Q4 2022 Intuitive Surgical Inc Earnings Call
Okay.
Yes.
Ladies and gentlemen, good afternoon. Thank you for standing by and welcome to the intuitive quarter for 2022 earnings release at this time all lines are in a listen only mode. Later, there will be an opportunity for your questions. Now if you do wish to ask a question today. Please press one followed by the zero.
One followed by the zero for questions or comments Fisher Kearney, Operator assistance. Please press star followed by zero and an AT&T operator will assist you and as a reminder, today's conference is being recorded.
I'd 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 its fourth quarter earnings conference call.
With me today, we have Gary <unk>.
CEO and Jamie Smith, 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 October 21st 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 fourth 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 and.
Then I will discuss procedure and clinical highlights and provide our updated financial outlook for 2023, and finally, we will host a question and answer session.
And with that I will turn it over to Gary.
Thank you for joining us today.
The fundamentals of our business were healthy in Q4 and for the full year 2022.
Procedure growth for the full year approach pre pandemic levels install base growth was solid and customers concurrently increased utilization of existing systems.
Our investments in product development extended our multiport single port and flexible robotics ecosystems through new instruments accessories digital products and indication expansions.
Finally, the fine work of our operations teams and supply partners largely mitigated the supply chain challenges that persisted through the year.
Turning first to procedures, we saw 18% procedure growth for the quarter and the full year.
Areas of strength included general surgery in the United States, particularly benign procedures, such as bariatric surgery, cholecystectomy and hernia repair.
Colon and rectal procedure growth also continued.
Strong growth beyond neurology outside the U S was accretive to our global performance.
We attribute this diversification to the value of our ecosystems and our strategic investments in organization clinical trials data products and market access.
Regionally, the United States, Japan, Europe , and India stood out in the quarter and year.
Procedure growth in China was hampered by the Covid wave in Q4 with procedures progressively declining starting in November through the end of 'twenty two.
I N procedures. So showed continued strength with 218% growth in 'twenty, two compared with 21 N.
N S. P procedures grew 38% over the same period.
With the majority of its growth coming from Korea.
Global core procedure areas of urology, and gynecology moved toward recovery in the year.
Both exceeding their three year compound annual growth rates in 'twenty two.
On the capital front, we placed 369 systems in Q4 compared with 385 in Q4 2021.
For the full year, we placed 1264 systems compared with 1347% and 21.
Our installed base growth rate was 12% for multi port 149% for island and 22% for S. P in 2020 two.
Overall, our capital placement trends showed sustained demand for additional capacity in multi port and strong interest in expanding capacity for Ireland.
With several hospitals now operating multiple ion systems in their programs and variable demand for S. P. As we continue to pursue our additional indications.
System utilization is an important predictor of future demand and utilization grew 5% for multi port in the year and 10% for Ireland.
Utilization was roughly flat for S. P over the year, however utilization increased by 9% in Q4 measured year over year as our organization incorporated learnings.
Touching on our finances revenue grew 9% in 2022.
Revenue was impacted by the strength of the dollar in the year and the decline of the trade and population of third generation multi port systems.
Our expenses landed at the higher end of our spend guidance, reflecting continued R&D investments that support the growth of our platforms and digital products expansion of our manufacturing and commercial capabilities and capital amortization driven by expansion of our global footprint.
Structurally we have been increasing our own capital expenditures as we continue to build the company to supply the globe at industrial scale.
This is an important investment as several procedures using our systems have become the standard of care in several countries.
We have been very vertically integrating key technologies to develop a more robust supply chain and bring important products to market at attractive price points.
These investments include increased ownership of our imaging pipelines strategic.
Instrument and accessory technologies.
In software and digital products that allow us to serve our customers.
The investments make our business more capital intensive than years past and supportive of industrial dependability, a more robust supply chain and lower product costs.
I'd also like to take a moment to walk through our platform investments.
Intuitive starts with the end in mind coordinating our efforts to enable our customers' pursuit of the quadruple aim and specific procedures for example, those in general surgery.
We design all our systems to allow for the addition of new functionality over time.
For our multi port platform. This design philosophy has enabled us to continuously strengthen our fourth generation.
Generation da Vinci Si by adding new regulatory clearances, a new model with the da Vinci X, new instruments and accessories, new imaging capabilities in new software products.
These products include our stapling lot of instruments as well as our advanced energy instruments.
Each contributed approximately $890 million in revenue in 'twenty, two with revenue growth of 18% in the year.
A key enabler of the general surgery growth discussed a minute ago.
We added 65 representative clinical procedure indications in the United States to our fourth generation multi port platform since its launch.
Our multiport indications now spans six surgical categories in total over 70 procedure indications for multi port platforms in the United States today.
We routinely improve our platform operating systems with roughly 10 significant fourth generation OS releases since launch and dozens of smaller software upgrades.
We launched our next generation X Y visualization, endoscope, plus and have been integrating digital products, including virtual reality training intuitive hub and the my intuitive out.
