Q2 2023 Intuitive Surgical Inc Earnings Call
Speaker 2: Ladies and gentlemen, thank you for standing by and welcome to the intuitive Q2 2023 earnings release. At this time all participants are on a listen-only mode. Later we will conduct a question and answer session. To place yourself in key for questions, you may depress one and zero at any time on your telephone keypad.
Speaker 2: You may remove yourself from that cue by also repeating the 1 then 0 command.
Speaker 2: As a reminder, today's call is being recorded. I will now turn the call over to your host, head of investor relations, Brian King. Please go ahead, sir.
Speaker 3: Thank you.
Speaker 2: Good afternoon and welcome to Intuitive's second quarter earnings conference call. With me today we have Gary Guthart our CEO and Jamie Sumath our CFO .
Speaker 2: Before we begin, I would like to inform you that comments mentioned on today's call may be deemed to contain forward-looking statements.
Speaker 4: Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties.
Speaker 4: 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 10, 2023 and Form 10-Q filed on April 20, 2023.
Speaker 4: Our SCC filings can be found through our website or at the SCC's website.
Speaker 4: Investors are cautioned not to place undue reliance on such forward-looking statements.
Speaker 4: Please note that this conference call will be available for audio replay on our website at www.Intuitive.com on the events section under our investor relations page.
Speaker 4: Today's press release and supplementary financial data tables have been posted to our website.
Speaker 4: Today's format will consist of providing you with highlights of our second 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.
Speaker 4: 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.
Speaker 4: And with that, I will turn it over to Gary.
Speaker 5: Thank you for joining us today. The fundamentals of our business were healthy in the second quarter, with strong procedure and utilization growth and strong capital placements.
Speaker 5: Our product operations teams continue to build capacity and deliver in a dynamic supply chain environment as customers increasingly rely upon us for routine use.
Speaker 5: Our research and development efforts continued to build momentum in the corridor, including positive development milestones for our intuitive ecosystem.
Speaker 5: including systems, instruments, accessories, digital tools, and new indications.
Speaker 5: Turning first to procedures, growth in the quarter was 22%.
Speaker 5: Areas of strength include general surgery and gynecology for benign conditions, particularly in the United States.
Speaker 5: General surgery procedure growth was led by cholecystectomy and hernia repair.
Speaker 5: Colon and rectal procedure growth was healthy.
Speaker 5: Global procedure growth was also strong in the quarter, led by a recovery in China and continued strength in Japan, Germany, and the UK.
Speaker 5: Ion procedures showed continued strength with 145% growth in Q2 of 23.
Speaker 5: SP procedure growth was accretive, with 40% global growth in the quarter driven by accelerating growth in the United States.
Speaker 5: On the capital front, we placed 331 systems in Q2, compared with 279 systems in Q2 of last year.
Speaker 5: Our clinical installed base now stands at 7900 multi-port DaVinci systems, 435 ion systems, and 142 single-port DaVinci systems.
Speaker 5: Overall, our capital placement trends reflected demand for additional capacity in multiport.
Speaker 5: strong interest in our ion system, and stable demand for SP as we build our SP indications.
Speaker 5: System utilization, defined as procedures per installed clinical system per quarter, grew 9% globally year over year, reaching a new high as customers adopt a broad mix of procedures on our systems.
Speaker 5: We believe real world evidence of improvements across the quadruple lane, from better patient outcomes to surgeon satisfaction and lower total cost to treat per patient episode.
Speaker 5: underpin this increasing utilization. Turning to our finances, our revenue grew 15% in the quarter, our capital and operating expenses were within our spend of guidance
Speaker 5: reflecting continued investments in R&D to support growth of our platforms and digital tools, expansion of our manufacturing and commercial footprints, and capital amortization.
Speaker 5: We will continue investing in R&D manufacturing and commercial operations to serve our global markets at industrial scale.
