Q1 2023 Intuitive Surgical Inc Earnings Conference Call
Ladies and gentlemen, thank you for standing by and welcome to the intuitive quarter. One 2023 earnings released at this time all participants are in a listen only mode. Later, we will conduct a question and answer session to ask a question. Please press one and then zero on your telephone keypad.
If you should require assistance on the call you can press Star then zero and as a reminder, this call's 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 first quarter earnings Conference call with me today, we have Gary <unk> our CEO .
And Jamie Smith, our CFO .
Before we begin I would like to inform you that comments mentioned on today's call may be deemed to contain forward looking statements.
Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These.
These risks and uncertainties are described in detail in our security and Exchange Commission filings.
Including our most recent Form 10-K filed on February 10 2023.
Alright, SEC filings can be found through our website or at the SEC's website.
Busters are cautioned not to place undue reliance on such forward looking statements.
Please note that this conference call will be available for audio replay on our website at intuitive dot com on the events section under our Investor Relations page.
Today's press release, and supplementary financial data tables have been posted to our website.
Today's format will consist of providing you with highlights of our first quarter results.
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 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 use of our products grew strongly in the first quarter versus a year ago helped by a positive surgical trends and strong execution by our team.
New capital installs were likewise strong as customers built their da Vinci and island system capability capacity to meet demand.
Revenue grew 14% on the back of us continuing to adoption.
Manufacturing and supply challenges this quarter negatively impacted our product margins. This is an opportunity for sharper execution going forward.
Our R&D and innovation engines are making good progress with a strengthened and adoption progress in our digital efforts and indication expansion for ion and SP.
For all of our core business remains strong with some near term procedure and product cost dynamics that we'll discuss today.
Starting with procedures, we saw surprising strength in the quarter led by general surgery in the United States and procedure growth beyond urology outside the United States.
On a procedure basis cholecystectomy bariatric surgery in hernia repair led the way.
All of our major all our major regions performed wealth standouts included India, Spain, U K, Japan, Germany and Italy.
U S performance was significantly above trend in China is recovering from lows in Q4, though not yet meeting our expected 2023 run rate.
Given the first quarter of the year exceeded our procedure expectations, we're reviewing underlying drivers there.
Return of patients to health care providers and diagnostic pipelines post pandemic continues with evidence of both an increase patient census, and some diagnostic pipelines running above pre pandemic levels. After several years of lag.
We also see a commitment by our hospital customers to work through staffing constraints to maintain surgical volume.
Lastly, customers are expressing confidence in our products as a clinically and economically sustainable path forward for minimally invasive surgery.
Taken together, we see continued share gain from open surgery, and laparoscopy and several procedures and in several countries as evidenced accumulates in our favor.
Strong growth in procedures and a capable product portfolio has supported a healthy capital placement quarter.
Worldwide, we placed 312 da Vinci systems in 55 Island systems in Q1, compared with 311 da Vinci systems in 34 systems in Q1, 2022.
Capital placements were healthy in the United States, our distribution markets U K and in India in the quarter.
Our product portfolio and our teams are competing effectively with the offerings of a growing set of competitors, notably in O U S markets, where customers have had more time to evaluate the relative strength of our offerings.
Procedures per system per quarter grew 13% during Q1 versus a year ago.
Systems are being used more hours per operating day and customers are increasing the mix of shorter duration procedures.
Both trends are good long term indicators for our business customer.
Customers are finding more value in their systems and are moving more of their procedure volume all toward devices compared to other surgical approaches.
Turning to our finances, a revenue growth of 14% reflects the strength of our procedures and capital placements, while average selling prices remained stable.
Our margins were pressured primarily by charges taken of our stapling line due to raw material a lot nonconformance that necessitated scrapping instruments.
We also experienced lower manufacturing yields during the bring up of new production lines in our high volume production facilities to support multi port accessory and I on catheter growth.
Customer availability was briefly impacted for stapling, but has since recovered and we're working on bringing customer stocking levels back to their par levels.
For our ion catheters, and our multiport accessories were investing in capabilities to increase yield and robustness in the face of rising demand.
We've worked through the issues that drove the bulk of the scrap charges in the quarter.
Finally in SG&A and R&D, we're spending roughly to plan, while continuing to pursue productivity improvements post pandemic.
Jamie and Brian will take you through our finances in forward outlook in more detail shortly.
On new products and indications, we've had a productive quarter.
We received our CE Mark for ion and we expect to launch in the U K is our first entry into the European region.
As we focus on scaling ion we initiated our first time high volume production lines in our Mexicali facility, increasing production volume, 50% over just the prior quarter.
In digital our simulations subscription install base grew 36% year over year as virtual reality training becomes more deeply embedded in the training pathway.
Our intuitive hub install base grew 41% year over year and utilization during da Vinci cases grew 80% year over year.
As customers use our intuitive hub computing system to record and analyze procedures more routinely.
