020 to 69, 2% compared with 71, 7% for the second quarter of 2021, and 69, 8% last quarter.
Pro forma gross margin was lower primarily as a result of the stronger U S. Dollar higher logistics costs increased component pricing and increased fixed costs relative to revenue as we invest in our infrastructure and manufacturing capacity to serve our long term needs.
Pro forma operating expenses increased 23% compared with second quarter of 2021.
The increase in second quarter operating expenses from a year ago reflected an increase in head count higher R&D related project costs and higher travel costs, including the impact of inflation.
Given the early stages of our newer platforms ion and SP and our digital ecosystem, we expect to continue to invest in R&D given the return profile of these investments.
Spending in SG&A will be more closely linked to a procedure and revenue performance and we will continue to pursue plans to invest in infrastructure and business process automation to ensure we can efficiently and effectively scale.
Pro forma operating margin for Q2 was 35% as compared to four 8% for the full year 2021.
As compared to the second quarter of last year, the net impact of FX inflation and manufacturing inefficiencies associated with the supply chain environment is a reduction in operating margin of approximately 2%.
Our pro forma tax rate effective tax rate for the second quarter was 22, 3% in line with our expectations.
Second quarter 2022 pro forma net income was $415 million or $1 14 per share compared with $475 million or $1 30, if a share for the second quarter of 2021.
Capital expenditures in Q2 were $131 million, primarily comprised of infrastructure investments to expand our facilities footprint increased manufacturing capacity and automation of certain production lines.
I will now summarize our GAAP results.
GAAP net income was $308 million or 85 cents per share for the second quarter of 2022.
<unk> GAAP net income of $517 million or $1 42 per share for the second 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 $2 billion compared with $8 $4 billion at the end of Q1.
The sequential reduction in cash and investments primarily reflected share repurchases and capital expenditures.
Partially offset by cash from operating activities.
Our capital allocation priorities remain consistent and are as follows.
First to organically invest in the business given the significant opportunities, we see to develop differentiated technology and drive adoption of our products.
Second to acquire external technology that creates value for our customers and or accelerates development timelines or acquisition to accelerate our growth.
Third we return excess cash to shareholders and look to do so efficiently.
In Q2, we repurchased $2 2 million of our shares.
The average price of $224 per share for a total expenditure of $500 million.
Concurrent with today's earnings release, our board of directors have improved an increase to the share repurchase authorization to $3 $5 billion.
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 second quarter 2022 procedure growth was 14% compared to 68% for the second quarter of 2021, which we believe benefited from a number of procedures, which had previously been deferred due to COVID-19.
Three year compound annual growth rate was 16% between the second quarter of 2019 and second quarter of 2022.
In the U S second quarter 2022 procedure growth was 11% year over year compared to 77% for the second quarter of 2021, and 16% last quarter on a three year compound annual growth basis U S procedure growth was 14%.
Q2 procedure growth continued to be driven by general surgery with particular strength in Barry <unk> Cholecystectomy and colorectal while hernia and forget were also strong contributors.
Growth in mature urology and gynecology procedures also continued but at a moderate pace in the low single digits.
Outside of the U S second quarter procedure volume grew approximately 22% compared with 51% for the second quarter of 2021, and 25% last quarter. Despite COVID-19 related restrictions in China on a three year compound annual growth basis procedure growth was 20%.
Turning to Europe procedure growth was led by strong growth in Italy, U K and Germany.
In all three regions noted procedure growth was strong in general surgery and gynecology.
In Italy growth in these procedures outside of Urology was led by general surgery, specifically in colorectal and HPV procedures.
In Germany growth in these categories was led by early stage growth in colorectal surgery and benign hysterectomy.
Year over year procedure growth in these non urology procedures was almost three times higher than urology.
While in the U K benign hysterectomies and colorectal resection experienced strong early stage growth.
In Asia, we experienced strong growth in Japan, while in China procedures remain below expectations as government restrictions continued due to COVID-19 infections that persisted throughout most of the quarter.
In Japan growth in general surgery, and gynecology continued to be strong with robust growth specifically in benign hysterectomy rectal resection and gastrectomy.
In addition, prostatectomy continued with solid double digit growth, reflecting a recovery when compared to the prior year, which was constrained by COVID-19.
