Q3 2022 Intuitive Surgical Inc Earnings Call
Okay.
Yeah.
Ladies and gentlemen, thank you for standing by welcome to the intuitive third quarter earnings release call.
At this time all participants are in a later listen only mode. Later, we will conduct a question and answer session.
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As a reminder, this conference is being recorded I would now like to turn the conference over to our host head of Investor Relations. Mr. Bryan King. Please go ahead.
Good afternoon, and welcome to intuitive third quarter earnings conference call with.
With me today, we have Gary <unk>, our CEO and Jamie <unk> our 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 Securities and Exchange Commission filings, including our most recent Form 10-K filed on February 3rd 2022, and Form 10-Q filed on July 22nd 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 Intuit, a 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 third quarter results as described in our press release announced earlier today, followed by a question and answer session.
Gary will present, the quarter's business and operational highlights.
Jamie will provide a review of our financial results.
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.
I will turn it over to Gary.
Thank you for joining us today, our business fundamentals.
Mental strengthened in Q3 with 20% procedure growth.
And da Vinci procedures, compared with Q3 of last year and solid performance in each of our global regions.
Our capital placements, reflecting 13% growth in our installed base to meet procedure demand accompanied by continued increases in utilization per system per year.
Healthy indicators for our customers and for us.
Ion also experienced increases in installs procedures performed and annualized system utilization.
Supply chain challenges, while still present are abating from their pandemic peaks.
Looking more closely at procedures, 20% growth is up from 14% last quarter and above our three year compound annual growth rate of 16% during the pandemic.
General surgery, our largest procedure category is growing at the fastest rate of any category fueled by bariatrics surgery, cholecystectomy hernia repair and other forget procedures in the United States.
In Europe , so what countries are growing nicely with diversified use beyond urology.
Germany.
The U K, and Ireland, Italy, and Spain stood out in the quarter.
And Asia Japanese procedure growth accelerated relative to Q2 and Korean group growth remains solid.
Procedures in both countries are also diversifying beyond urology.
And China procedure growth was just above our global average hampered in part by regional Rolling Lockdowns that continue to impact procedures and utilization.
Turning to capital, we placed 305 systems in the quarter compared with 336 in Q3, a year ago and 279 last quarter.
Wrong procedure demand is supporting da Vinci install base growth of 13% in the quarter.
Per system utilization grew 7% in the quarter up from our three year compound annual growth of 5% over the pandemic.
Utilization was aided by a recovery from a softer U S procedure quarter last year.
As well as customer performance of more types of procedures and higher volume categories and increases in customer efficiency.
S I trade ins continue to slow given the decline in remaining trading opportunity.
I N placements grew to 50 this quarter up from 28 last year and 41 last quarter, reflecting continued growth in an early market.
Overall customers are acquiring systems, where there is opportunity for procedure growth.
On the investment front, we continue to focus on our platforms and multiport 10 to low middle single Port in digital through indication and regional regulatory expansions innovation in products and services that meet customer needs and product quality and cost refinements.
We expect our new platforms to approach our historical levels of contribution margin over time.
Progress year to date has met our expectations.
With regard to our expenses this quarter, we moderated head count growth to focus on deeply integrating those employees, who joined us in the past several quarters.
Going into 2023, we expect the rate of growth in fixed expenses to slow as we pursue leveraging our enabling functions and sequence some of our forward investments.
We've had a solid quarter, achieving product and services milestones, we continue to expand access to our multiport products training and services globally.
Standouts in the quarter include record global quarterly New surgeon training completions to first case and accreditation of our technology training pathway by the Royal College of Surgeons in the U K.
For ion we submitted our registration application in China and.
And we obtain German regulatory clinical study approval for eye on ablation technology would start which starts our clinical journey towards enabling interventions beyond biopsy.
Im procedures grew 211% in the quarter.
Turning to our single Port platform da Vinci S. P procedures grew 46% year over year with particular strength in Korea, where our S. P team launched next generation S. P instruments, and our Firefly enabled endoscope.
We also received P M D a clearance in the quarter.
<unk> S P. A japan across a broad set of clinical indications similar to the indications S. P as in Korea.
In our digital portfolio, our my intuitive App and portal are being adopted broadly in regions in which they're released as the go to digital portal for da Vinci customers.
Installs of our in room computing platform intuitive hub grew 21% over the third quarter last year and softer software updates or hub installed base improved usability and enabled telepresence and.
In summary, our core business strengthened in the quarter as acute pandemic impact softened we.
We are managing spend growth, while investing in core growth opportunities for the future.
I'll now pass the time over to Jamie to take us through our finances in some persistent macroeconomic issues in greater detail.
Good afternoon, I will describe the highlights of our performance on a non-GAAP or pro forma basis.
I would also summarize our GAAP performance later in my prepared remarks, a reconciliation between our pro forma and GAAP results posted on our website.