Turning to S. P. We received new indications for SP in the United States through a 525.
Five 10-K clearance in urology.
Covering simple prostatectomy.
<unk> have a noncancerous prostate for treatment of advanced benign prostate hyperplasia.
We also installed our first da Vinci SP system in Japan, and they completed their first set of cases.
For 2023, our priorities are as follows.
First we're focused on increased adoption for our priority procedures in countries through outstanding training commercial and market access execution.
Second we're pursuing expanded indications in launches for our new platforms.
Third we're focused on excellence and continuity of supply product quality and services provision as we emerge from pandemic stresses and finally, we're pursuing increased productivity in our functions that benefit from scale.
You can see from our first quarter results the relevance of these priorities and our urgency in pursuing them.
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 outperformance on a non-GAAP or pro forma basis.
I will also summarize our GAAP performance later in my prepared remarks.
Reconciliation between our pro forma and GAAP results is posted on our website.
Before I dive into the details about Q1 results I would expand on the two areas of note in the quarter as Gary highlighted.
<unk> growth and gross margin.
Global procedure growth in Q1 of 26% came in well above our expectations.
Notable strength in the U S where procedures also grew by 26%.
As a reminder, procedures in Q1 of last year reflected an adverse impact from Covid and the early part of the quarter in the U S. In the latter part of the quarter in Korea and China.
We believe that the return of patients to normalized health care routines, including diagnostics and improved staffing levels have positively impacted this quarter's procedures.
However, it is difficult to precisely characterize or estimate the degree or duration of this impact.
Looking at the monthly trends in the U S January and February were particularly strong relative to historical seasonality.
In March we saw more normalized growth rates.
Outside of the U S procedure growth of almost 28% was also ahead of our expectations with growth outperforming expectations across all our major international markets.
In the first quarter non urology procedures represented roughly half of our total O U S procedures grew 35% from Q1 of last year.
Brian will provide additional commentary and our updated procedure outlook later in the cole.
Pro forma gross margin in Q1 was below our expectations at 67, 2%.
Lower than last quarter at 68, 2% in last year's 69, 8%.
Q1 results reflected one time adverse impacts of approximately 100 basis points relating to manufacturing related issues and an increase in inventory reserves as Gerry detailed.
While we largely resolved with these one time items in the quarter, we see opportunity to strengthen our manufacturing operations and improved product costs.
This is a priority for our business unit and operations teams and aligns with our capital investment plans as we described on last quarter's cole.
Turning to other key metrics in Q1, the installed base of da Vinci systems grew 12% to almost 7800 systems.
Driven primarily by demand for additional capacity given procedure growth.
Average system utilization grew 13% year over year significantly above long term trends driven by notable strength in procedure volumes in January and February and by an increasing mix of shorter duration benign procedures in the U S.
While we do not expect this level of utilization growth to continue we actively support our customers.
They increase utilization of the da Vinci systems, which in turn lowers their per procedure costs.
With respect to capital performance.
We placed 312 systems in the first quarter ahead of our expectations with notable strength in O U S markets.
Current quarter placements were roughly even with the 311 systems replaced in the first quarter of last year.
That was 67 trading transactions in the quarter as compared to 108 last year.
Excluding trading transactions net new system placements increased 21% over the first quarter of last year.
As of the end of Q1, there were approximately 560 <unk> remaining in the installed base.
Approximately 110 or in the U S.
Q1 revenue was $1 $7 billion, an increase of 14%.
On a constant currency basis first quarter revenue grew approximately 17%.
Recurring revenue represented 81% of total revenue and grew 21% over last year.
Within <unk> revenue at our advanced technology categories, Stapler, and energy revenue grew a combined 26% over Q1 of last year.
Additional revenue statistics and trends are as follows.
In the U S. We placed 141 systems in the first quarter lower than the 186 systems were placed last year, reflecting a decline of 51 systems associated with trade in transactions.
Outside the U S. We placed 171 systems in Q1, compared with 125 systems last year.
Current quarter system placements included 101 into Europe , 16 into Japan, and 18 into China.
Compared with 78 into Europe , 19 into Japan, and nine into China in Q1 of last year.
First quarter system placement performance in Europe included two placements in the U K driven by timing of the NHS budget period, which closes each year at the end of March.
We placed 12 systems in India, a quarterly high for us, which in part stems from our recent procedure growth. There in Q1 procedures in India grew 55%, albeit from a relatively small base.
Reviewing the capital performance in the quarter, we do not expect the strength in U K and India to repeat in the remainder of the year.
Customers, particularly in the U S and Europe continued to be challenged by stuffing inflation debt servicing costs and other financial pressures and as a result, we expect customers to continue to be cautious in their overall capital spending.
Leasing representing 42% of Q1 placements compared with 42% last quarter and 35% last year.