Further contributing to procedure strength was early growth in the adoption of newly reimburse procedures, namely colon resection and nephrectomy procedures.
In China second quarter procedure growth continued to be negatively impacted by regional lockdowns due to ongoing COVID-19 infections that affected many large cities throughout most of the quarter.
Despite the restrictions China experienced modest year over year growth and began to show signs of a return to normal run rates in June .
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 that have been published over the years.
Earlier this year doctors, Sarah D S and Robert query from St. Joseph Mercy Hospital, Ann Arbor, along with doctors Young Gen Lee and I'm here by stars from the Swedish Cancer Institute in Seattle, Washington, and in collaboration with intuitive published a real world body of evidence comparing health care utilization outcomes and payer patient.
<unk> associated with open and minimally invasive colectomy for benign disease.
Notably this analysis also included a comparison of laparoscopic and da Vinci approaches.
Utilizing the IBM market scan commercial claims and encounter database. This study included over 10000 adult patients who between January 2013, and December 2018 underwent an elective inpatient colectomy for a benign condition with over 2500 patients in the open group and over 6000 subjects in the laparoscopic.
Group and over 1000 patients in the da Vinci group.
Through an inverse propensity treatment weighted analysis, the minimally invasive approach demonstrated a lower total health care expenditure across all timeframes analyzed from the surgical procedure through 365 days post procedure with lower average total expenditures ranging from 2000 and $300 to $8100.
Yeah.
With regards to resource utilization the minimally invasive approach demonstrated an approximately two day lower length of stay with these patients are less likely to be readmitted visit the emergency department or visit the outpatient department within 365 days when the procedure.
The reduction in health care use among minimally invasive patients translated to an additional savings of over $5700 and over two fewer days missed from work for health care visits.
Within the M. I S category, when comparing laparoscopic and da Vinci approaches da Vinci had a 70% lower risk of conversion to open with over a half day shorter length of stay and patients were less likely to have an outpatient hospital visit within one year of the procedure.
Of note patients who had a conversion to open had a longer length of stay higher hospital payments and we're more likely to have a readmission or hospital visit within one year of the procedure the reduction in conversions translated to an additional savings of approximately $4800 and one and a half fewer days of Miss work due to.
Health care visits.
The authors concluded in part that minimally invasive colectomy is associated with lower mean health care expenditures and less mean healthcare resource utilization compared to the open approach for benign disease with a shorter mean length of stay and conversion to open rate observed with the da Vinci approach.
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 12% to 16%.
We are now increasing our forecast and expect full year 2022 procedure growth of 14% to 16.5%.
This range continues to reflect the uncertainty associated with the course of the pandemic. The low end of the range assumes increasing COVID-19 hospitalization and staffing pressure at hospitals for the remainder of the year.
At the high end of the range, we assume COVID-19 related hospitalizations around the world continue to decline throughout the remainder of 2022 and there are no additional significant impacts from further resurgence.
The range does not reflect significant material supply chain disruptions or hospital capacity constraints similar to what we experienced at the start of the pandemic.
While procedure growth so far in the first half of 2022 has been healthy the capital pipeline in the U S has been softer than in prior periods, mainly due to a lower number of Si systems in the installed base available for trading and macro related headwinds, creating pressure on hospital capital spending.
Capital placements in more mature markets are a function of procedure demand that is moderated by system utilization growth and trading opportunities.
While trading opportunities have declined the core demand for procedures continues to be healthy and system utilization has been increasing.
With a three year compound annual growth rate and procedures of 16% from Q2 of 2019 to Q2 of 2022 and installed base growth of 11% over the same period utilization of installed systems has continued to increase through the pandemic and first half of 2022.
This is increasing the value derived from the existing installed base for our customers and for us.
As we look ahead, we expect these capital dynamics to continue for the foreseeable future.
Turning to gross profit on our last call we forecast our 2022 full year pro forma gross profit margin to be within 69% and 75%.
We are now refining our estimate of pro forma gross profit margin to be within a 69% and 70% of net revenue.
Given the ongoing impact of higher input costs related to supply chain and the impact from a stronger U S. Dollar we would expect to be towards the lower end of that range.
Our actual gross profit margin will vary quarter to quarter, depending largely on product regional and trade in mix fluctuations in foreign currency rates 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 23% and 27%.