Q3 growth in procedures.
Installed base of da Vinci systems, and average system utilization was healthy the.
The strength of these key business drivers, resulting in a pro forma operating margin of 36% and pro forma EPS of $1 19.
Simultaneously, we saw headwinds from the strong U S dollar lingering supply chain issues and inflation, which together negatively impacted pro forma operating margin by approximately two percentage points compared to the third quarter of last year.
I will take you through these details.
Q3 procedure growth of 20% reflected an increase in U S procedures of 18% and O U S procedure growth of 24%.
U S procedure growth reflected a favorable comparison to the year ago quarter, given the impact of the Delta Varian last year.
On a three year compound annual growth rate basis U S procedures grew approximately 13%.
In China, our second largest market during the quarter procedures continued to recover from the impact of Covid related Lockdowns that we described on last quarter's earnings call. However, we continue to see regional lockdowns occur as Covid cases rise.
Turning to capital, we placed 305 systems in the third quarter, 9% lower than the 303006 systems, we placed last year.
Third quarter system placements included approximately 15 systems that were delayed at the end of last quarter due to component supply delays.
That was 71 trade in transactions in the quarter as compared to 136 in Q3 of 2021, reflecting the decline in the number of Si's remaining in the installed base.
As of the end of Q3, there were approximately 739 S is remaining in the installed base of which 191 or in the U S. A.
Excluding trading transactions global system placements grew 17% from last year.
The installed base of da Vinci systems grew approximately 13% year over year consistent with recent trends.
Utilization of clinical systems in the field measured by procedures per system increased almost 7% compared to last year.
Using a three year compound annual growth rate third quarter utilization was consistent with historical averages increasing almost 5%.
Average system utilization in the U S grew 6% year over year, an improvement from the 1% decline in utilization in Q2.
As a result of a procedure and capital performance Q3 revenue was $1.56 billion, an increase of 11% from the third quarter of 2021.
On a constant currency basis third quarter revenue grew approximately 15%.
In the third quarter revenue denominated in non USD currencies represented 22% of total revenue.
On a revenue weighted basis using current exchange rates net of hedges in place for Q4. The U S. Dollar is approximately 3% stronger than the rates realized in Q3.
Additional revenue statistics and trends are as follows in.
In the U S. We placed 175 systems in the third quarter lower than the 227 in Q3 of 2021, reflecting a decline of 66 systems associated with trade in transactions and a challenging macroeconomic environment.
Outside the U S. We placed 130 systems in the third quarter compared with 109 last year.
Current quarter system placements included 54 into Europe .
To enter Japan, and 14 into China.
Compared with 47 into Europe .
In terms of Japan, and 17 into China in the third quarter of 2021.
As of the end of Q3 2022, there were 40 systems remaining under the current quota in China, which is also available to the three domestic competitors to have completely local registration with N M. P. A.
Markets that are served through distributors represented approximately 10% of system placements. So far this year.
Our distribution partners purchase product from us in U S dollars and sell in their local currencies.
While we have not experienced a significant impact so far the strengthening of the U S. Dollar reduces distribute our margins and may cause delays in capital purchases.
Leasing represented 37% of Q3 placements compared with 42% last quarter and 41% in the third quarter of 2021.
The lower lease mix as a function of customer and regional mix and while leasing will fluctuate from quarter to quarter.
We continue to expect that the proportion of placements under operating leases will increase over time.
Third call our system average selling prices were $1 $5 million consistent with last quarter.
System Asps were negatively impacted by a higher trade in mix and the impact of FX offset by a higher mix of X sight dual console placements.
We recognized $17 million of lease buyout revenue in the third quarter, compared with $22 million last quarter and $25 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 $1800 compared with approximately $1900 for both last quarter and last year.
On a year over year basis, FX negatively impacted ina per procedure by approximately $50.
The remainder of the year over year reduction was primarily a result of customer ordering patterns.
During the quarter, our distributors and customers and sudden O U S markets reduced the inventory of supply chain predictability moderately improved.
We placed 50 ion systems in the quarter as compared to 28 in the third quarter of last year.
The installed base of ion systems is now 254 systems.
Of which 112 or under operating lease arrangements.
Third quote ion procedures of approximately 6400 increased 211% on a year over year basis.
Ion is in the new M D. A regulatory review process in Europe and during the quarter, we submitted I own into the regulatory process in China is it.
Reminder, regulatory review timelines in China are lengthy.
Moving onto the rest of the P&L.
Pro forma gross margin for the third quarter of 2022 was 69, 8% compared with 71, 3% for the third quarter of 2021.
69, 2% last quarter.
Q3 pro forma gross margin included a one time benefit of approximately 50 basis points relating to the favorable conclusion of certain indirect tax matters.
Pro forma gross margin was lower than last year, primarily due to the stronger U S dollar manufacturing and logistics inefficiencies as a result of the supply chain environment.