We are increasingly seeing customers address system access and capital budget barriers by choosing our usage based leasing models.
The proportion of placements under the structure continued to increase particularly in the U S.
As a result of this trend and the earliest stage of our leasing program with O U S customers we.
We continue to expect that the proportion of placements under operating leases will increase over time.
Q1 system average selling prices were $1 $47 million as compared to $143 million last quarter.
The sequential increase in system Asps.
It was primarily driven by a lower mix of trade ins.
We recognized $24 million of lease buyout revenue in the first quarter compared with $17 million last quarter and $16 million in Q1 of 2022.
Da Vinci instrument and accessory revenue per procedure was approximately $1780 compared with approximately $1820 last quarter and $1870 last year.
On a year over year basis.
Ex negatively impacted <unk> per procedure by approximately $40 and ordering patterns in China had a negative impact of approximately $50 per procedure as our channel partners continue to manage their inventory levels and a dynamic environment.
On a sequential basis the primary driver of the decline in <unk> per procedure $40 was customer ordering patterns in the U S.
Turning to our ion platform in Q1, we placed 55 ion systems as compared to 34 in Q1 of 2022.
First core I am procedures of approximately 10200 increased 159% as compared to last year.
During the quarter, we received CE mark clearance for our ion platform in Europe .
While we will initially focus on the U K market and on the collection of clinical data in support of our European reimbursement strategy.
Regulatory processes for Iona continues to progress in Korea and China.
10 of the systems placed in the first quarter were SP systems include.
Including our first placement in Japan following clearance last quarter.
SP procedures grew by 37% and average system utilization increased by 12%.
To Q1 of last year.
Moving on to the rest of the P&L as previously referenced.
Gross margin for Q1 was 67, 2%.
In addition to the one time impacts described earlier.
Pro forma gross margin reflects the impact of higher components and labor costs.
Relative to the year ago period, a stronger U S dollar.
Gross margin for our ion platform is currently considerably below our da Vinci business.
<unk> in an adverse mix impact to gross margin given the higher growth rates of our Io business.
A key area of focus for our eye on and manufacturing teams over the next 18 months. He has to improve supply stresses shrimp and manufacturing capability is lower our product costs.
Iron ore prices have remained the same for the life of X side.
However, given that your ability if component cost increases throughout the pandemic.
Executing an increase to the list price of da Vinci I N a.
Only 5% over the next couple of months.
This increase reflects only a portion of the increased component and labor costs reflected in our gross margin.
We expect the impact of this decision to be an increase in revenue and operating profit of approximately $100 million in 2023.
Yeah.
First quarter pro forma operating expenses increased 20% year over year, driven by primarily by increased head count added throughout last year <unk>.
Higher variable compensation and higher travel costs and increased expenses associated with customer training.
Operating expenses were moderately above our expectations due to higher variable compensation and training costs related to our procedure performance in the quarter.
On a sequential basis operating expenses were up 1%, including the annual reset of certain payroll taxes.
Head count increased by approximately 330 in Q1 of which roughly half are in support of revenue growth.
Capital expenditures in Q1 were $197 million.
Primarily comprised of infrastructure investments to expand our facilities footprint and increased manufacturing capacity, including automation of certain production lines.
Our pro forma effective tax rate for the first quarter was 22, 1% consistent with our expectations.
First quarter pro forma net income was $437 million or $1 23 per share compared with $413 million or $1 13 per share for the first quarter of last year.
I will now summarize our GAAP results.
GAAP net income was $355 million or dollar per share for the first quarter of 2023.
Compared with GAAP net income of $366 million and also a dollar per share for the first quarter of 2022.
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.
Please stock based compensation.
Amortization of intangibles and gains and losses on strategic investments.
We ended the quarter with cash and investments of $6 $6 billion compared with $6 $7 billion at the end of last year.
The sequential reduction in cash and investments, reflecting share repurchases and capital expenditures, partially offset by cash from operating activities.
During the quarter, we spent $350 million to repurchase one $5 million of our shares at an average price of $230 per share.
From the beginning of 2022 through the end of Q1. This year, we have repurchased 12 6 million shares.
Average price of $234 per share.
And have $1 $1 billion remaining under current board authorization to repurchase our shares.
And with that I would like to turn it over to Brian who will discuss clinical highlights and provide our updated outlook for 2023.
Thank you Jamie.
Our overall first quarter procedure growth was 26% year over year compared to 19% for the first quarter of 2022.
And 18% last quarter.
In the U S.
First quarter 2023 procedure growth was 26% year over year.
Compared to 16% for the first quarter of 2022, and 18% last quarter.
Q1 growth continued to be driven by strong growth in procedures within general surgery.
Specifically growth was led by a cholecystectomy bariatrics hernia repair and other foregut procedures.
Outside of the U S first quarter procedure volume grew 28% compared with 25% for the first quarter of 2022.
18% last quarter.