We are refining our estimate and now expect our full year pro forma operating expense growth to be between 23% and 25%.
We are refining our estimate for noncash stock compensation expense to range between 520 million to $540 million in 2022.
We're also refining our estimate for other income, which is comprised mostly of interest income to total between $60 million and $70 million in 2022, an increase from our previous estimate of estimate of $50 million and $60 million the.
The increase primarily reflects the continued rise in interest rates.
On last quarter's call, we forecast 2022 capital expenditures within a range of 700 million to $900 million.
We are now refining estimated capital expenditures for 2022 to be in the range of 700 million to $800 million.
With regard to income tax we continue to estimate our 2022 pro forma tax rate to be between 22% and 24% of pretax income.
That concludes our prepared comments, we will now open the call up to your questions.
Thank you, ladies and gentlemen, the phone lines. If you wish to ask a question today. Please press one followed by the zero you can take yourself out of the queue by simply pressing the one zero command again again for questions. Please press one zero at this time.
And we're going to begin today.
With Larry Nicholson, representing Wells Fargo. Please go ahead Sir.
Hi, good afternoon. Thanks, so much for taking the question.
Gary maybe if I could start with the supply constraints that you talked about could you quantify how much you think that negatively impacted Q2, it sounds like they've been resolved Gary obviously people are worried about the impact of a recession. How are you better positioned this time compared to the last recession, we saw in 2018.
And then I had one follow up.
Okay.
The supply constraint side.
I'll give you a qualitative perspective, and Jamie you can fill in a little bit of a quantitative perspective, what's.
Turning his semiconductor suppliers and some other raw material suppliers, giving us choppy delivery time timelines so.
Estimates that are sometimes moving around in that can bring product in late in the quarter.
When we assemble that product it can sometimes make it hard it vary quarter end to match system configurations to customers and that's partially what happened in Q2.
Jamie you want to.
Add to that.
Think about the impact to Q2 placements.
Roughly in the 5% ish range in terms of.
Without those supply constraints those delight semiconductor components, the incremental systems that would have been delivered in Q2.
That continues to be choppy and we expect certainly for Q3 and perhaps a forward that will continue to fight those fights in terms of timing of supply.
On the second question second part of your question on recession, clearly our hospital customers are under financial pressure, we have seen that at the end of Q1 and have communicated with you at that time, I think relative to where we were as intuitive a decade ago.
The size and strength of the installed base the relative position that we have in terms of a.
Centrality to surgery in multiple disciplines.
And the expression of that in recurring revenue the percentage of our business. That's in recurring revenue I think gives us a little bit better shock absorption and predictability.
<unk> in terms of a large part of the revenue of the business and it gives us a few more degrees of freedom in terms of how we make our investments in time those investments relative to O eight or nine.
We are close with our customers I am personally in contact with many.
The trends that we've been describing to you I think we understood pretty well the the size and duration of those trends in terms of pressure there very hard for any of us to predict.
And you had a follow on.
That's all fair game to push my luck a little bit here.
F D a seems to be requiring clinical data for new systems. We know you have a new system in development.
Question is do you know yet if FDA is going to require clinical data for your new system before approval and if so what can you share. Thank you.
Looking at two two things I think let me broaden the question looking at the regulatory environment globally in particular in the United States in Europe , we have seen a trend.
In medical device and in robotic assisted surgery for increasing.
Data requirements, sometimes those are trials, sometimes or other kind of data.
That trend has continued and it's impacting all of us in the market, including intuitive.
You can expect that we will improve the gen. Four product that's out there we can get good ideas and technologies into our existing customer base hands and improve their utility. We will do that we are of course working on next generations and as I've said before generations after that.
Without answering your question specifically.
The deeper the technological opportunities and the clinical impact the more likely you have deeper validation work to do and where.
We're not afraid of that work.
I'd, rather I'd, rather do things that are really clinically meaningful for the customer and if we have to do the work then we'll do the work.
I will say for everybody on the call, it's clear that relative to a decade ago.
The investment trough and the timelines for new systems.
Have both increased the timelines have increased because of the changing regulatory environments in several countries and as a result of the amount of investment that has to go into that has also changed its also increased.
I think and this is this is a prediction that it will also extend the useful life of products that we design. So it's taking a little longer to get to market than it used to maybe more than a little.