Hyatt component pricing and increased fixed costs relative to revenue.
Indicators of supply and inventory health modestly improved in the quarter, but remain well below pre pandemic levels.
Pro forma operating expenses increased 24% compared with third quarter of 2021, driven by increased head count higher R&D related project costs and higher travel costs.
Growth in operating expenses as being primarily in support of our ion platform next generation robotics capabilities. Our digital capabilities is an expansion of our infrastructure to allow us to effectively scale.
We're also seeing higher regulatory cost as a result of increased regulatory requirements globally and expansion of our new platforms into O U S markets.
As Gary mentioned earlier during the quarter, we slowed our hiring pace, adding approximately 530 employees lower than the 700 plus employees, we have added per quarter in the last three quarters.
As we look forward to 2023, we expect that our operating expense growth will be lower than the growth for this year.
The slowing growth rate of operating expenses reflects the completion of some of our infrastructure and business process improvement investments and planned leverage in our enabling functions.
As part of our planning process.
We are also conducting a review of our capital expenditure priorities and will provide an update as to the outcome of this review on the next call.
Within this framework, we will continue to invest in our new platforms I on an S. T next generation capabilities and our digital ecosystem given the return profile as we see for those investments.
Pro forma other income was $7 2 million for Q3.
Lower than $10 $4 million in the prior quarter.
Primarily due to the impact of foreign exchange losses from Remeasurement of the balance sheet, resulting from the continued strengthening of the U S. Dollar.
Our pro forma effective tax rate for the third quarter was 23, 4% in line with our expectations.
Third quarter 2022 pro forma net income was $429 million or $1 19 per share compared with $435 million and also adult <unk> 19 per share for the third quarter of last year.
Capital expenditures in Q3 were $153 million, primarily comprised of infrastructure investments to expand our facilities footprint and increased manufacturing capacity.
I will now summarize our GAAP results.
GAAP net income was $324 million or <unk> 19 per share for the third quarter of 2022, compared with GAAP net income of $381 million or $1 four per share for the third 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.
<unk> of intangibles the <unk>.
Asian charges and gains and losses on strategic investments.
We ended the quarter with cash and investments of $7 $4 billion compared with $8 $2 billion at the end of Q2.
The sequential reduction in cash and investments, reflecting share repurchases and capital expenditures, partially offset by cash from operating activities.
During the quarter, we completed a $1 billion ASR. In addition to the $607 million of shares repurchased in the first half.
Since the end of 2021 and went to the share count has decreased by approximately 7 million shares or 2%.
We have a remaining authorization to repurchase our shares of $2 $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 third quarter 2022 procedure growth was 20% compared to 20% for the third quarter of 2021, and 2014% last quarter.
The three year compound annual growth rate between the third quarter of 2019 and third quarter of 2022 was 16%.
In the U S third quarter 2022 procedures exceeded our expectations with growth at 18% year over year compared to 16% for the third quarter of 2021, and 11% last quarter.
Procedure growth reflects a positive impact relative to Q3 last year, which was impacted by the Delta variant.
On a three year compound annual growth basis U S procedure growth was 13%.
Third quarter procedure growth continued to be driven by general surgery with strength in bariatrics, and cholecystectomy and hernia repair.
Trends in malignant procedures, namely colorectal and lobectomy procedures were also strong.
Growth in gynecology, our second largest procedure category in the U S also experienced double digit growth, while more mature urologic procedures grew in the high single digits.
Outside of the U S third quarter procedure volume grew approximately 24% year over year compared to 30% for the third quarter of 2021, and 22% last quarter on.
On a three year compound annual growth basis procedure growth was 21%.
Turning to Europe procedure growth was led by strong growth in Germany.
U K, Italy and Spain.
And all of the regions noted procedure growth outside of urology was strong and general surgery and gynecology categories.
Specifically in Germany, we experienced early stage growth and benign hysterectomies and colorectal surgery.
In the U K growth was led by benign hysterectomies colorectal and cholecystectomy procedures.
While still early stage year over year procedure growth in these non urology procedures was almost four times higher than urology.
Turning to Asia, and Japan growth in general surgery, and gynecology continued to be strong we.
We experienced robust growth in these categories led by Gastrectomy rectal resection and benign hysterectomy.
Further contributing to strong procedure performance was continued early stage growth and newly reimbursed procedures, namely colon resection and nephrectomy procedures.
In China, we continued to see a recovery in the first couple months of the third quarter as Covid cases began to decline and lockdown restrictions were lifted.
Procedure growth was driven by Urologic procedures, specifically prostatectomy and partial nephrectomy, along with strong growth in colon resection within general surgery.
Later in the quarter, we began to see procedures start to moderate as Covid began to reemerge in various regions and rolling Lockdowns were implemented.
Korea procedure growth was also solid in the third quarter growth in procedures continued to be broad based with strong growth in SP Sp procedures.