We expect to launch additional gen four compatible products and operating systems software this year.
Concurrently we invest in new generations of our multi port platform that bring new and significantly enhanced capabilities.
For our multi port system development programs, we prioritize as follows.
Our highest priority is the improvement of core surgical capability targeting improved patient outcomes.
Often through innovation and robot and instrument precision imaging and sensing.
Focusing on dependability and product quality.
Next we designed to improve usability care teams skill acquisition and analytic power, including digital products for the operating room personalized learning for care teams and efficiency analysis and services for surgical programs.
Next we design platforms and their ecosystems that can lower the total cost to treat per patient episode and.
And finally, we designed with the flexibility to add future capability to systems post launch.
Given the time required to design and validate new architectures at any given moment, where typically developing more than one system architecture beyond that in the market.
And the current global regulatory environment core technology changes often require human clinical trials and substantial review.
These are multi year investment cycles, and we're making good progress as.
As we start this year, we do not currently expect a new multi port system launch in 2023.
Turning to island adoption has been healthy based on its ability to meet an unmet clinical need in lung biopsy.
We're focused on improving the manufacturer ability cost and robustness of iron products to support its rapid growth in the U S.
We have also submitted our regulatory dossier for review in Europe , Korea, and in China's Green channel.
We expect clearance in Europe in 2023.
We don't have a firm forecast on the time for iron clearance in China at this time, given pandemic related adjustments ongoing in the Chinese health care system.
And it's also a platform with strong opportunities for future clinical applications, we're conducting advanced development and clinical research to extend into other indications in the law.
While our iron flexible robotics offering offers an opportunity to provide value in the body outside the long our focus is on completing what we started for pulmonologists and thoracic surgeons.
Our single Port platform da Vinci S. P is supported strong adoption in Korea and has recently obtained P. M D. A clearance with broad indications in Japan.
We expect first installs of S. P in Japan in the coming months.
Next we plan to submit our dossier on da Vinci S. P to our notified body in Europe mid year of 2023.
So far customer feedback on the clinical utility for S. P. It's been healthy with strong multi specialty use of S. P in Korea.
In the United States, some indications have required prospective clinical trials and we're currently conducting IDE trials in colorectal surgery and thoracic surgery.
We're pursuing additional indications for SP beyond these two.
And we'll share more information on these indications in 2023 as the requirements for a regulatory pathway for them are established.
We're continuing to invest significant resources in R&D, where the portfolio. We have under development is positioned to support leadership in existing categories and expansion into new ones.
Our capital investments will increase to support supply chain robustness product cost reduction in global industrial scale.
On the SG&A front, we are making some foundation foundational investments and will turn to pursue leverage.
In enabling functions.
Recognizing economic conditions for 2023 are hard to forecast, where targeting a deceleration of fixed cost growth rate in 'twenty three relative to 'twenty two.
We expect pro forma operating margins to fluctuate in the next several quarters and then improve over the midterm.
In closing our priorities for 2023 are as follows.
First increased adoption and focused procedures defined by country through outstanding training commercial and market access execution.
Second pursuit of expanded indications in launches for our new platforms.
Third excellent performance and the continuity of supply of product quality and services provision as we emerge from the pandemic stresses and finally pursuit of increased productivity in our functions that benefit from scale.
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 or pro forma basis.
I will also summarize our GAAP performance later in my prepared remarks.
A reconciliation between our pro forma and GAAP results is posted on our website.
Q4, and 2022 revenue and procedures are in line with our preliminary press release of January 11.
I will briefly review full year 2022 performance before describing our Q4 results in greater detail.
2022 procedures grew by 18% as compared to 2021 or 15% on a three year compounded annual growth rate basis.
During the year, we placed 1264 systems at customers.
<unk>, 6% year over year, driven by a decline in trading volumes of 165 systems due to the declining population of size in the field.
Recurring revenue, which is correlated to ongoing use of our products represented 79% of total revenue and grew 15% over the prior year.
Total revenue of $6 $2 billion increased 9% year over year and grew approximately 12% on a constant currency basis.
Pro forma operating margin was 35% of revenue and reflected the impact of several headwinds.
<unk> supply chain challenges and inflation together adversely impacting 2022 pro forma operating margin by approximately one percentage point.
During the year, we repurchased $2 $6 billion of our stock or approximately $11 2 million shares and we have a remaining authorization to repurchase our shares of $1 $5 billion.
Turning to Q4 with respect to capital performance, we placed 369 systems, 4% lower than the 385 systems, we placed in the fourth quarter of last year.
They are a 110 trading transactions in the quarter as compared to 117 last year.
51 of the 110 trading transactions with O U S customers higher than recent trends, primarily driven by customers in Japan and Brazil.
As of the end of Q4, there were approximately 620 <unk> remaining in the installed base of which 134 are in the U S.
Given the continuing decline of older generation systems in the field, we expect trading volumes to decline significantly in 2023.
Q4 revenue was $1 six $6 billion, an increase of 7% from last year.