Speaker 5: These investments are likely to be lumpy over the next couple of years as significant operations, expansions, and other projects complete. Taking a step back, we have found that the quadruple aim is the right north star for us.
Speaker 5: focusing on demonstrable improvements to outcomes across specific procedures in patient populations.
Speaker 5: increasing patient and care team satisfaction.
Speaker 5: lowering the total cost to treat per patient episode.
Speaker 5: As electronic medical records have been adopted, we have partnered with our customers to analyze this data.
Speaker 5: building real world evidence and big data approaches to measure quadruple aim improvements within countries, regions and health systems.
Speaker 5: paired with our ecosystem investments and training services and products.
Speaker 5: powered by digital tools that can generate actionable intelligence from surgical data, we can help our customers analyze their programs, recommend and support actions to improve performance and lower total costs.
Speaker 5: This integrated business system is catalyzing our customer's goal of strong MIS programs by servicing actionable and measurable steps. Our approach is scalable for us too, working for our DaVinci platforms and for Ion, and opening the door to future opportunities.
Speaker 5: Turning to our ecosystem investments, we're making solid progress extending our offerings to new clinical domains and new regions.
Speaker 5: For DaVinci MultiPort, we recently obtained NMPA registration for XI local production in China.
Speaker 5: This means our DaVinci XI will be able to compete for the locally sourced tender subset of the recently released updated national quota.
Speaker 5: Our DaVinci SP team achieved several milestones recently. We completed patient enrollment for our colorectal and arthrassic IDE trials, continued our first phase of launch of SP in Japan, and submitted our CE-Mark dossier for SP in Europe .
Speaker 5: Turning to ION, our team installed their first ION system in the UK and initiated first cases. For our digital tools, we have initiated our Phase 1 launch of Case Insights.
Speaker 5: Turning to ION, our team installed their first ION system in the UK and initiated first cases. For our digital tools, we have initiated our phase one launch of Case Insights, our name for our computational observer.
Speaker 5: Case Insights is a tool that works with the DaVinci system and hospital data to build AI models that find correlations between surgical technique, patient populations, and surgical outcomes.
Speaker 5: Our first phase of launch builds on work over the past few years with our clinical research partners to refine objective performance indicators and link them to actionable changes to improve outcomes, shorten training times, and improve surgical program efficiency.
Speaker 5: We think these computational tools can make a significant impact using real world and real-time data to improve skills and outcomes and to inform future product and automation opportunities.
Speaker 5: That said, features can be built quickly, but long-term validation is arduous.
Speaker 5: We're a science-driven organization and we'll work through validation pathways in pursuit of long-term success.
Speaker 5: We do not expect material revenue from Case Insights for the next several quarters.
Speaker 5: In closing, our core business has momentum. We see a significant long-term opportunity to improve the quadruple aim using our integrated ecosystem.
Speaker 5: powered by analytics, and we are pacing our investments to catalyze that opportunity.
Speaker 5: I'll now turn the time over to Jamie, who will take you through our finances in greater detail.
Speaker 3: Good afternoon. I will describe the highlights of our performance on a non-GAAP or performer basis.
Speaker 3: I will also summarize our GAP performance later in my prepared remarks. A reconciliation between our pro forma and GAP results is posted on our website.
Speaker 3: Global procedure growth in Q2 of 22% reflected US procedure growth of 19% and 28% procedure growth outside of the US. Procedures in Q2 benefited from higher patient admissions as hospitals, particularly in the US.
Speaker 3: and or treatment was delayed during the pandemic.
Speaker 3: Consistent with our comments last quarter, our contributions to procedure growth from surgeons new to the da Vinci platform were strong, reflecting both the strength of our training capabilities and an increasing number of graduates of residency and fellowship programs who are trained on da Vinci.
Speaker 3: Within one of our target procedure areas, bariatric surgery, our growth rate in the US slowed during the quarter.
Speaker 3: Some customers have indicated that they are seeing increased patient interest in weight loss drugs.