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 today at the annual chest conference in Nashville, Tennessee.
Doctor, Eric full from Massachusetts General Hospital presented preliminary performance updates from the precise study.
Results were consistent with data released last year and demonstrate encouraging results for diagnostic yield and sensitivity of malignancy for samples obtained through an ion procedure with a strong safety profile.
We anticipate the final data from precise to be published in the first part of next year.
Continuing with island, a group from the Mayo clinic in both Rochester, Minnesota, and Jacksonville, Florida led by doctors all the Hunter I leave Matteo <unk>, Johnny Ryzen hour and Sebastian Fernandez Bucy published a retrospective case series and Respirometry comparing the performance of the iron and alumina.
System with the C T guided transfer ASIC approach for pulmonary lesion biopsy.
A total of 225 patients were included in this study.
113, who underwent an ion procedure with a median nodule size of 18 millimeters and 112, who underwent a transfer ASIC biopsy with a median nodule size of 16 millimeters.
Within the island group, the overall diagnostic yield and sensitivity for malignancy reported was 87, 6% and 82, 1% respectively.
Which were comparable to the same outcomes from the trans thoracic approach.
<unk> the rate of complications with significantly lower for the ion approach with a 13% difference relative to the transfer ASIC approach.
Further analysis demonstrated an approximately 80% reduced chance of newmont pneumothorax associated with the eye on procedure.
The authors concluded in part that robotic assisted approach with ion can be as accurate as the trans thoracic approach for sampling pulmonary nodules with similar or reduce complications and should be considered as a means for nodule biopsy.
Turning to the surgical side.
Dr. Leonardo solar any from the University of Bologna, and colleagues published a systematic review and meta analysis comparing the robotic assisted in laparoscopic approaches for left colectomy procedures in the International Journal colorectal disease.
Data from 11 different articles, including over 52000 patients were included in this analysis with over 13500 in the robotic arm and over 39000 in the laparoscopic arm and with no difference in pre operative characteristics reported.
With regard to perioperative outcomes, a 4% lower conversion to open rate was reported for the robotic assisted approach compared to the laparoscopic approach.
Further analysis demonstrated the risk of conversion to open for the robotic assisted approach was approximately half the risk of the laparoscopic approach.
In addition, the analysis showed a higher risk of post operative complications after a laparoscopic left colectomy as well as a lower rate of superficial wound infections for the robotic assisted approach.
The analysis also showed an aster monarch leak was 30% less likely with the robotic assisted approach compared to the last group.
The authors concluded in part that robotic left colectomy requires less conversion to open surgery than the standard laparoscopic approach and more studies are warranted to highlight possible advantages in using the robotic platform for left colectomy.
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 14% to 16, 5%.
We are now increasing our forecast and expect full year 2022 procedure growth of 17% to 18%.
This range continues to reflect the uncertainty associated with the course of the pandemic.
The low end of the range still assumes increasing COVID-19 hospitalizations regional lockdowns 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 as.
The range does not reflect significant material supply chain disruptions or hospital capacity constraints similar to what we have experienced at the start of the pandemic.
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% expected to be towards the lower end of that range.
We are now refining our estimate of pro forma gross profit margin to be within 69% and 69, 5% of net revenue given the ongoing impact of higher input costs related to supply chain and the 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 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 25%.
We are adjusting our estimate and now expect our full year pro forma operating expense growth to be between 21% and 23%.
We are narrowing our estimate for noncash stock compensation expense to range between $520 million to $530 million in 2022.
We are also updating our estimate for other income which is comprised mostly of interest income to total between 40 million and $50 million in 2022, a decrease from our previous estimate of $60 million and $70 million.
The decrease primarily reflects lower interest income on cash that was used to repurchase shares and also the net impact of certain foreign exchange gains and losses.
On last quarter's call, we forecast 2022 capital expenditures within a range of 700 million to $800 million.
We are now lowering our estimate for capital expenditures for 2022 to be in the range of 600 million to $700 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 remarks, we will now open the call to your questions.
Yeah.
Yeah.
Maggie I think we'd like to go ahead and.
At least the Q&A to the.
Alright, yes. Thank.
Thank you, ladies and gentlemen, if you wish to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command.
And first we have a question from the line of Travis Steed with Bank of America. Please go ahead.
Hey, Thanks for taking my questions and congrats on a good quarter alright, maybe Gary on the on the capital selling funnel just maybe you could comment how the funnel has changed since the beginning of the year. When you initially highlighted.
Florida funnel.
And just trying to trying to square away, the but 13% installed base growth with a floor of funnel and that's being offset by the 7% or higher utilization and how to think about capital you know ended up placements moving forward.
What we're seeing on that side on the capital side is that where we see healthy procedure growth.
The install big installed base growth is keeping pace and you're absolutely right. In your question to kind of link utilization growth with installed base growth on the utilization side, the 7% is higher than the norm. It's it's got a little artifact in it we think which is a year ago third quarter was a little bit suppressed because of the delta variant.