On a constant currency basis fourth quarter revenue grew approximately 10%.
For full year 2022 revenue denominated in non USD currencies represented 24% of total revenue.
The U S. Dollar has weakened recently and as a result on a revenue weighted basis using current rates. The U S. Dollar is approximately 100 basis points stronger than the average rates realized in 2022.
Additional revenue statistics and trends are as follows.
In the U S. We placed 181 systems in the fourth quarter lower than the 235 systems, we placed last year, reflecting cautious capital spending by customers given the macroeconomic environment and a decline of 21 systems associated with trade in transactions.
Average system utilization in the U S increased by 6%, reaching an all time high.
Outside the U S. We placed 188 systems in Q4, compared with 150 systems last year.
Current quarter system placements included 17 to Europe , 51 into Japan, and 14 into China.
Compared with 63 into Europe say seven into Japan, and 14 into China in the fourth quarter of 2021.
As of the end of 2022, there were 34 systems remaining under the current quota in China.
There are now four local competitors that are registered in China and they are active intended under the existing quota.
Delays in the granting of a new quota in China will constrain our ability to further grow the installed base and limit capacity you feel procedure growth.
Leasing represented 42% of Q4 placements compared with 37% last quarter and last year.
The higher lease mix is primarily driven by the mix of customers in the U S, who prefer to lease and reflected in PA and increasing placements acquired under usage based arrangements.
While leasing will fluctuate from quarter to quarter, we continue to expect that the proportion of placements under operating leases will increase overtime.
Q4 system average selling prices were one point full $3 million as compared to $1 $45 million last year.
System Asps were negatively impacted by FX, partially offset by a favorable regional mix and a higher mix of X sight jewel placements.
We recognized $17 million of lease buyout revenue in the fourth quarter compared with $17 million last quarter and $26 million in Q4 2021.
Da Vinci instrument and accessory revenue per procedure was approximately $1820 compared with approximately $800 last quarter and $1940 last year.
On a year over year basis, FX negatively impacted ina per procedure by approximately $50 a customer ordering patterns had a negative impact of approximately $40 per procedure as customers, particularly in the U S and China reduced their inventory levels.
Turning to our ion platform in 2022, we tripled procedures to just over 23000 and double systems placements 292 as compared to 2021.
In Q4, we placed 67 I own systems as compared to 31 in Q4 of 2021.
The installed base of ion systems is now 321 systems of which 132 under operating lease arrangements.
Fourth core ion procedures of approximately 17, 900 increased 169% as compared to last year.
Leveraging previous investments, we've made and now with da Vinci ecosystem during the quarter. We commenced the launch of my intuitive apps for ion uses providing them real time access and insights that I own usage statistics.
Moving onto the rest of the P&L.
Gross margin for the fourth quarter of 2022 was 68, 2%.
Paired with 17, 1% for the fourth quarter of 2021, 69, 8% last quarter.
As a reminder, last quarters 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 increased fixed costs relative to revenue the stronger U S dollar and higher component pricing.
The supply chain environment was challenging in Q4 and indicators of supply and inventory health did not improve as compared to last quarter.
High fixed costs relative to revenue reflect the combination of manufacturing related inefficiencies given the environment.
And investments for future growth.
Fourth quarter pro forma operating expenses increased 19% compared with last year, driven by increased head count and higher travel costs increased customer training activities and higher R&D related project costs.
Fourth quarter 2021 operating expenses included a 30 million dollar contribution to the intuitive foundation, which can support their efforts for the next couple of years and did not repeat in 2022.
The pace at which we are increasing head count continued to moderate in Q4 with net additions of about 300, and some employees in the quarter compared to a net increase of approximately 530 employees last quarter.
More than half of the employees, we added in Q4, what production staff and our instrument factory in Mexico to support procedure growth.
While we are slowing our hiring pace and pursuing leverage in our enabling functions. We are planning for balance growth in operating expenses in 2023, given the opportunity to advance our next generation robotics capabilities and the relatively early stage of our investments in ion SP.
And digital.
In 2023, we expect a significant increase in expenses related to clinical trials.
Ryan will provide our outlook for operating expenses later in this call.
As we look forward to our growth plans over the next several years, we are planning to make significant capital expenditures.
Capital expenditures for 2022, but with $532 million and we expect 2023 capital expenditures in a range of $800 million to $1 billion.
Of which approximately two thirds will be for facilities to expand our manufacturing capacity.
Our manufacturing investment plans include advanced proprietary facility is for production of new products in the eye on platform in California, and da Vinci systems in Georgia.
Internationally, we are increasing our product development capacity in Germany building, a new low cost endoscope manufacturing facility in Bulgaria, and establishing manufacturing capacity for domestic <unk> production in China.
We will also be expanding the footprint of our high volume low cost instrument site in Mexico to support procedure growth across all of our platforms.
These investments allow us to consolidate our manufacturing into larger centralized hubs such as the headquarter campus in Sunnyvale, California, and our east coast hub, just outside of Atlanta, While we will co locate surgeon training technology development and manufacturing capacity.