Speaker 3: It is too early to conclude if the slowing growth is a temporary pause as patients evaluate these new drug therapies or if it is a trend that continues.
Speaker 3: We believe that during the quarter, da Vinci continued to gain market share in the bariatric surgical market.
Speaker 3: OUS procedure growth of 28% reflected strength in China, the UK, Germany, and Japan.
Speaker 3: Strong procedure growth in China was driven by a continued recovery from more recent COVID-related impacts and a favorable comparison to Q2 last year, which was also impacted by the pandemic. Consistent with our comments last quarter, growth in non-neurology procedures outside of the United States was accretive.
Speaker 3: growing at approximately 35% driven by increases in colorectal, hysterectomy, and thoracic procedures.
Speaker 3: Turning to other key metrics, in Q2, the installed base of DaVinci systems grew 13% to just over 8000 systems driven primarily by demand for additional capacity given procedure growth.
Speaker 3: Average system utilization grew almost 9% year over year, reflecting an increasing mix of short-duration benign procedures in the US.
Speaker 3: and customers prioritizing use of their existing assets given the financial pressures they face.
Speaker 3: With respect to capital performance, we placed 331 systems in the second quarter ahead of our expectations.
Speaker 3: Capital strength in the quarter included a higher number of placements to our distributors and a higher number of multi-system deals in the US relative to recent trends.
Speaker 3: reflecting in part certain placements accelerated into Q2 from future quarters.
Speaker 3: Despite Q2 system placements being ahead of our expectations, customers, particularly in the US, appear to be cautious in their capital spending given ongoing financial pressures.
Speaker 3: We placed 279 systems in Q2 of last year, which, as a reminder, reflected a delay in the shipment of approximately 15 systems from June into July as a result of supply chain challenges we encountered during the quarter.
Speaker 3: Q2 revenue is $1.8 billion, an increase of 15% year over year.
Speaker 3: On a constant currency basis, second quarter revenue grew approximately 17%. Recurring revenue represented 85% of total revenue as compared to 72% for the full year 2019 and grew 20% over last year, driven by procedure growth.
Speaker 3: and an increase in the installed base of systems under operating lease arrangements. Additional revenue statistics and trends are as follows.
Speaker 3: In the US, we placed 157 systems in the second quarter.
Speaker 3: compared to 150 systems placed last year. Outside the US, we placed 174 systems in Q2 compared with 129 systems last year. Current quarter system placements included 76 into Europe , 33 into Japan, and 16 into China.
Speaker 3: compared with 78 into Europe , 18 into Japan, and 15 into China in Q2 of last year.
Speaker 3: During the quarter, the China National Health Commission published the 14th five-year quota of 559 robotic systems. For those systems awarded to our JV under the new quota, we expect a significant majority to be placed in 2024 through 2027.
Speaker 3: We are seeing increasing participation of local competitors in tender processes under the national quota.
Speaker 3: In addition, during 2023, we have experienced pricing pressure in China as a result of provincial government policy changes and competition.
Speaker 3: The dynamics create greater variability in the outlook for our procedure, system placement, and revenue performance in China.
Speaker 3: In Q2, 60 of the 331 systems placed were trade-in transactions compared to 56 trade-in transactions in the second quarter of last year.
Speaker 3: As of the end of Q2, there are approximately 500 SIs remaining in the installed base, of which 97 are in the US.
Speaker 3: Leasing represented 50% of Q2 placements compared with 42% for both last quarter and last year.
Speaker 3: In the US, 78% of system placements in Q2 were under operating lease arrangements, compared to 59% last quarter.
Speaker 3: The higher rate of operating leases in the US is primarily driven by an increasing customer preference for our usage-based leasing models.
Speaker 3: in part due to capital budget constraints and continuing financial pressures faced by many of our customers. In addition, some customers are choosing leasing structures to preserve flexibility to upgrade to next generation technology.