Hosting us more to get there, but that change in environment also means that really well designed systems, probably have longer useful life in the field and I think we're starting to see the early evidence of that as well. So thank you for the question.
Thank you.
And next we'll go to line of Amit Hazan, representing Goldman Sachs you are open.
Oh, they say no. Good afternoon, maybe to come back to the supply chain question I wanted to maybe ask it through the lens is kind of a bigger picture here just given all the challenges you've gone through in the past year and a half or so.
Do you have plans that changed strategically in terms of evolving towards you know, maybe regionalization or domestic domestic kitchen of the supply chain and you know how do we think about that and incremental costs that might come with that if that's the plan or do you just plan to kind of ride this out and expect a more normal environment next year.
Yeah, I'll start and then Jamie you can you can lean in.
First off I want to acknowledge our operating teams and the supply chain teams. They have done a spectacular job in the.
The number of components that we manage in our robotic surgery system, both on the capital side and on the instruments and accessories side and the management of those supply chains is remarkable.
Perhaps bigger than most people expect.
Relative to the size of our company.
They have been really good at being proactive and thoughtful about supply chain robustness about strategic reserves.
And about.
The ability to pivot into alternative components, when we need to.
And that has really been a spectacular performance.
That's a long way of saying that they have been proactive they will continue to be forward looking.
And.
Designed for supply chain robustness, what that looks like depends a lot on the on the underlying product whether it's.
Creating second sources or using alternatives or thinking about regional.
<unk> deployment, we have been working through regional deployment.
Prior to the pandemic and we've done that work as we've gone on.
That does incur some cost.
We're thoughtful about it and Jamie why don't you provide your perspective.
From a strategic perspective, our long term perspective, setting aside the current supply chain challenges some of the things that we consider in our own long term planning is.
The size of our business as they as it grows over time in the various regions that we serve.
Why you might locate redundant capacity or incremental capacity and in terms of the economic equation, you'll trading the potential cost of redundancy with savings on freight and logistics to the extent that you can supply them in region that economic analysis is relatively straightforward and in really yoga.
Looking for the degree of redundancy you won and when does the regional businesses get big enough to warrant the economics, but certainly what you describe is something that we're looking at carefully and have been.
Thank you for that and and maybe just to hit on just earnings going into the future with the components that you gave us it seems pretty clear this year, we're probably not going to get earnings growth.
Richard your comments it sounds like the R&D, you're going to you're going to keep spending and you believe you're doing organically that makes sense I'm not sure. If you have more comments on SG&A, but just thinking through okay. No earnings. This year you know in terms of your commitment to shareholders.
Is it is it okay for you not to grow earnings next year or two would that become a bigger focus for you just given how this year has gone well how do you think about earnings growth. After you know kind of what this year is going to end up looking like.
Yes, so we're not going to get specific about 23 at this point and Youll, obviously see us provide our outlook on the January cold.
What we're doing with respect to R&D currently is investing in multi year projects and investments.
See that in our newer platforms ion and SP, we have obviously investments in digital many of which are at an early stage and we do continue to invest in in the fourth generation ecosystem and we look at the returns on those investments carefully and have confidence in them, but in part because of the regulatory timelines that Gary.
Scribed they are multi year investments and we think the returns there are all quite attractive.
That's why you see for example, if you look at the first half hour R&D grew 38% relative.
Relative to the overall growth of about 25%.
Opex.
But if you take a multi year view given the growth opportunities that we see you would expect us to grow earnings over time, and I'm going to say, whether that's 23 Oh no.
With respect to operating margins specifically, what we've said is we look to be at the high end of our med Tech peers and by Med Tech that means high growth companies that have growth opportunity is as we see that we do.
I'll speak to us for a second on SG&A.
We do have some infrastructure that is either needs to be built out to support the growth, particularly in manufacturing.
Or we have some some processes.
In other parts of the business, where we were long lived on our on our pavement and Theres, some repaving or potholes to fix that we will finish.
We do expect to see.
Yeah.
Highly targeted spending in that area going forward and as we retire some of that.
Project spend will be won't be thoughtful about where we go next so we'll start to see some of that.
<unk> start to titrate into into next year.
Thank you.
And next we'll go to line of Travis Steed with Bank of America. Please go ahead.