These are multi year investments and as a result, we expect depreciation expense to increase in 2023 and increased most significantly in 2024.
Pro forma other income was $21 $8 million for Q4 higher than $7 $2 million in the prior quarter, primarily due to lower foreign exchange losses from Remeasurement of the balance sheet and higher interest income.
Our pro forma effective tax rate for the fourth quarter was $18 2%.
Lower than prior quarters, primarily as a result of a more favorable geographical earnings mix and a discrete tax benefit of $7 million associated with a foreign tax matter.
Fourth quarter of 2022 pro forma net income was $439 million or $1 23 per share.
Paired with $473 million or $1 29 per share for the fourth quarter of last year.
I will now summarize our GAAP results.
GAAP net income was $325 million or 91 cents per share for the fourth quarter of 2022.
Compared with GAAP net income of $381 million or.
Dollars four per share for the fourth 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 litigation charges and gains and losses on strategic investments.
We ended the year with cash and investments of $6 $7 billion compared with $7 $4 billion at the end of Q3 the sequential.
Reduction in cash and investments, reflecting share repurchases of $1 billion and capital expenditures, partially offset by cash from operating activities.
And with that I would like to turn it over to Brian who will discuss clinical highlights and provide our outlook for 2023.
Thank you Jamie.
Overall procedure growth for the full year 2022 was 18% and increased 15% on a three year compound annual growth basis.
Overall procedure growth was comprised of 16% growth in the U S and 22% growth outside of the U S.
In the U S fourth quarter 2022 procedures grew 18% year over year.
Compared to 16% for the fourth quarter of 2021 and.
An 18% last quarter the U S procedure growth rate reflected a favorable comparison to the quarter a year ago, given the impact of the omnicom variant in December of last year.
On a three year compound annual growth basis U S procedure growth was 13%.
Outside of the U S fourth quarter procedure volume grew approximately 18% year over year compared to 28% for the fourth quarter of 2021, and 24% last quarter on a three year compound annual growth basis procedure growth was 19%.
Turning to Europe procedure growth in the quarter was led by strong growth in the U K, Germany and Italy.
And the reasons noted procedure growth outside of urology was strong and general surgery and gynecology categories.
Specifically in the U K, we experienced strong early stage growth in colorectal surgery and continued strong growth in hysterectomy.
Turning to Asia growth outside of China continued to be solid with notable strength in capital and procedure growth in Japan.
Procedure growth in Korea was healthy in India, and Taiwan continue to experience strong early stage growth.
In Japan as Jimmy noted earlier 51 systems were placed in the country. The most in a single quarter.
Overall procedure growth in Japan for the quarter was led by general surgery with strong early stage growth in colon resection, and constructing and also in neurology with newly reimburse nephrectomy procedures.
And China Midway through the fourth quarter, we observed a decline in procedures.
Where is the end of the quarter, we saw a significant decline in procedure volume as hospitals were dealing with increase in Covid cases, once the zero Covid policy was removed.
As a result, China procedures experienced a modest year over year decline in Q4.
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 details of scientific studies that have been published over the years.
While still in the early stages of adoption in the U S. Robotic assisted bariatric surgery has been one of the fastest growing procedures in general surgery for intuitive.
In October 2020 to the American Society for metabolic and Bariatric surgery and International Federation for the surgery of obesity and metabolic disorders released major updates to the 1991 National Institutes of health guidelines that recommended lowering the BMI for metabolic and bariatric surgery or MBS.
Yes from 40 to 35, regardless of the presence absence or severity of Comorbidities.
These guidelines note that quote MBS is now preferably performed using minimally invasive surgical approaches laparoscopic robotics and close and that quote M. B S is the most effective evidence based treatment for obesity across all BMI classes and quote.
And another very entre analysis, Dr. Wang barley from St Lukes University Hospital in Bethlehem, Pennsylvania.
Recently published a descriptive analysis from the M. B a S. I P database identifying the proportion of MBS procedures in the U S performed between 2015 and 2020 user.
Using a robotic or laparoscopic approach and found up to a three fold difference in the proportion of various robotic assisted M. B S cases per year.
We believe our investments in advanced instruments, and surgeon training are helping to drive adoption of robotic assisted surgery in bariatrics.
We look forward to continuing to support surgeons and their care teams as they provide high quality robotics minimally invasive care for an even greater portion of the population under the new guidelines.
A recent rectal cancer study by Doctor Fang from Fudan University in Shanghai and on behalf of the real study group published short term outcomes from our multicenter randomized controlled trial in Atlanta.
This study compared robotic assisted in laparoscopic approaches performed by experienced surgeons for middle and low rectal cancer.
Cross 11 hospitals in China with approximately 580 cases included in each approach.
With respect to perioperative outcomes the rate of patients with a positive circumferential margin was three 2% lower than the robotic assisted group.
As well as a three 6% higher rate of complete microscopic resection.