So I think it's hard to keep doing 7% quarterly.
If the customers could do that we'd be delighted.
Realization is good for them, it's good for us and it's fine. It's just hard to move in a durable way because of all the workflow issues in the hospital at large not just robotics, but but just across the.
System. So we're seeing both I think the capital side, what we've seen here is that.
Capital is available to be competed for if you can.
Become a high priority within within the hospital to get it. So it's not so much that the capital environment as easy as it is competitive and if you can rise on the priority list. Then we will find that they'll move in and we're seeing that in install base growth and greenfields in an aisle.
Thank you and thanks for the question from the line of Amit has done with Goldman Sachs. Please go ahead.
Oh. Thank you a couple of questions. If that's okay. Its first I think maybe just to.
Ask about how you're thinking about the pipeline for more mature procedures, if I heard you right urology in.
Gynecology up high single digits double digits in the U S pretty good numbers just want to make sure those are clean.
And then just kind of the typical question about you know your own sources external internal customer discussions just how you're thinking about the diagnostic pipeline for those slower growing cancer procedures and.
And kind of where we are and where we're heading relative to the trough levels that were observed.
Last year.
Okay on the on the issue of kind of the quality of growth on urology and gynecology, Brian I'm going to kick that to shrink and I think Gary touched on it on the previous answer you know an element of that being just a comparison period from last year, but still seeing you know really healthy growth in those procedure categories as I called out.
Our growth.
Growth in kind of gynecology, which is our second largest procedure category. You know did have I'd say double digit growth.
Probably in the lower end there and then those more mature urologic procedures, you know being it was high single digits, but it's really favoring from the comparison from last year, but still doing really well on the diagnostic pipelines, while we continue to see for the most part is.
Relatively steady in terms of the tests.
During <unk>.
Mostly a little below the volumes that we saw pre pandemic.
One exception that we've seen in the U S and kind of recent trends is a tick up in colonoscopy is.
Wouldn't say that that is evidence of that impacted da Vinci procedures, yet as that's a recent trend.
Obviously, we're encouraged by the fact that more patients are able to get back to having those diagnosed gnostic tests and we'll see how that plays out in terms of surgery.
On just a follow up point to Brian Your answer I think the other thing is that while we are mature in urology.
Urology and gynecology in the United States, there's still a little growth there too, but outside the United States and Europe and Asia, We were still relatively early and we think that in those two categories will continue to see growth.
Jamie just a follow up point on on your answer on the diagnostics side, you were saying you know it started to come back and we're seeing a little bit of an uptick. It is absolutely clear that there's been a trough or a bolus of people who stayed out of diagnostic pipelines.
That hasnt fully recovered and their disease is progressing that is also absolutely clear in the literature. So how big that is and what that looks like as they come back into the health system in terms of surgery and da Vinci surgery, just going to have to wait and see it's a hard thing to measure.
But I think there's a bolus out there and.
And it's unfortunate given the disease progression.
Thank you. Our next question from the line of Larry <unk>.
Wilson with Wells Fargo. Please go ahead.
Oh, good afternoon, and thanks for taking the question and congratulations just two for me I wanted to start Gary with the color commentary you gave on Opex spending next year. If we look at the last five years, you grew EPS faster than sales or pre COVID-19 I'm sorry, four to five years. This year it looks like earnings would probably be.
Be down.
How much of a priority is EPS growth and what would need to happen for you to get back to that algorithm. We grew EPS faster than sales and I have one follow up.
Yeah.
The.
We watch it we want to make sure that we're efficient.
Stewards of our of our expenses and our capital and.
And where we see an efficiency well pursue it that's what I've been messaging and that's what I was talking about here in the script. We think there are opportunities for us to increase our productivity.
And to do a better job Onboarding some of the staff, we brought in have helping them become more productive more quickly.
We think there are really good opportunities in our new platforms of the things we've been talking to you about our ion is growing nicely S. P. As we pursue additional indications I think will be quite strong and we're pleased with multi port currently what's in the market. The things that we're working on as well as our digital tools. So we think those things are important we don't want to starve them, but.
We will sequence them.
So it's a balanced approach some of it is making sure that our growth engines remain intact and we continue to innovate.
Other parts are just making sure that we're being efficient with our use of capital and that we're building a lean organization as we grow Jamie you can speak a little bit to the expense characterization as you see it.
This is just a couple of framing comments I'd make Larry if you look to the midpoint of the procedure guidance. We've provided on a three year CAGR basis that some that's procedure growth of about 15% just under just over 15% you do the same for our Opex guidance, that's just under 15%.
Kind of back to 2019 on that three year CAGR basis procedure growth and spending growth relatively in line.
Just one other thing.