First quarter 2023 O U S procedure growth was driven by continued growth in general surgery, and gynecology categories, primarily from colon resection and hysterectomy.
Growth in urology continue to be solid led by kidney procedures, along with continued double digit growth in prostatectomy.
In Europe , we experienced strong growth in the U K, Germany, Italy, and France and.
And all of the regions noted procedure growth was driven by strong growth in colorectal and hysterectomy.
Urology was also solid with particular strength in kidney procedures.
Outside of those procedures in Germany. We also saw strong growth in hernia repair and in France growth in lung resection was also strong.
In Asia growth beyond Urology was also led by general surgery and gynecology procedures.
In Japan growth was led by colon resection, a newly reimburse procedure in 2022 that provided the most incremental cases this quarter.
Growth was also robust in rectal resection, and distracted me and continued early stage growth in kidney procedures.
In China for.
<unk> started to recover in February from the impact of Covid exceeding our expectations for the quarter, but still below prior opportunities.
Growth in urology was solid in particular with growth in prostatectomy and kidney 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.
Yeah.
Starting with the clinical study for benign general surgery, Dr. Courtney Collins from Ohio State University Wexner Medical Center published outcomes, comparing robotic versus open retro muscular ventral hernia repairs in older adults using prospectively collected data from the abdominal core health quality collaborative.
National Hernia specific registry.
Published in the Annals of surgery over 1100 patients over the age of 65 were included in our propensity matched analysis with 350 patients in the robotic arm and approximately 750 patients in the open arm.
This study reported the median length of stay associated with robotic assisted <unk> was one quarter of the length of stay for patients undergoing an open repair where the one day stay in the robotic assisted arm and a four day stay in the open arm.
While complication rates were similar between both groups. It was notable that median one year quality of life scores using the Hercules quality of life survey tool.
Ended favorably for patients in the robotic assisted arm.
The authors concluded in part that their results suggests that robotic approach may offer at least short term benefits to appropriate with older patients undergoing retro muscular ventral hernia repair.
Including shorter length of stay with relatively low risk of complications with.
With the important note that surgeon comfort and knowledge of the likely come tax complexity of a repair should always guide operative approach in any patient.
Now turning to a report published in January of this year.
Doctor some AML from the Cleveland Clinic, Florida reported outcomes for robotic assisted versus laparoscopic resection, a pea for rectal cancer and the British journal of surgery.
This study leveraging data from the National cancer database and after a one to one propensity score matching.
<unk> 470 patients undergoing minimally invasive resection for non metastatic T for rectal cancer.
With 235 subjects in each of the laparoscopic and robotic assisted cohorts.
Notably.
The rates of conversions in the robotic assisted group, where approximately half the rate of conversion in the laparoscopic group with eight 9% and robotics group versus 17, 9% and the laparoscopic group.
Further analysis demonstrated the risk of conversion to open was 45% lower than the robotic assisted group when compared to the laparoscopic group.
In addition patients who underwent a robotic assisted procedures had a one day shorter length of stay compared to patients in a laparoscopic arm.
The authors concluded in part that robotic assisted resection of T for rectal cancer were associated with a significantly lower conversion rate and shorter hospital stay and laparoscopic surgery.
I will now turn to our financial outlook for 2023.
Starting with procedures.
On our last call, we forecasted full year 2023 procedure growth within a range of 12% to 16%.
We are now increasing our forecast and expect full year 2023 procedure growth of 18% to 21%.
This range continues to reflect the uncertainty associated with the course of the pandemic and macroeconomic risks.
Hello end of the range still assumes continued choppiness with Covid hospitalizations.
Uncertainty with the timing of the capital quota in China for the remainder of the year.
Macroeconomic challenges that could impact hospitals and patients spending.
And a moderation in procedures from elevated levels experienced in January and February of this year.
At the high end of the range, we assume COVID-19 related hospitalizations around the world continue to decline throughout 2023.
Our capital quota in China is available.
And macro economic challenges do not impact hospital procedure volumes.
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.
Turning to gross profit we continue to expect our 2023 full year pro forma gross profit margin to be within 68% and 69%.
Our actual gross profit margin will vary quarter to quarter, depending largely on product regional and trade in mix and the impact of new product introductions.
With respect to operating expenses on our last call, we forecast pro forma operating expense growth to be between 9% and 13%.
We are increasing our estimate and now expect our full year pro forma operating expense growth to be between 11% and 15%.
The increased operating expense growth reflects higher variable compensation and other costs related to higher procedure growth performance.
We're also updating our estimate for noncash stock compensation expense to range between $600 million to $630 million in 2023, a decrease from our previous estimate of $610 million to $640 million.
We continue to expect other income, which is comprised mostly of interest income to total between $140 million and $160 million in 2023.
With regard to capital expenditures, we continue to estimate a range of $800 million to $1 billion for planned facility construction activities.