Furthermore, patients than the laparoscopic arm experienced a two 2% higher rate of conversion to open.
A three 3% higher rate of intraoperative complications was also reported in a laparoscopic group.
Notably five 8% less abdominoperineal resections, where performed in a robotic group.
Postoperatively patients in the robotic assisted arm also had a faster gastrointestinal recovery post operatively.
As well as a one day shorter length of stay and approximately 7% lower rate of postoperative complications with the Colombian didn't do a grade of two or higher.
In summary, the authors concluded that short term outcomes suggests that for middle and low rectal cancer robotics surgery by experienced surgeons resulted in better quality of resection, and conventional laparoscopic surgery with less surgical trauma and better postoperative recovery.
I will now turn to our financial outlook for 2023.
Starting with procedures.
For 2023, we anticipate full year procedure growth within a range of 12%.
The 16%.
The low end of the range assumes continued choppiness with Covid hospitalizations and staffing pressure at hospitals globally throughout the year. In addition, it assumes ongoing staffing significant challenges with Covid in China.
And uncertainty with the timing of the new capital quota.
At the high end of the range, we assume no new significant impact from Covid throughout 2023.
And assume continued growth in general surgery in the U S and diversified growth beyond urology outside of the U S.
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.
Beyond the uncertainty with Covid in China, we expect similar seasonal timing of procedures in 2023, as we have experienced before the pandemic with the first quarter being the seasonally weakest quarter as patient deductibles are reset.
With respect to revenue as we have mentioned previously capital sales are ultimately driven by procedure demand catalyzing hospitals to establish or expand robotics system capacity.
Capital sales can vary substantially from period to period based upon many factors, including National Health care policies Hospital capital spending cycles reimbursement and government quotas product cycles economic cycles and competitive factors.
Turning to gross profit.
Our full year 2022 pro forma gross profit margin was 69, 2%.
In 2023, we expect our pro forma gross profit margin to be within 68% and 69% of net revenue.
The lower estimate of pro forma gross profit margin in 2023 reflects the impact of higher infrastructure investment cost higher supply chain costs, and a greater mix of new products in particular from our ion platform.
Our actual gross profit margin will vary quarter to quarter, depending largely on product regional and trade in mix procedure mix and volumes fluctuations in foreign currency rates and the potential impact of competitive pricing.
Turning to operating expenses in 2022, our pro forma operating expenses grew 23%.
In 2023, we expect pro forma operating expense growth to be between 9% and 13%.
The operating expense growth reflects investments to advance our platform capabilities digital products, along with continued expansion into markets outside of the U S.
And spending to support regulatory clearances in clinical trials.
We expect our noncash stock compensation expense to range between $610 million to $640 million in 2023.
We expect other income which is comprised mostly of interest income to total between $140 million and $160 million in 2023.
With regard to income tax in 2022, our pro forma income tax rate was 21, 8%.
As we look forward, we estimate our 2023 pro forma tax rate to be between 22% and 24% of pretax income.
That concludes our prepared comments, we will now open the call to your questions.
Ladies and gentlemen on the phone lines, who wish to ask a question today. Please press one followed by the zero now you're going to hear an acknowledgment that you've been placed in Q U can take yourself out of that Q by simply pressing the one zero command again again for questions. Please press one followed by zero.
Our first question today comes from Robbie Marcus representing J P. Morgan. Please go ahead.
Great I appreciate it thanks for taking the questions maybe to start you know the Opex guide it came in a lot better than expected.
But balanced that with Oh, taking it longer to get through the regulatory cycles and bring to market with a new robot. So maybe you could talk about what exactly is taking longer or there are certain trials that maybe hadn't had to be done in the past there now being required and is this a.
Our global regulatory lengthening of time or are there specific markets that are taking longer to come up with a new robot.
Alright, Thanks Robby.
I think we've been sharing with you over several quarters now in terms of.
New technologies and new indications, we've seen in many of the core markets not every single one but many of them additional data requirements.
That changed probably four years ago.
But it has been playing all the way through so it's not so much that the environment has changed over that period, just the implications of that and you see that in things like S. P. R. S. P trials.
Five or six years ago would have come to market differently and they're requiring some.
Prospective human clinical work.
That's not unique to S. P. It really has to do with what the underlying technologies are in what.
New indications might be.
So I think that is playing through relative to prior iterations of systems and features that's true certainly in the United States, we've seen with the European regulatory changes over the years increased data requirements in Europe , and then it kind of varies by country from there.
In terms of Opex, perhaps I'll, let you ask a follow up question for Jamie on that one.
Yeah, and Jamie maybe to follow up on the Opex and I'll I'll tie in Capex here that there is a a good investment there for the future.
Maybe talk to where you're seeing the decrease in opex SG&A versus R&D and <unk>.
Where the the lower spending growth rate year over year is coming from thanks.
As fab will be that we're investing differentially across the areas of investment and the functions within the company areas that are priorities for the twenty-three with respect to operating expenses to drive growth in the areas of focus and we're being focus that we're looking to execute some opportunities to expand market.