Speaker 3: As a result of these dynamics and the earlier stage of our leasing program with OUS customers,
Speaker 3: We continue to expect that the proportion of placements under operating leases will increase over time. Q2 system average selling prices were $1.39 million as compared to $1.47 million last quarter.
Speaker 3: The sequential decrease in system ASPs was primarily driven by a higher mix of X-placements for purchase deals and geographical mix.
Speaker 3: We recognize $12 million of lease buyout revenue in the second quarter, compared with $24 million last quarter and $23 million in Q2 of 2022.
Speaker 3: DaVinci instrument and accessory revenue per procedure was approximately $1,840 compared with approximately $1,780 last quarter and $1,900 last year.
Speaker 3: On a sequential basis, higher INA per procedure is driven primarily by the INA price increase we described last quarter and customer ordering patterns.
Speaker 3: Turning to our ion platform, in Q2 we placed 59 ion systems as compared to 41 in Q2 of 2022.
Speaker 3: Second quarter ion procedures of approximately 12,700 increased 145% as compared to last year.
Speaker 3: During the quarter we placed our first ion system in the UK market.
Speaker 3: And in this early phase of our European launch, we have focused on the collection of clinical data in support of our reimbursement strategy.
Speaker 3: 12 of the systems placed in the second quarter were SP systems, compared to 10 systems last quarter.
Speaker 3: SP procedures grew by 40% and average system utilization growth accelerated from last quarter's 12% increasing by 14% compared to Q2 of last year.
Speaker 3: Moving on to the rest of the P&L.
Speaker 3: Proforma gross margin for the second quarter was 68.5% compared with 67.2% last quarter and 69.2% last year. Proforma gross margin was lower than last year primarily due to a higher mix of ION revenue, which currently carries significantly lower margins as compared to the DaVinci business.
Speaker 3: and lower system ASP. As we described last quarter, improving product costs and manufacturing efficiency is a priority for our teams over the medium term.
Speaker 3: Second quarter pro forma operating expenses increased 12% year over year, driven primarily by increased headcount added throughout last year, higher variable compensation, higher
Speaker 3: increased prototype expenses, and increased expenses associated with customer training in support of procedure growth. Proforma operating expenses represented 33% of revenue in Q2 compared to 35% of revenue for the full year 2022.
Speaker 3: reflecting in part planned leverage in our enabling functions. Capital expenditures in Q2 were $178 million, primarily comprised of infrastructure investments to expand our facility's footprint and increase manufacturing capacity.
Speaker 3: Our pro forma effective tax rate for the second quarter was 22.3% consistent with our expectations.
Speaker 3: Second quarter pro forma net income was $507 million or $1.42 per share, compared with $415 million or $1.14 per share for Q2 of last year.
Speaker 3: I will now summarize our GAAP results. GAAP net income was $421 million or $1.18 per share for the second quarter of 2023.
Speaker 3: compared with GAAP net income of $308 million, or $0.85 per share for the second quarter of 2022.
Speaker 3: 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.
Speaker 3: employee stock-based compensation, amortization of intangibles and gains and losses on strategic investments.
Speaker 3: We ended the quarter with cash and investments of $7.1 billion compared with $6.6 billion last quarter. The sequential increase in cash and investments reflected cash from operating activities, proceeds from employee stock exercises, partially offset by capital expenditures.
Speaker 3: And with that, I would like to turn it over to Brian , who will discuss clinical highlights and provide our updated outlook for 2023.
Speaker 4: Thank you, Jamie.
Speaker 4: Our overall second quarter procedure growth was 22% year over year compared to 14% for the second quarter of 2022 and 26% last quarter.
Speaker 4: In the US, second quarter 2023 procedure growth was 19% year over year, compared to 11% for the second quarter of 2022 and 26% last quarter. G2 growth continued to be driven by strong growth and procedures within general surgery with particular strength in cholecystectomy and hernia repair.
Speaker 4: Bariatrics growth was healthy in the quarter, but as noted earlier, growth was lower than in prior periods. People continue to native Greg
Speaker 4: Outside of the US, second quarter procedure volume grew 28% compared with 22% for the second quarter of 2022.