Alright, thanks for taking the questions Gary I'd Love, a little more color just on the overall hospital capital environment are you seeing hospital, just being more cautious on the near term or do you think we're in for a longer duration capex slowdown I'm curious how you think the slowdown could range in terms of outcomes and it's like Oh wait Oh, nine or 13 14 R 22.
'twenty.
And also like leases ticked up to 42% this quarter I'm curious, where do you think that could peak on in Florida Capex environment.
Yeah on the hard hard to predict the depth and.
And duration of.
Hospital Crusher.
So I won't.
I will talk about what the I think what the inputs are what they are faced with.
Clearly there they're constrained on.
Labor and the labor costs because of that constraint have gone up.
That's not something that will resolve quickly they're also facing inflationary pressure in some of their materials that they purchase and they don't have enormous flexibility to change pricing on their side. So I would expect profitability constraint on the hospital side to be present.
In light of that.
One of their first tools in their tool kit as to try to get greater productivity out of existing assets and capital and intuitive will help them. If there is more productivity to get out of the products. They already owned we will help them do that.
I still think there are hospitals out there that are gonna be strategic that are in better financial condition than if they want to build a new capacity.
And our new product line says S. P. Your eye on or where to branch out into a new region and they'll do that and we will help them do that as well.
I don't think this is a one or two quarter resolution it serve.
Gonna be something longer than that with regard to change in lease and how do we think about leases going forward. Jamie I'll ask you to take that yeah. If I split between U S and O U S. What you're seeing in the U S is relative mature he in understanding and acceptance and use of our leasing program, it's been ticking up.
Slowly over time.
While it will fluctuate quarter to quarter based on customer preference I do think the that will slowly continue to tick up just based on what we hear from customers.
And O U S, where we offer a offer leasing which is not in every market. We're in earlier stage and so you'll seeing growing understanding and acceptance of leasing as an option as they acquired capital and so I would expect that to continue to climb overtime.
Thank you and I had one other question Gary I listen to your talk of a throw off a few weeks ago and you mentioned that the time it takes to get new products to market is a couple of years longer I think you said six to eight years before now eight to 10 years and.
I'd love to kind of get a little more detail on the on that.
Something that you you went through there and it kind of it because I got to assume most of your regulatory but kind of dig into the comment a bit more and see how that's changed your strategic thinking of general, but how do you think about innovation in your product cycles at the moment.
Yeah It was a.
Kind of a directional comment more about averages then about a particular product line. So I would discourage anybody looking at a particular product line and try to infer from it but we have a basket of things, we do and on average it's got longer.
So strategically I think there are a couple of things that strengths in the business that versus a decade ago that that help us and give us more flexibility more freedom and and that is both the the deep penetration we have in the market. The large size of the customer base in terms of active users.
If we can get them technology in increments.
We're not as dependent on capital revenue and as the years passed I think the recurring revenue side is a strength for us.
That increases productivity for the hospital, that's great. It turns out that that gives them better financial returns on the investments. They made but also our economic or economic profile is stronger in repeat use utilization than it is in capital change.
So what that means to us is bring capital change when it really is differentiated when it really brings incremental clinical value or new market access to our customers and that's what we're focused on.
With regard to the regulatory side, our goal is to be really good at it.
To get the right data, we need at the right time done right. The first time and and take care of it and those those types of requirements ebb and flow over time and we're in a particular state where the requirements are quite high and we'll deal with it.
Great. Thanks for the color.
Okay.
And we'll go to line of Robbie Marcus representing J P. Morgan. Please go ahead.
Great. Thanks for taking the questions.
Maybe to start and a lot of your comments it feels like it's a U S comment in terms of the capital equipment I wanted to get a sense is there any difference in geography, just given the hospitals most of them outside the U S are dictated by a single payer country networks.
And then I'll just ask the follow up as well you know pretty good O U S procedure number how do we think about how much of an impact that the shutdowns in China had and how should we be thinking about the ramp in second half on China, just given that that the country is still not on a strong path.
The way to a reopening thanks.
Yeah, Robbie on that first question, it's a good one and I appreciate it.
It clearly.
The utilization of systems, and the and the posture of hospital acquisition relative to to systems differs by country based on the maturity of our markets and the depth of penetration of of da Vinci.