Gaining additional clinics.
Clinical indications and geographical clearances, and obviously, we want to advance our technology.
Within SG&A, what you see in subsets of the G&A functions and you're just looking to pursue leverage it as we've described and generally from an R&D perspective, there are some investments to Gary as previously referenced we're sequencing and that's partly motivated by the way in which head count has expanded over the let's say the last.
A year or two and with moderate moderate head count growth as described and that gives us the opportunity to absorb some of that head count.
For you to grow at relatively similar rates next year.
Great I appreciate you taking the questions.
Yeah.
Well go to line of Larry Big Olson with Wells Fargo. Please go ahead.
Good afternoon. Thanks for taking the question one on your carry your new systems comments and one on the industrial scale comments that you made today at J P. Morgan. So you know you talked about core technology changes often requiring the clinical trials.
You won't launch a multi port system in 2023, So Gary Mike. My question is a you know will you start a clinical trial at a new system in 'twenty three and B. If you did start a clinical trial would you disclose that publicly even if the trial were outside the U S. A in a developing market.
Oh across our systems.
Whether it's S P I N or otherwise and so the answer there is we have some places where those are publicly disclosed per normal rules for competitive reasons, we don't try.
Try to detail them too much and that's the position we'll take going forward.
That's fair enough.
Gary you talked a lot about you know you used the term industrial scale a lot recently, what does that mean exactly.
What are the implications for intuitive financially. Thank you.
I'll take the what does it mean in and I'll ask Jamie to help me on the detailing on the finance side.
One of the things that's going on is that we are.
Becoming well integrated into many surgical practices in several countries.
That's a great opportunity for us and in a serious responsibility as we've seen the last couple of years with regard to supply chain robustness and other things, making sure that we have a supply chain stability that we want.
Vertically integrating where we can we have been doing that.
A lot of the imaging pipeline.
Work that we've done we think that the both gives us higher quality. It allows us to lower cost to the customer and it gives us robustness. We can plan for that robustness, that's true not only in imaging, but in some core technologies in instruments and accessories and we think those are good long term investments. So that's been really positive theres another.
Place, where our digital tools and our digital products are.
One of the things that's going on that I think is powerful for the company is not just product architecture, but business architecture, and what I mean by that is that our supply chain can support multiple platforms and multiple countries around the world. It can by that I mean, multi port as single Port an eye on.
Our digital products architecture also was seamless and can integrate and support those platforms. So that gives us a great quality advantage. It gives us a leverage capability and allows us to lower the total cost.
For our customers and the cost to serve for our customers.
Those things take some planning and some forward investment and it can be in core technology. For example in digital it can be in facilities.
Manufacturing base. So we can build our products, but it's that opportunity, it's a global opportunity to help support the standard of care in multiple countries.
I think that the.
Customer advantages are quite clear and I think the cost robustness and long term durability advantages for the company are quite clear, but that takes some capital investment that will play out over time Jamie.
Jamie any help you yogesh.
I would just say industrial operating industrial scale is linked to the capital expenditure plans that we've described the 800 to a $1 billion of investment in 'twenty three.
Just add the financial ROI calculations on those investments are relatively straightforward and we think there are real advantages in having large highly automated factories, but run at scale and that's an advantage both for us and for our customers.
So the return calculations are relatively straightforward and they're essentially the incremental gross margin dollars, we can drive from growth.
Alright, Thank you very much thanks, Larry.
And next we'll go to line of Travis Steed with Bank of America. Please go ahead.
Hi, Thanks for taking the question just curious Gary I mean, you mentioned no new multi port platform in 'twenty, three but but curious how you're thinking about upgrades of gen. Four.
Mostly just around the software upgrades, you've mentioned or if it could be something more material capability upgrades on hardware imaging or are things that bring the cost per seat or procedure down.
Yeah, we continue to add capabilities into Gen. Four we expect to do so this year as well some of it will be an advanced instrumentation.
We are doing some nice work in our energy systems.
On the both on the hardware.
Hardware side and some of the software side and we think there is some capability improvements that we're gonna be developing over time around.
Core imaging capability and in Gen. Four so we continue to make progress.
Okay, but not saying anything to come in 'twenty three are not on on that front and then while I have you just in your early comments on the capital funnel in 'twenty three I think last year kind of January February time frame. It's fun customers are evaluating budget. So just want to make sure things seem fairly stable what capital funnel.
On the capital funding side, what I'd say is given the macro.
Inputs from customers or our sense is that they are still relatively cautious I think there's quite a bit of uncertainty still in the macro and while for example, staffing shortages have improved.
There's still quite a bit worse than pre pandemic levels in terms of labor costs vacancy rates for hospitals.
They are being careful from a financial perspective in that cautious given macroeconomic uncertainty I think our experiences in the second half of 2022 has been where customers are seeing nice growth in their robotics programs da Vinci stays as a relatively high priority in terms of their capital budgets.