Highlight to make a point if you look at the reported revenue growth for Q3, and 11% year over year. If you look at our recurring revenue growth that's about 80% of our total revenue, 16%. If you adjust down on a constant currency basis is 20% revenue growth and so comparable with the 20% procedure grow.
And you look back 18, 19, generally procedure growth and revenue growth are relatively similar youre seeing a disconnect right now for the reasons. We've described the lower trading volumes trading volume. So far this year are down 40% from the prior year and you're seeing the impact of FX as we've described and so.
There are some some Mac <unk>.
<unk> insight secure level impacts on what's happening in the P&L. This year, specifically on spending we kind of described it in the script. There are some infrastructure investments that we've been making the stops are complete.
That creates the opportunity for us to spend a lower growth rate and given the work that we've done and the investments that we've made we are gonna look for some leverage in our enabling functions, particularly as we get into next year.
The final thing that Gary mentioned was as you look to kind of a pipeline. There is some natural sequencing that you'll do with respect to some of our programmatic spending next year and those factors play into this slowing operating expense growth rate that we've described.
That's super helpful. If I could sneak one in one more and Gary you've talked about a huge amount of variation in surgery around the world.
Talked about developing tools to identify best practices to reduce variation and improve outcomes, where are you in that process and what are the capabilities you still need to develop to make that a reality.
Yeah, I love that question.
There's a couple of things on the kind of the baseline you need to gather enough.
The right data to characterize variability of care teams and variability of patients. So there's a patient population, it's got variability and you've got care team or physician variability as well.
The getting the right data streams getting them stored in figuring out how to do the right kind of assessment or analysis on them generating that data and making sure. Its amputated properly. Some basic stuff that you have to do to be able to look for meaningful sources of variation.
We're well down that pathway in terms of getting the right data streams, having the right conversations with our customers.
And starting to do the analysis.
So I am excited by it as we as.
As we look at how to deliver that we're still in a I think surgical science discovery phase we are partnered with.
Many of the top.
Hospitals academic hospitals around the world looking at surgical data science, starting to figure out the sources of variation and drawing it back to causality not just correlation. So I think the baseline is there the ability to collect and gather that data I think our relationships with top tier researchers are in place.
We're starting to see early signals that look really good.
Final point I'd make is there some basic things we can do that are logical and not.
Not extraordinarily complicated that can help <unk>.
Personalize learning pathways and training pathways and we're starting to work through that now that that's kinds of technologies, what will come out into the field first so I think it was a long term journey some of the things we talked to you about intuitive hub or the or some of the baseline capabilities. There in terms of the right data collected.
I'd say that the right way and shared with the right hospital customers to get us good outcomes.
Okay.
Thank you next we have Robbie Marcus with Jpmorgan. Please go ahead.
Oh, great. Thanks for taking the question I'll add my congratulations on a nice quarter.
And maybe just to dial in a little bit more on the capital equipment environment you touched on this and it's great to see procedures driving.
Placement volumes, but are you seeing any changes whether it's in the U S or Europe as we're you know an uncertain economic environment around the world you know, it's clearly not showing up in the numbers yet, but just seeing if there's any rate of change or if the outlook is any different than the current environment. Thanks a lot.
Just a couple of things I'd highlight.
As we've spoken to.
Customers and this is mostly anecdotal you do see some input that staffing pressures are easing a little bit, particularly with respect to vacation race and labor costs.
Those two factors are still.
Way above pre pandemic levels, but you see a little bit of improvement in the core or at least based on both of those anecdotes in the survey work that we've seen in Q2 and Q3, you saw customers going through the process of reexamining their capital budgets.
And that causes some delays in capital investments and obviously they re prioritize what they invest in I think I think robotic surgery is still an area of potential value for customers that does cause some delays.
On the O U S side, we haven't seen a significant impact yet so far in terms of capital spending by those customers.
Generally we are at earlier stages of adoption for payers structures are different and so so far at least what we've seen is kind of.
Nice capital numbers in the yogurt market. So as you can see from the the kind of comparisons you can look at European placements in Q3, they were up 15% placements in Asia were up 36% year over year. So we haven't seen anything so far I would say there are obviously economic risks, particularly in Europe with the energy situation.
<unk> the situation with Ukraine, and Russia, we haven't seen those manifest yet.
Thank you and next we have.
From the line of Richard No matter with twist. Please go ahead.
Hi, Thanks.
Thanks for taking my questions and congrats on the quarter.
Yes with respect to the spending sneak one thing comments that you made.
What should we be thinking about that with.
We expect the implications for kind of a next gen console.
Some of the other types of iterative.
All of the advancements you've talked about the pipeline is there any implication for you know.
Our new system, if you will or Vinci console.
And the cadence of.
The spending you're talking about right.
We know across the platforms, we work on.
Improvements to the robot system side or a.
Full innovation, there, we work on instruments, and accessories and software updates and sometimes partner product.