We've tried to call that out a little bit in the script, Jamie I don't know if theres additional color you'd like to apply.
I would just say the softness in the U S capital pipeline is clear and it's been clear for two cool as what you saw in placements in Q2 was actually O U S placements grew as compared to a year ago.
We haven't seen any clearer in specific indications on capital weakness I call Al Obviously, China had a challenging quarter with respect to procedures.
But you look at the macro you look what's happening in Europe .
Imagine that that might be a challenge as you look forward, but nothing that I'd call out at this point.
You would ask kind of how do we expect China to proceed.
Procedures in the back half.
Of course, that's impossible for us to predict what I might ask Brian as you might just reiterate some of your comments as what's assumed in the model in terms of buying more yeah. So we have seen you know I'd say at the end of Q2, we did see some improvement or recovery of procedures.
I'd say, probably closer to more normal levels, you know over time, it's really hard to predict what's going to happen in China I think you know.
They are our second largest market by procedure volume.
It does have an impact when things do slow down, but you can see the procedure growth that we had despite the challenges in China. So I think it's probably a bit too soon to really give any color on what's going to happen there because they just they're just still so much variability and frankly, we're still really early in the quarter.
Great. Thanks for the color.
Yeah.
Yeah, we have a question from Rick Weiss representing Stifel. Please go ahead.
Yeah, Good afternoon Gary.
Again, reflecting on.
History, a little bit.
When I think back to the end of the financial crisis to earlier last decade, obviously there were periods.
Marked capital slowdown and yes. Those are the recovery following that was in part a macro recovery.
But it was also.
In 2014, the launch of the X I it was.
Prestige or volume uptake.
<unk> Smith I mean, there are many drivers.
Under the umbrella of the <unk>.
Recovery.
You know as we.
Look ahead and think about the next few years.
Assuming the macro recovery occurs.
Okay.
I was just reflecting the mix might be different this time.
But what's the on the procedure side and the CIS.
System, our instrument side, what are the drivers that get us back to that.
Accelerated growth, but yet is it.
Is it international instrument, then yes inevitable yeah, no system at some point or how.
How would you talk about the next two years and thinking about.
Covered from this period.
And.
I appreciate the question in terms of drivers of growth first.
Zoom out.
We are in the thick part of the adoption curve in the United States in general surgery.
Across multiple sub procedures.
And there is real room, there I don't think were worse.
We're saturated in and response has been really good at.
Training numbers in an adoption in the underlying.
Capability of our Gen. Four products has been great. So that's one too we're seeing investments that we've made many years ago in rounded teams rounds intuitive teams in key countries of payback now and that has been fantastic. So it starts with.
Growth in oncology oncologic surgical procedures outside of Urology. In addition to urology. So we're seeing that but we're also seeing the early indications of adoption in benign surgery.
<unk> markets, which is.
Frankly, unexciting green shoot in the sense that.
That could follow a pathway that.
Mirrors, what we saw in the U S. So I think theres lots of opportunity there and then that has to do with bringing our instruments, our accessories, our ecosystem our training capabilities, our data capabilities into our priority country markets over time. So we've got that we have outstanding innovations that are coming to market ion is.
Doing really well in the U S. Our ion will go deeper.
Into other applications, where we're trying to bring it to Europe are in that process, we'll bring it to Asia over time.
SP SP is having great success in Korea, we're bringing it to Japan, we are working on additional indications for the United States.
S. P has differentiated capability and as those indications get added and it's hard work I think it will bring incremental procedures to our customers.
And then to us over time and those are procedures that are either rarely done with da Vinci are not done with da Vinci at all and I think that's that's another leg of opportunity and you know how many years does that take while they will layer out those things will layer out overtime in terms of regional performance, we have those opportunities in front of us right now.
Now in terms of things like SP and ion SP is one of the more mature technologies and new platform I think its economics are looking increasingly good for intuitive and as they continue to knock down <unk>.
Additional clinical indications I think that'll add strength.
Ion has been growing like a weed.
It's less mature in terms of its financial profile, but we're working hard on it and so I think those things will contribute as well twice I think we have.
Biogen irons in the fire that we have confidence in.
And just one last quick one for me.
Fishing.
Expedition kind of question.
Just reflecting on your comments about partnering with hospitals.