Speaker 4: Outside of the US, second quarter procedure volume grew 28% compared with 22% for the second quarter of 2022 and 28% last quarter.
Speaker 4: Second quarter 2023 OUS procedure growth was driven by continued growth in general surgery, primarily from strong growth in colorectal procedures.
Speaker 4: Second quarter 2023 OUS procedure growth was driven by continued growth in general surgery, primarily from strong growth in colorectal procedures, followed by growth in thoracic procedures.
Speaker 4: Growth in urology continued to be healthy, led by kidney procedures, along with continued double digit growth in prostatectomy.
Speaker 4: In Europe , we experienced strong growth in the UK, Germany, and Spain. In all the regions noted, procedure growth was driven by colorectal and hysterectomy procedures. In Asia, growth was led by China, where we saw a continuing recovery in procedures that were impacted by COVID.
Speaker 4: and benefiting from a favorable comparison to procedure volume that was impacted in the same quarter a year ago.
Speaker 4: Procedure growth was led by strong growth in urology, namely prostatectomy and kidney procedures. In Japan, growth was led by general surgery, with the largest procedure contributions coming from colorectal and gastrectomy procedures.
Speaker 4: While still at earlier stages of adoption, India and Taiwan both demonstrated strong growth in gynecology and general surgery procedures.
Speaker 4: Now, turning to the clinical side of our business, each quarter on these calls we highlight certain recently published studies that we deemed to be notable.
Speaker 4: 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. This past May, Dr. Zhang from the second affiliated hospital of Jiaxing University in China, has been working on the study of the scientific research that has been published over the last few years. Dr. Zhang has been working on the study of the scientific research that has been published over the last few years.
Speaker 4: published a systematic review and meta-analysis comparing outcomes of robotic right colectomy procedures
Speaker 4: with outcomes associated with laparoscopic right colectomy. Published in Techniques in Coloproctology, this meta-analysis evaluated a total of 15,241 patients across 42 studies with over 2,700 subjects in the robotic right colectomy group.
Speaker 4: and over 12,000 subjects in the laparoscopic group, and included outcomes associated with the entire population, as well as outcomes for both intracaporial and extracaporial anastomosis.
Speaker 4: Looking at the population overall, the authors reported, among other outcomes, an approximately half day shorter length of hospital stay.
Speaker 4: 51% lower risk of conversion to laparotomy.
Speaker 4: and a 12% lower risk of complications with the robotic approach. Notably, in the subgroups specifically comparing outcomes for procedures with an intracaporial anastomosis, the robotic right colectomy group was associated with a shorter length of hospital stay by approximately 16 hours and a 65% lower risk of conversion to laparotomy.
Speaker 4: Within the extracorporeal and anastomosis subgroup, the robotic-assisted approach was associated with a 40% lower risk of overall complications. The authors concluded in part that quote.
Speaker 4: The safety and efficacy of robotic right colectomy is superior to laparoscopic right colectomy, especially when an intracorporeal anastomosis is performed. End quote.
Speaker 4: Turning to a clinical study reporting outcomes for robotic assisted and video assisted thoracoscopic surgery.
Speaker 4: Dr. Marissa Beig from Danbury Hospital in Connecticut.
Speaker 4: Published outcomes comparing lobectomies performed with either approach using the National Cancer Database.
Speaker 4: This study focused on patients with complex etiology, such as non-small cell lung cancer who had received neoadjuvant therapy, had N1-N2 disease, and had a non-small cell lung cancer who had received neoadjuvant therapy, had N1-N2 disease.
Speaker 4: or had a tumor greater than 5 centimeters and compared 9,500 subjects with over 2,100 in the robotic arm and over 7,000 in the VATS arm.
Speaker 4: Notably, when analyzing rates of conversions to open, the authors reported a 7.7% lower rate of conversion to open in the robotic arm with an approximately two times higher risk of conversion associated with the VATS group.