With regard to income tax we continue to estimate our 2023 pro forma tax rate to be between 22% and 24% of pre tax income.
That concludes our prepared comments, we will now open the call to your questions.
Thank you and ladies and gentlemen, if you do wish to ask a question. Please press one and then zero on your telephone keypad.
Withdraw your question at any time by repeating the ones Youre command and if you're using a speakerphone. Please pick up the handset before pressing those numbers.
Again, it's one zero.
We will first go to Travis Steed with Bank of America. Please go ahead.
Start out with a 26% procedure growth can you just comment a little bit on how much of this is just a better hospital environment better procedure environment versus maybe some uptick in share gains from robotics and a little bit more color on the January February versus the March I'm. Just curious do you think there's just some kind of temporary.
Catch up here or some sustained better procedure environment kind of moving forward.
Travis as Jamie I think there are four drivers on the 26%, we do think theres, a little bit of a soft comp on the base period, given some impact from Covid in Q1 of 'twenty two.
You have three other drivers we think there is some backlog effect from patients.
Patients generally returning to more normalized health care routines, given the effect of the pandemic over several years included within that is <unk>.
Diagnostic pipelines, we see the last year or so of diagnostic pipelines being above pre COVID-19 levels second effect. There is strength in the U S. In general surgery, particularly benign general surgery.
And in our O U S markets, the non neurology side of our procedure categories are growing nicely.
We also think that relative to Q4 staffing has improved.
It's not where it was pre COVID-19, but I think that's allowed for some incremental procedures to be performed we don't have good estimates as to where the kind of various outperformance is between those those are categories that we described.
Date of likes that.
Certainly, there's some market share gains, particularly in benign general surgery in the U S.
What was the second part of your question Travis.
It's more of the January February versus March and if there was more of a early part of the catch up I think you answered part of that versus some sustained better environment here and into April .
Yes.
January in particular was very strong that also probably reflects in part a little bit of that come.
February continues to be strong and I characterize marches, a normalized growth rate I'm not going to give you the percentages because I think that can be misleading.
Early part of April it's difficult to look at just a couple of weeks, but I'd say generally that's consistent with what we've seen in March.
We've seen some third party data through end of February just with respect to total U S. Inpatient admissions and that shows kind of the same trends in terms of a strong January February .
That's helpful and then I Wonder if I've got the price increase on an I N a.
Ross the board for just the U S I assume but wanted to clarify that and the math I was doing about 150 basis points of margin, but the gross margin guide still staying the same at 68% to 69%. So just wanted to make sure I understood. The moving parts on the margin side and how you are incorporating that into the overall margin guidance.
Yes so.
The 5% is in the vast majority of our markets.
Smaller markets, where local dynamics are such that we have to take a look at that more carefully.
It doesn't go into effect for the full year in the next couple of months that will implement.
I think if you look at the gross margin impact of the 100 million, depending on where Youre modeling revenue I think you have to do it with and without revenue and gross margin dollars to do the.
The impact to gross margin percentage I think is less than the number that you described and yes. It is reflected in the gross margin guidance that we provided so what you have there is the puts and takes of the Q1 performance our updated outlook for the rest of the year and then you add in the effect of the price increase.
Great, Thanks, everybody and all whatever that pop out.
And next we'll go to Robbie Marcus with Jpmorgan. Please go ahead.
Oh, great and I just.
Just wanted to say congrats on a great quarter.
Maybe if I could ask on placements you know that the net placements, where we're well above consensus here in the first quarter of really strong showing.
Flat with last year pretty much despite a lower trade ends.
But that comes with your comments that it's still a fairly tight capital environment. So in a normal environment, how much better do you think you'd be doing on placements and are you seeing a an improvement at all in the capital equipment environment, certainly not holding you back here, but I'm just really curious where you think you could do.
If the environment was a bit healthier.
Yes.
Yes, I would say that the environment is still challenging and for hospitals, there's no question that.
They are encountering relatively significant financial pressures generally we see customers, particularly in the U S and Europe prioritizing their capital investment dollars based on where they see the greatest rois and where they have opportunities to gain market share.
And so for us where we see that evidence is in where they start to have procedure growth that means they're out of capacity and they look to invest in da Vinci to expand capacity given the economic evidence that they've accumulated with the experience of their programs.
To answer your question directly in terms of what would the captive environment be if it were in lets say normalized times for US I think we're focused on this period on offering customers flexibility in how they acquire capital meeting them with their financial objectives, and serving their objectives and expanding their robotics programs.
Great and maybe just a quick follow up on you know Jamie as we think about your your opex progression through the year it came in a bit higher.
Than the street had in first quarter.
You know how should we think about that flowing through through the rest of the year and was there anything or any kind of big quarters that we should be thinking about in our progression through the year. Thanks a lot.
I would say roughly.