In general, we maintain our priority and our cadence on those things that we think we're going to have the biggest impact to our customers that allow them to get better outcomes.
To address new opportunities that theyre not addressing today.
We continue to invest.
And have a high priority on quality improvements and things that will well Baker our customers more satisfied.
Some other things that tend to be.
Great ideas, but but perhaps not.
Highly urgent then those things will will sequence out and that's a conversation we routinely have.
What do we have to do it a high priority and and do it at high quality quickly what are the things that can sequence after that.
So hard to answer your question in detail from a process point of view.
Matters, a lot to our customers if it's a hard to satisfy our high opportunity those things get put in line first.
Thank you and next we have the line of Jayson Bedford with Raymond James. Please go ahead.
Hi, good afternoon, thanks for taking the question.
One one topic that I thought it was interesting you mentioned ablation technology with respect to ion and starting a trial in Germany can you talk a bit more about the technology and the size and scope of the trial and maybe any type of timeline you can offer in the U S. In terms of starting a trial.
Well I'll talk a little bit about the motivation in terms of the details of the trial I don't have them at our fingertips, but our team can respond to that in the future a future call.
Here, we know that ion can navigate in the deep into the long and we know that surgeons and interventional pulmonologists want to treat tissue there they want to be able to engage with it one way or another.
So ablative technology can be used for a couple of different disease states.
And we have high interest in that whether it's inoperable cancer or whether it's <unk>.
Something for emphysema or chronic bronchitis, so being able to navigate there with an energy source will ultimately be important. So first of all one that we're talking about here I believe is a microwave energy source. There are some other energy sources that people are interested in in some cases, we're developing it ourselves and several other cases where partner.
With others, and we think that'll open the door to additional indications for ion in the long and elsewhere, we're pretty excited about it.
Apologies for not having the details of the trial at our fingertips, but I imagine our team will get that to you in the future.
Thank you and next we have the line of Matt Taylor with Jefferies. Please go ahead.
Hi, Thanks for taking my question and congrats on a nice quarter.
I wanted to get some updated thoughts you've been asked a little bit about this in the.
The recent patent on this call, but maybe you could give us some feedback on.
How you're thinking about capital spending from hospital customers, you know going into recession and thinking.
Thinking about how this one could compare to what you've seen in the past with some of the different.
Cycles that the company has gone through over a longer.
We're at a time, maybe do some some compare and contrast and talk about the demand.
The environment that you see out there and how are you going to compete for other priorities for capital.
Just with respect to prior cycles and this one actually matters.
Resting insofar as as we indicated in Q1, we saw some softness in the capital pipeline in Q1, and Q2 and to some extend that continued in Q3.
If I look back at prior cycles in 2008, you saw.
Three quarters of a year over year decline in capital placements 2013, I think we saw a five quarters in a row of declining capital placements and then when Covid hit in 2020 again three quarters in a row I only give those as reference points I don't think we can say that those are indicative as to what may happen.
If and when there's a recession in the U S or beyond so I think honestly if you look at the progression of our economic projections is pretty complex and hard to call. At this point. So we just give those historical reference points.
Two two comments for me you know of course.
The occurrence of the depth and the shape of a recession impossible for for US sitting at this table to predict what I can talk about is how are the conversations with her.
The hospital executives have gone I think in general there.
Sure.
Perspective is to serve their patient population as best they can.
With with technologies that will get the outcomes. They want at the price points. They want I think we've been doing well with that I I think both on the product side and our ability to to demonstrate economic viability and contribution margin gains for hospitals has been powerful and I think that gives us some strength going.
Into.
The future.
That said, depending on how hard and deep. It is then it's then it becomes a question of what they want to offer their their patient population and what kind of decisions are going to have to make.
But I also think that relative to past.
Cycles intuitive as a couple of more tools in the toolbox in terms of leasing portfolios and some other things harder.
Hard to predict where it will go I think our ability to both demonstrate.
Demonstrate value and adjust.
Our capital placement models, it's a little stronger than it was in past years.
Yeah.
Thank you and next we have Adam Maeder with Piper Sandler. Please go ahead.
Okay.
Hi, Good afternoon. Thank you for taking the question and congrats on a nice quarter I wanted to ask you about ion, which if I'm looking at it correctly you had a record placement for installs with also some very nice.
Volume trends so.
Gary or Jamie can you just talk about kind of what's driving that inflection and system placements and then you referenced the precise data that was presented at chest I think earlier today as.
As well as the journal publication coming next year, just talk about any potential impact to adoption looking forward. Thank you.
I'll jump in and Jamie you can you can help I think we're still in the early market.
We're pleased with the growth in and the customer feedback that we've been getting the.
And when we talked to you and survey our customers their satisfaction levels are very high with the online product I think it's driven by a couple of things.
Preliminary data that's come out of the precise trial, that's already been talked about and now the later data.
I think was attractive to the customer base I think the other thing going on is that as we've we've installed additional sites and help them bring their programs up.