Speaker 4: The authors concluded, quote, in summary, our analysis of the National Cancer Database suggests that robotic lobectomy for complex lung resections achieves similar perioperative outcomes and R0 resections as VADs lobectomy with the exception of a lower rate of conversion to thoracotomy.
Speaker 4: I will now turn to our Financial Outlook for 2023.
Speaker 4: I will now turn to our financial outlook for 2023, starting with procedures.
Speaker 4: On our last call, we forecasted full year 2023 procedure growth within a range of 18%.
Speaker 4: to 21%. We are now increasing our forecast and expect full year 2023 procedure growth of 20% to 22%.
Speaker 4: The low end of the range reflects uncertainty around the duration of elevated procedure volumes with patients returning to health care.
Speaker 4: continued slowing of bariatric growth rates in the US, and macroeconomic challenges that could impact hospitals and patient spending. At the high end of the range, we assume macroeconomic challenges do not have a significant impact on hospital procedure volumes.
Speaker 4: Bariatric growth rates in the US continue at the rate we saw in Q2.
Speaker 4: The range does not reflect significant material supply chain disruptions or hospital capacity constraints. Turning to gross profit.
Speaker 4: 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.
Speaker 4: 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, we will continue to expect our 2023 full year pro forma gross profit margin to be within 68% and 69%.
Speaker 4: On our last call, we forecast pro forma operating expense growth to be between 11% and 15%.
Speaker 4: We are adjusting our estimate and now expect our full year pro forma operating expense growth to be between 12% and 15%. We are also updating our estimate for non-cash stock compensation expense to range between $600 million to $620 million in 2023.
Speaker 4: narrowing the range from our previous estimate of $600 million to $630 million. We are increasing our estimate for other income, which is comprised mostly of interest income, to total between $160 million and $180 million in 2023, an increase from our previous estimate of $140 million and $160 million.
Speaker 4: The increase primarily reflects the rise in interest rates.
Speaker 4: With regard to capital expenditures we continue to estimate a range of $800 million to $1 billion primarily for planned facility construction activities.
Speaker 4: 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.
Speaker 2: Thank you. Ladies and gentlemen, if you wish to ask a question, you have not already done so. You may press 1 then 0 on your telephone keypad at this time.
Speaker 2: We'll go through the first question from the line of Larry Weigelson.
Speaker 2: We'll go to the first question from the line of Larry Weigelson. Wells Fargo, please go ahead.
Speaker 6: Good afternoon. Thanks for taking the question. Gary, just two for me. One big picture question on AI, and second on procedure growth. So AI is obviously having its moment in the sun here, Gary. I'm curious, where is Intuitive spending time in applying AI? Is it imaging?
Speaker 6: you know, movement of the robot, you know, training. I'd love to hear your thoughts and then I have one follow up.
Speaker 5: Yeah well we'll start on AI let's talk about what it is. You know I for us it's a suite of digital tools that rests on a baseline and then can be built upon using various machine learning techniques including computer vision.
Speaker 5: We've been at it for some time. We started the internet of things for surgical robots over a decade ago. We built the baseline of
Speaker 5: And so for us, that has been robot data, some other data, and electronic medical record data in partnership with our customer base. We've been doing that for several years now. From that, I think you can start to do analytic inspections. You can do analyses on the data, look for correlations. Sometimes it's pretty simple math that gets you.
Speaker 5: big data explorations, some simple things that we can do to help our customers become more efficient and to expose variation.
Speaker 5: Over time you can invest further in things like computer vision which we have been doing and into predictive analytics. The idea that you can look at surgical data science, understand the variation of patient populations and what's happening in surgery and start to to create tools, digital tools that can help improve outcomes or speed learning curves.