Pending on where you are in the range Q2, and Q3 operating expenses should be roughly similar to Q1 and you start to see a less of effect from the payroll tax reset in Q2 and Q3 as those Max out and you should see Q Q4 seasonally higher.
Great great.
Great quarter again, thanks, a lot.
Actually can go down lately Burleson with Wells Fargo. Please go ahead.
Good afternoon, and thanks for taking the question.
Gary you've talked about competition potentially lengthening the capital placement cycle, but my question is if there's an effort by a competitor to discount I E by 30% or so.
How could this how would this impact your procedures and then secondly, Gary why is this the right time to increase price.
And I had one follow up.
Yeah on the on the first question of Whats real.
Reising out there.
There's a few competitors out there a couple or are trumpeting marketing claims about how much they're going to reduce pricing.
When we see them in tenders when we actually see what's written down we don't see the marketing claim.
So I don't know that that's been realized yet or if it's something they want to do in the future if they're really going to deliver I don't know, but we do have real world evidence of engagement in our O U S markets with most of these competitors and what we find is that the reality is we have a very strong portfolio, we can hit multiple price points because we.
Different systems that can hit it at different places. The other thing that goes on is that it's more than just whatever our company's supplies to get to the total price per procedure. So if a new competitor enters and they have a short procedure set in other words. They don't have everything you need a customer will have to go to third parties to fill it out to finished.
The case, often and marketing materials, they don't make that clear.
Got to have more to get the case done but in the tender you do which is hey. This is all all the stuff that it really takes to get a procedure done so.
We're feeling.
Oh pretty good about where we are with regard to our ability to deliver economic value that really matters to our customer I think that we're having real exchanges with them about what that looks like so that's kind of a baseline we have been investing in the virtuous cycle.
Any fracturing capabilities some of the capital you hear us investing as both facilities and automation are getting.
Our factories in the right places in the world for logistics into labor.
We're doing those things to be able to lower our product cost increase our quality as we get volume that has been lumpy I wish it was smoother, but it's been a lumpy process for us so the timing for us in terms of a price increase is really not about a specific issue its not about a specific competitive issue.
Scrap it's really around looking at the input costs that we're seeing over the last couple of years and component supply that comes to us from others.
Labour content labor costs, and saying, Hey, we're going to have to move a little bit here going.
Going forward.
It doesn't diminish the other programs that we've done to make sure we're bringing value to our customers extended life instruments and other price points that we can help them with.
That's very helpful and Gary just one on ion we estimate sales exceeded $140 million last year. It could drive a couple of hundred basis points of revenue growth. This year, so and thank you for giving the procedure numbers on that on this call. But my question is when are you going to start to break out.
On revenues and just maybe talk about the ramp in Europe . Thank you.
So the first question of the kind of breakouts in your estimates I'll, let Jamie answer that and I'll talk a little bit about Europe .
So little early at this point is 2% to 3% of procedures and revenue.
We want to give it a little more time get a little more experienced in the marketplace execute some of the commercial activities that we have for the year when it becomes a bigger portion of the total maybe a year from now we would look to do some guidance and give great disclosure.
On on Europe . This first year as we go in will be relatively.
Modest in terms of revenue and installs I think we will start the process. We're excited about.
Some of the sites and clinical trial work that we need to do we.
We do have to do some evidence generation in Europe , we do want to look at some of the reimbursement capabilities that are going to be important for broader market access. So year. One is really about establishing evidence having the right conversations and building a database of that.
<unk> and broader use can be it can be deployed.
Thank you Gary.
And next we'll go to Jason Bedford with Raymond James. Please go ahead.
Good afternoon, just a couple of questions.
On China.
I assume there was a backlog built in December and January and part of February .
I don't know if you commented on March trends, there, but can you comment on the procedure growth in China in the quarter and to the extent that you do believe there is a backlog do you expect a bolus of growth in that geography over the next quarter or two.
Hey, Jason this is Brian .
Good to hear from you.
If you recall it really at the end of last year, we had highlighted that we saw a a significant.
Impact from Covid at the end of the quarter to procedure volumes.
What we saw was that that actually carried over into the beginning of this year.
What we were highlighting in our prepared remarks was we definitely saw an impact in China continue through January started to see a recovery in February .
And a bit into March I guess I would say.
Overall, I think procedures in China exceeded our expectations, but it still was below our overall sales.
Long run averages over time, so it's a.
It's probably all that I can say, maybe anything beyond that I couldn't say, if theres anything different in March versus February .
I would just add Jason that that may be still some some unmet backlog in China.
If there is probably relatively small and it's captured within the procedure range that we provided.
Yes.
Okay and just another quick clarification question.
Apply challenges impacted margins was there an impact on revenue in the quarter and just curious how long it'll take to replenish the normal inventory levels.
Customer level.
Yeah, there was not an impact to revenue that I'd highlight in Q1. It was really just the gross margin impact of about 100 basis points to there'll be highlighted.