But beyond the fact that that cautious I wouldn't say, there's anything specific I'd highlight in terms of 'twenty three outlook.
Okay, great. Thank you.
Okay.
And our next question will come from the line.
Of Rick Wise with Stifel. Please go ahead.
Good afternoon, Hi, Gary.
Starting off maybe with the new system. Thank you for being so clear about your thoughts about.
The timing of a new system.
Not in 'twenty three.
But at a high level could you talk to us a thinking about why or why not I mean, I know obviously you.
You always are the companies.
For your diary history, you're always thinking about what's next and getting ready for it.
But how are you is it debt.
The technology that you wanted to have.
It isn't ready yet or this is more about competitive positioning or the difficult external environment on capital makes you hesitant to go ahead this year.
Just trying to understand your thinking about it and how.
What that might say about the future.
We thank you for the question, we think mostly about what can we do that changes the the experience of surgery for.
The patient in terms of outcomes and the care teams in terms of how they deliver that set of outcomes and what we can do in terms of a technology basis products and services and training that can help that happen that that is the primary thing. That's the thing that is front and center and we do design studies research usability effort all the.
You would expect for us to make progress and then we try to advance that.
As quickly as reasonably we can given the environment that we're in we don't do too much.
Perfection of timing about what we think the hospital capital environment is going to be we don't.
You can imagine somebody doing that that is not my highest motivation I think these things are sophisticated enough and complex enough to bring to market that trying to time it perfectly with regard to the macroeconomic environment is not what were really driven by.
We work closely with our technologists, who are I think spectacular we work closely with regulatory bodies around the world to understand what their needs and requirements are and of course, we work very closely with key customers to understand whether the things we think matter matter.
And those are the things that we really do and once we find a pathway then we worked down that pathway.
I have to say that supply chain disruptions that have happened in the last three years have impacted not only production capability, but the impact new product development as well because that puts waves and ripples into.
What kind of items people can procure for prototypes and other forms of focus so theres a little bit of that in there too.
Thank you and just as a follow up.
If you could expand further on your China comments.
Particularly related.
Related to new tender quota expectations and I just want to make sure I'm understanding carefully are all understanding.
Your thoughts or your embedded talks about a procedure recovery as.
Slow as the year unfolds. Thank you very much.
Yes, I think what we're saying is we saw.
China procedures impacted in November that go more severe than in December has continued so far in the early part of January and we expect therefore procedures in China to be at least impacted in Q1, and perhaps beyond and I think it's difficult for us to predict given the relatively unique situation China is in real.
<unk> to the zero copay policies as they have had so we're not we're not making any specific predictions as to when and how that might recover.
Brian laid out how that is reflected in our procedure guidance that we provided.
Separately on on Nicola.
In the third yeah again of the kind of new quote a period. The last two quotas have been issued in the third year, we only use as a historical reference nothing more we don't have any particular insight as to when a new quota might come.
Thank you Jamie.
And our next question will be from the line of Matt Taylor with Jefferies. Please go ahead.
Yeah.
Hi, Thanks for taking the question.
I wanted to ask one on China, you talked about the uncertainty with refreshing the quota and then some new.
Local competitors, they're competing for tenders I wondered if you could kind of flesh that out a little bit and talk about any insight you have into when and how much the quota. It can be and then could you give us a flavor for how competitive you think the local competitors will be to compete with the tenders in China and beyond.
I would just say the underlying demand for robotics technology in China, If you take a mid and long term view.
It's quite strong and our experience. So far has been that surgeons care about the capability and feature set of the products that they use that.
Again, we don't have any particular insight with respect to timing and size of quote.
We saw that the last call we received was higher than the previous one.
But we haven't we have no ability to predict it will be larger again so.
We'd love to be able to give you greater clarity.
Car even than that Tim was the second part of your question Matt.
Why don't I take that one that was a little bit about local competition and what what kinds of things we're seeing.
First I think the entry of competitors in China is natural and should be expected I think in some ways. It's probably a net positive in terms of how people think about the quota.
More people advocating for the value of this in the market, it's probably a net positive over time, therefore for market development also.
In the near term.
Early markets, we've seen this everywhere.
Around the world with new systems entering the very early entry.
It is different than the middle is different than the late in the early there tend to be a lot of placements a lot of things around clinical trials.
A lot of things around setting up all the capacity that that are.
In some sense not not indicative of value based or feature based competition and what we're going to see some of that early on and then after that wave goes through the putting your clinical trial systems out then it starts to settle down and you see a little bit more.
Or what the core competitive dynamics look like so we're really really in the early.
Innings with what we're seeing in China competitors, and I expect them to be active in.
The sort of.
Okay, great. Thank you for the color.
Next we'll go to the line of Anthony Petrone, representing the Mizuho Group. Please go ahead.
Ah Thanks meal, one on on overall pricing as it relates to just the update here on the multi port system and then a follow up on procedure volume specifically in the U S. On pricing just trying to understand the dynamics here, we have higher input cost as it relates to R&D.
There is inflation.