One aspect is financially and with leases et cetera.
But I know you'll have many initiatives underway in terms of data collection management any update in terms of your initiatives. There and is there anything on that side of the house, we should be paying attention to.
Thank you.
Thanks, Rick on the basics.
And in our more mature da Vinci markets are data facility and in terms of the ability to collect analyze and share our insight.
With our hospitals has been really good.
And they are the things that allow them to compare the efficacy and efficiency of their da Vinci program relative to others in their own hospital group, rather relative to national and international norms.
It allows them to make decisions about where capacity at ago, where there are opportunities for improvement within their system. We use that routinely it is not a new idea, it's starting to become a really baked into all the workflows and processes. We're automating a lot of that capability. So that's been fabulous.
The other end of the spectrum.
We are engaged with a hard core health care researchers looking at what AI and our datasets can bring in terms of improved outcomes personalized training faster time to competency and the excitement level. There is quite high and we're continuing to invest down that pathway.
And once that is used every day and another set I think it's in the.
<unk> engines, and it's informing discovery and I believe those discoveries in a few years will will change the nature of the.
Surgery and some of the training that we do so I think there's an opportunity on both sides.
Thank you <unk>.
One last question please.
[laughter].
Alright, and our final question today will come from the line of Richard a new winter represented Truest you are open.
Hi, Thanks for taking the questions.
Yeah, just on that that last answer Ken can you give us any sense as to how a S end and maybe even when you might look to begin monetizing those types of Oh, I don't want to say.
New news new alternative service models.
You know things that might help hospitals become more efficient.
Can we expect to see see that filter into our new sources of revenue streams and when and are you already exploring that and then I had one follow up.
And we've said this before.
In our digital efforts in terms of digital tools. Some of them are the way, we do our financial analysis some of them are value, creating through efficiency and labor savings on our side or on the hospital side and the investments are really a reduction of our cost to serve so that's one category there's another category.
That is around accelerated time to competency that that lowers our cost to serve through <unk>.
Having people.
Get through their their implementation and programmatic processes more quickly. The third category is direct revenue opportunity we have things in the field working in all three of those categories. So none of them is is empty.
In terms of pricing and customer acceptance of our value proposition we are out in our training.
Opportunities in some of our augmented reality spaces and then our.
Intuitive hub starting to explore those some of them are very very early some of them are reasonably mature in terms of what our pricing and other models look like what I would tell you is that relative to other sources of revenue.
These should be accretive to our bottom line because of some of the cost savings, but they won't be huge revenue lines in the near term I would not set the expectation that all of that turns into big time revenue, our biggest thing and our focus is to help.
Customers hospitals get to great high functioning minimally invasive surgery programs using our products.
We do that then they will find a way to to pay us and so far that economic engine has worked well for them and it's worked well for us.
Great and just you guys mentioned tours I believe where SD is gaining traction you've got 20% penetration.
Thank God you estimate of U S estimated procedures, just remind us how big of a how big of a category.
As toys can you quantify that for us and where do you think something like that could go or where some of your more aggressive users.
And in terms of their penetration already thank you.
Yeah on the micro questions. So that was malignant tools, it's a small but high value segment.
Roughly Tam number of surgeries performed as in the 10000 per year range, so relatively small market.
Like I said for surgeons and patients really high value.
And where it might go I'll, let I'll, let Gary expand on that yeah, I think that.
S. P. A neuro access surgery has opportunities to extend the kinds of procedures that are done Robotically and we'll look to Korea as a guide in that they have broad clearances and they're using it all over the body from gynecology to breast oncology and other things, where they see value and I think that.
As that clinical evidence comes through and as the clearances expand you'll see incremental opportunity that is.
A reasonable for us and I think exciting for our customer base.
We'll detail those things further in future calls as that data starts to publish.
That was our last question in.
In closing we continue to believe there is 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 that are experiences for their care teams and ultimately a lower total cost of care.
We believe value creation in surgery and acute care is foundational in human.
Falls from respect for and understanding of patients and care teams their needs and their environment.
At intuitive, we envision to cure a future of care that is less invasive and profoundly better where diseases 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.
Look forward to talking with you again in three months.
Ladies and gentlemen that does conclude our conference for today, we thank you for your participation and using the AT&T Eve and services you may now disconnect.
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