With respect to inventory if I just look at the Big picture, we've been trying to replenish inventory targets for each of our critical path for some time, we've been supply constrained for a good portion of the pandemic.
<unk> health improved in Q1 relative to Q4, but we still have a number of parts, where we have to get to our target levels and that will probably take us over the course of the rest of the year.
Just a note supply chain shocks through the last couple of years depleted inventory now we're building it back up and given a.
Given some of the lack of smoothness would probably holding a little more inventory than than we would.
More smooth times.
Got a little additional inventory increases.
You know risk at some point so we we.
We saw that in this quarter.
We will work through it this year, but I think that risk still exists a little bit as inventory levels.
Our higher than they were the last two to three years as we recover.
Thank you.
And next we'll go to Richard New header with twist Securities. Please go ahead.
Alright, thanks Congrats.
Congrats on the quarter I've two quick ones on an S.
SP I think you had said that <unk> procedures grew 37% in the quarter. If you could just remind us kind of how that stacked up for the last two quarters and then the second one on SP, just the the new indication there for BPH.
Significant is that and maybe just talk a little bit about it.
How expensive that is free and I have one follow up.
I'll, let Jamie take the trend data and I can talk about BPH.
The 22 procedure growth rate for SP, I think it looks like Brian is looking it up I'm going to do the second question first and then Brian is going to come back and save the day.
On BPH. So there are a lot of different treatments for BPH, so quite common condition.
Oh, that's smaller prostate sizes when it's caught earlier there are pharmacological approaches there are some minimally invasive in office approaches.
Those tend to delay further onset adult tend to to cure.
So folks over time fail out and as they fell out of those other procedures surgery becomes increasingly important.
Early days it looks to be quite interesting. It's a minimally invasive approach. It can deal with advanced stage disease that we think other approaches are not handling well at all and so as we get involved I think that's.
Another arrow in the quiver of an S. P. Urologist I think that helps them, we're already engaged with those customers and it may give us a lead to participate in a bigger part of that market as time goes on but back to the trend data I'll go back if I just take 22 as a whole SP procedures grew 38% so relatively consistent.
Great and just on the benign procedure commentary.
Such an enormous step up particularly in the U S. I appreciate easier comps, but what what.
With a benign procedures potentially saw a little bit disproportionate lift this quarter confined just to general surgery benign procedures or was it you know.
Also inclusive.
Benign you I am just trying to get a sense for kind of where this procedure strength really derived.
Relative to trend lines, we saw benign strength in G. Y N also so benign Julien growth rates were higher than we've seen in recent times and higher than long term trend rates and we think that speaks to kind of this backlog of patients returned to normal healthcare routines et cetera that that's part of what's reflected in those.
Growth rates.
Thank you at the risk of Riemann being redundant I think theres two concepts that are worth stitching together, but one of them is that utilization went up.
The 14% in the quarter procedures per system per year. So folks are using capital more frequently there was an increase in the benign side.
So we're seeing a rotation of mix of putting of those procedures onto systems that they own already.
That was a big step up I think it speaks to how hospitals are thinking about robotics assisted surgery programs and how they're thinking about capital and the simple answer is they are looking to see greater capital productivity out of what they already own.
And they see through real world evidence the ability to look into their own electronic medical record data that their outcome.
Outcomes are really good with robotic assisted surgery in their contribution margins are really healthy so rotations onto those systems are happening and I think that's been an acceleration at least in this quarter. So we'll see if it holds through the year, but I think it tells you a little bit about the capital environment and it tells you a little bit about the commitment toward robotics assisted surgery.
Securely and higher volume shorter duration procedures.
Thank you.
Yeah.
Next we'll go to Matt Taylor with Jefferies. Please go ahead.
Hey, guys. Thanks for taking the question.
So I just wanted to ask one.
Because you had with <unk> performance in procedures and talked about increased procedure guidance for the year.
As you unpack that at all geographically or just by area. It sounds like general surgery is very strong, but just any more color on expectations for procedure growth in these different geographies with some of the fluctuations that we're seeing or by category would be great.
Yes, I would say.
Major international markets, So in Europe , Germany, France, UK, Italy in Asia, China, Japan, South Korea.
They all performed well in the core.
They all exceeded our expectations and what we're seeing within those categories within those market is nice growth in non euro off non neurology, so hysterectomies colorectal thoracic depending on the market.
We're starting to see albeit early stages some of those procedures in those markets starting to go into an adoption curve.
So I think the.
We're a relatively optimistic on the outlook for those markets.
Our expectations are reflected in the procedure guidance range that Bryan provided.
Great. Thanks, Jamie just wanted to follow up on.
The kind of the China disruption.
Are you seeing that come back now and are there any other geographies, where youre still seeing any notable disruption in any recovery expectations you can provide.
So I think Brian described what happened in Q1, we saw an impact in January in China.