I think they were able to replicate that data I think that it.
As being commonly adopted.
That is having a compounding effect the idea that the early publications are being repeated in the hands of our new teams that are coming onboard gives them confidence.
This is a little bit of word of mouth amongst the pulmonology community gives them confidence that.
Bob.
They can get whats being published and I think that's been strong for us.
Jamie and Thomas I would just say there's as soon endorsement of the architectural choices that we made with respect in particular to the diameter of the catheter, which makes a real difference to diagnosis of smaller lesions and you see that in the in the clinical data.
I think that the engineering and the commercial teams have really executed really well through the period since we launched the product and.
And I do think that there is a halo effect of kind of word of mouth across Ips and uses of the product and I think in combination with clinical data.
I had a positive effect on our progress so far I wouldn't characterize.
How we've progressed so far as an inflection specifically I think we've made continued progression.
Thank you and next we have the line of Matt <unk>.
With Barclays. Please go ahead.
Great. Thank you so much for taking the question.
And yeah.
Is it perhaps a quarter so congrats on that as well.
I just wanted to follow up on a couple of things you've talked about.
Hum.
The macro factors and are affecting the market and your customers.
And your business a little bit.
One being kind of the staffing challenges.
Some of these centers are facing.
I'm curious how that if at all or is affecting the way either procedures are coming back.
Or or demand for systems is evolving here and then.
Into 'twenty three.
Just curious some of the costs that you've talked about everyone's talked about.
You know what what.
Early to ask this kind of question, but your thoughts at this point as to how we should think about those costs evolving in 'twenty three is either sort of rising and staying or rising and then being able to be managed down or just in terms of your cost structure and how it has increased any any thoughts you have would be greatly appreciated.
Yeah.
Then maybe the second part of the question I'll take them now.
So.
We're not going to give anything specific with respect to 'twenty three numbers, we'll wait till January to do that when we conventionally provide guidance.
I think what we've said with respect to operating expenses in 2023 for the reasons. Gary described the growth rate for that spending will be lower than the growth rate that we experienced in 2022 and.
A significant component of that is the number of people that we will hire next year and again Gary described was.
Given the new employees that we've hired there's a period here, where we're going to ensure that we effectively onboard those new hires and getting into a state of productivity and this will be a period for us to go through that kind of absorption phase I'll, let Cameron respond to the first part yes, Matt could you I'm sorry, I just.
I missed a little bit of that first part of the question is can you just restate that one.
Sure just a in the context of the factors affecting the ebbs and flows recovery.
Have your procedures and system.
New system trends.
How staffing.
Staffing or challenges there.
Our affecting those.
Those trends in your business if at all.
Fair question.
It's interesting I think there's a put and take there on the on.
On the tough side of course, if if hospital staffing is really challenged particularly as it relates to all our staff.
That can limit our procedures that they'll perform.
In general I think that folks are paying more to get.
Or staffed.
Recognizing they want to both treat those patients is important to the revenue line of the hospital. So it's it's primarily inflationary pressure as it relates to what's happening in the or.
Our space.
The interesting part is that high quality M. I S minimally invasive surgery of which we enable.
It helps too.
Offset some of the staffing requirements post surgery, it's quite clear actually.
So if they can do the procedure than the types of surgeries, we do.
It will save them, some backend costs and staffing so theres a little bit of a seesaw there.
So far I don't think it's improving in terms of staffing constraints very quickly. It does it does sound like its stabilized and maybe on the slight upside of improvement.
Operator, we have time for one more question.
Alright, we have the line of drew Ranieri with Morgan Stanley . Please go ahead.
Hi, Thanks for taking the questions.
Gary just maybe on ion and can you maybe I know, it's early days as you're kind of building into south commercially, but a couple of questions. One is are you supply chain support.
Why a constraint at all for meeting demand and then can you just give us a sense of maybe where you are in account penetration for ion and whether it's a two interventional pulmonologists or at a hospital level. Thank you.
On the supply side, we are.
Working extremely hard to meet demand on the capital side I think we're about there we're pretty close pretty close to balanced I don't think we're way ahead are way behind.
Likewise on the consumable or per procedure side, we're working extremely hard to meet demand and.
I think we're slightly behind not not way ahead, and yeah not way behind is we're probably running closer but.
Pushing hard to keep rolling.
So on the penetration side I think a little bit early to go into share mix and things like that I think we're not quite ready to describe where we are either on the account side or on the pulmonology side. So we'll save that for a future call.
Anyway. Thank you 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.
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.
Variances for their care teams and ultimately a lower total cost of care.
We believe value creation in surgery and acute care is foundational human it flows from respect for and understanding of patients and care teams their needs and their environment.
At intuitive, we envision 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.
Look forward to talking with you again in three months.
Yeah.
Thank you and ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T. Then conferencing you may now disconnect.
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