And there's a heavy capex cycle. So you can sort of a you know on the one hand push that through the higher pricing.
For our Nextgen robot, but on the other side, we have obviously hospital somewhat constrained here an intuitive now has a licensing model. So when we think about in a long gated regulatory cycle how does that.
Influenced the pricing strategy on the Nextgen robot and then just quickly on procedures, the the lower BMI threshold the new guideline.
40 to 35, it seems like a big deal.
Is that contemplated in the 12% to 16% procedure guidance. Thanks.
Just with respect to pricing I'll only comment on current products in the portfolio. As you described what we're seeing is core costs in our supply chain. The prices, we pay our suppliers the wage cost we pay our production staff. They are they have they have gone up and that looks sticky.
We have a routine process, we use to monitor pricing on an ongoing basis, we will continue that process.
Nothing that we would highlight at this point with respect to any specific decisions that we've made relative to pricing, but it's something that we're monitoring careful carefully through the existing processes that we have.
With respect to your question on Bariatrics and the change in BMI guidelines I think it's really early to determine what effect if anything that might have in terms of the total surgical time for bariatrics.
So therefore, there's nothing reflected in the 12% to 16% guidance that we provided and I wouldn't expect it to move that quickly.
And there are by the way in Bariatrics, there are kind of real protocols patients have to go through with respect to a set of activities that they undertake before they become eligible for surgery, even with this change in guidelines.
Yeah.
A tiny bit on on pricing and margin.
On the pricing side, we look all the way across the total cost of ownership for our customers and make sure that's matched to value. So what's the value. We can bring in and then what is the pricing that does that we do that as Jamie said routinely and we do it by country. It's it's a it's a global look.
With regard to some of the pressures on margin, whether they are inflationary or what have you.
Jamie's point some of those are sticky we understand the levers that we have whether it's in design or scale or production or are there other opportunities in and we are in pursuit of those I don't think we're confused about where to go from here some of them take a little while so some of the investments we're making some of the automation that we talked about some of the factory automation were.
Talking about but those are things that they give us.
Better control of cost over time, and so I don't think we're confused or.
Really caught off guard by.
Some of the changes of the cost inputs.
Thank you.
Yes.
And we have a question from the line of shotguns Singh with RBC. Please go ahead.
Great. Thank you for taking the question just a clarification and then one on island on the immune system, you said not 'twenty three but could we expect something in 'twenty four or you know if you have to initiate a clinical trial and depending on the size of it et cetera.
I'll be looking at a launch beyond the 24 timeline just just any preliminary color would be helpful. And then you did talk about.
The lowering the total cost to treat them as well as expansion in different kinds of procedures.
Color beyond what you provided on the call on what kind of advancements or any look into.
What what could allow you to achieve that in the new system.
And then on island I was just wondering if you could talk a little bit about the expected impact of the full set of the precise or to your results.
And also any progress that you're making on indication expansion and location technology. Thank you for taking the questions.
Okay, nothing nothing further to detail on on multi port beyond what we've discussed already.
With regard to opportunities for our platforms period.
We have opportunities across our set.
Well, you know I've talked to you a little bit about what we're doing in S. P already.
We will detail that more as it unfolds.
Procedure markets for Us, which we're excited about on.
On the on the Ion front, you asked a little bit about the precise tier data I don't have anything more to detail on that.
Feedback from the field, we have outside of that specific study has been.
That it's delivering on the promise of that folks are finding that it's usable that it that it is.
With supplying the outcome that they had hoped and we're seeing that reflected in the adoption. So we're pleased with that with regard to ablation. We are as we said last quarter. We're just at the early innings of.
Engaging customers in Europe , and looking at the trial data. We're excited by it I think there are several indications and along that we'll pursue over time, we will detail those more as we get more experience and more time, there are opportunities outside belong to I want to be clear.
We think those are interesting, but theyre not areas of current focus we really think.
<unk> finished the job we started we have great engagement with Pulmonologists and thoracic surgeons, we have opportunity to continue to support them to make our products ever easier more robust.
And to move the margin.
Structure, where we wanted to go we're going to focus on that and then we will move to other indications in the lung and then from after that we will have earned our opportunity to do the next step.
So thank you for the questions there.
Well that was our last question.
In closing we continue to believe there's a substantial and durable opportunity to fundamentally improve surgery and acute interventions. Our teams continue to work closely with hospitals physicians and care teams in pursuit of what our customers.
Have termed the quadruple aim.
Better more predictable patient outcomes better experiences for patients better experiences for their care teams and ultimately a lower total cost of care.
We believe value creation in surgery, and acute cares foundation to human.
Rose 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 are identified earlier and treated quickly so patients can get back to what matters most.
Thank you for your support on this extraordinary journey, we look forward to talking with you again in three months.
And ladies and gentlemen that does conclude our conference for today. We thank you for your participation and using the AT&T event services you may now disconnect.
Oh.
Oh.
Yeah.
Okay.
We're sorry your conferences ending now please hang up.