Start to recover in February and March I think the dynamics in China are relatively choppy.
And I think it's a relatively dynamic market. So rest of the year I think there is relatively hard to predict with respect to COVID-19 impacts in the other markets nothing that I would highlight I do think that the financial pressures staffing dynamics have as much of an impact in many of the European market as they do that.
Yes.
Yeah, I'll speak to some of my perspective on China, a little bit.
I think it's a little bit different market for us than other places.
One is.
Earlier questioner asked do we think there'll be a backlog and it will recover certainly.
As they reopen there'll be a backlog that of patients that need to come back to surgery, where such a tiny part of the overall surgery market.
We're so small relative to the total market size given the constraints of the quota that how much of that comes to us and go somewhere else is going to be hard for us predict we're just gonna have to live through it. So that's kind of number one the <unk>.
Second one is the demand side is really high the demand for additional systems in for training and.
Asian demand for a high quality Mis is really good we're waiting on clarity on additional quota, which is throttling the market right. Now. So those are the two things that that I think I have to clear up we'll see patients come back at some rate whether they wait.
To get a robotics surgery in Q, where they jumped out of queue to get it in any way that they need to get it that's going to be hard for us to know personally and we'll see as the government response to release a new quota.
Gotcha.
Thank you guys.
Uh huh.
And next we'll go to drew Ranieri with Morgan Stanley . Please go ahead.
Hi, Thanks for taking the questions Gary just maybe on placements for a moment you touched on this earlier, but can you give us any more context, specifically in the U S looks like what you're seeing in terms of capacity expansion versus new accounts, just adopting robotics. After 20 years would just like to hear your perspective, there and I had a follow up I'll take the first.
Part.
<unk>.
Spansion into Greenfields versus accounts that are already owned to Jamie last few Jamie to think a little bit about there's corporate ownership idms and Theres hospital level ownership within those ideas as to where they had a robotics program or not so perhaps tease those two apart a little bit.
If you look at maybe a five quarter average drew in the U S.
Bell 20 ish percent of the persistent placements of Greenfield accounts, but those greenfield accounts. So really at hospitals are part of a regional or national IV and that have not had a robotics program generally they have a higher mix of benign procedures.
Benign general surgery in particular and as the idea and at large is seeing growing economic and clinical evidence for those procedures, particularly on the economic side they've started to establish robotics programs in those greenfield accounts again as part of an existing IBM that we do business with.
If you look at kind of the trend line last couple of quarters, we've seen a little.
Less greenfield mix in this in our system placements I don't know that Thats a trend.
On a five or six core basis its relatively stable.
Just adding a little bit to your perspective, as we sit with our and level.
Customers and talk about this one of the things that.
Has been really exciting for us is in the last few years the ability to analyze carefully with the kind of data we can bring in the kind of data those those <unk> have in terms of their electronic medical record to both understand which which hospitals would benefit for robotic programs on what the total profitability is in their hands when they do it.
That resolution has gotten a lot better the quality of those conversations is fantastic.
The confidence I think they have to reinvest.
Because they can see the data and in their own hands, even if they don't have it at a particular hospital somewhere in their network. They have it and they can do that analysis.
That has changed the nature of the conversation in the last few quarters.
I think youre starting to see the reflection of that now.
Just one more question please.
Okay.
Gary just with about 4700 systems in the U S. Right now as you're thinking about competition eventually entering the U S kind of what are your thoughts on.
Robotic practices being multi disciplinary and robotics systems first center organization, which has been kind of a key effort of yours over the past several years. Thanks for taking the questions. Yeah. Thank you.
I think that not all customers are the same there there are different customers that I have a different mission some customers.
Our view themselves as wanting to be test sites for anything that comes out and they will do that.
Some customers want to be training facilities, and and as a result, we want to be able to train anybody from any setting at all and all commerce. So we're going to see us.
Some cross systems sites.
But I think that's different I think that's not the majority of the market I think a lot of the market is going to be interested in great outcomes.
Hi, applicability of their systems, so that they can be used across multiple procedure categories.
And serious dependability.
Are now being used more frequently they're a part of everyday.
Surgery for tens of thousands of surgeons now.
And I think in that category of the bulk of the market repeatability dependability outstanding outcomes great access.
Great regulatory approvals and a lot of confidence in the company that can deliver it I think those things are going to be assets and we'll see I don't have a crystal ball, we'll see how it plays out but so far so good.
I'll go ahead and close from here.
Thank you in closing we continue to believe there's a substantial and durable opportunity to fundamentally improve surgery and acute interventions more broadly.
Our teams continue to work closely with hospitals physicians and care teams in pursuit of what our customers have termed the quadruple aim.
Or 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 care is foundational in 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 hardwood 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.
Yeah.
Thank you and that does conclude the call for today. Thank you for your participation for using AT&T teleconference. You may now disconnect.