Speaker 5: content can be moved pretty quickly I think the validations take real time to do well particularly outcome based or interventional validations and so we're going to go through and do that with with real rigor so expect us to continue down that pathway
Speaker 6: That's very helpful. And then on procedures, you know, I'm just wondering, you talked about some catch up in Q2. How are you thinking about, you know, how much of the backlog of different procedures is still left? You talked about, you know, the diagnostic procedures on the last call. And any color and, you know, what you're assuming for bariatrics.
Speaker 5: here for the rest of the year, and does that mean, you know, international will continue to be stronger than the US? Thanks for taking the questions. Well, let me talk a little bit about, I think, the patient population that moved to the sidelines during the pandemic, and then I'll turn the assessment over to Jamie.
Speaker 5: the kind of the pandemic response it's hard to exactly estimate how many folks
Speaker 5: would have been in diagnostic pipelines that did not get their tests. We do look at the data that's available to do that. I don't think it will clear in just one quarter. I think our past experience on these things is that.
Speaker 5: Lower utilization happened over a several year period and it will probably take many quarters for it to fully recover. How long that is I think is very very hard to estimate.
Speaker 5: So far, so good. You asked a question about bariatrics. I'm gonna turn that over to Jamie. He spoke about it a little bit in his prepared remarks. Yeah, what we saw in Q2 was that growth rate slowed. We have some input from customers that the level of patient interest is such that...
Speaker 3: patients are now considering drugs versus surgery. It's unclear yet based on that set of inputs from customers the the duration of that evaluation by parents and other patients and obviously it's layered. So what we did for our guidance was we just said at the high end for the remainder of the year the bariatric growth rate in the US is consistent with what we saw in Q2.
Speaker 3: And at the low end, we said the growth rate continues to slow a little bit over the course of the year as patients become increasingly educated about the weight loss drugs. And obviously there's a number of factors that patients have to consider with respect to those drugs cost, side effects, what happens if they come off the drugs and regain weight, etc. But I think from
Speaker 3: our perspective. We're early in understanding what the longer-term impact will be. Customers have said that they have confidence that there is a role for surgery in weight loss and that that will endure over kind of the longer term. What happens in for the rest of the year I think we'll see.
Speaker 3: understanding what the longer-term impact will be. Customers have said that they have confidence that there is a role for surgery in weight loss and that that will endure over kind of the longer term. What happens in for the rest of the year I think we'll see. Thank you.
Speaker 2: We'll go to the next question.
Speaker 2: We'll go to the next question.
Speaker 7: Travis Steed, Bank of America. Please go ahead. Yeah I did want to ask about China and the China quota and how you think the opportunity is now that there's more local players but you also have the local version of XI and on the bear actor just a quick follow-up on that too. Is that around a hundred thousand procedures just trying to think about sizing.
Speaker 3: that their active surgery opportunity or impact. We've said the market size in the US is about 200K procedures annually for what we think is a good match for robotics. And in terms of where we are in penetration, we're kind of at the, if I put it in quartiles, we're at the beginning of the second quartile. What was your first question, Travis?
Speaker 7: It was on China and the China quota and how to think about that opportunity there versus last quotas given there's more local players but now you have the local version of XI.
Speaker 7: on China and the China quota and how to think about that opportunity there versus last quotas given there's more local players but now you have the local version of backside yeah I mean obviously
Speaker 3: There's increased opportunity in the sense that this quota is 559 systems relative to the prior quota of 225 systems. But you also have now five local players. There will be government interest in success of local players. We do believe that.
Speaker 3: surgeons cared about capability and feature set. And so the extent to which DaVinci continues to be differentiated, I think is to our advantage. In the, and we are seeing those local players increasingly participate in tenders. With respect to how that,
Speaker 3: quota will be allocated. So it gets allocated from the central government to the provinces and then it goes through tender processes. So there is some time before that results in placements and that's why we said in our prepared remarks, we think the bulk of the subset of that quota, our JV wins, will be in 24 through 27. I also described some dynamics that create greater variability with respect to pricing pressure and increasing competition.
Speaker 7: So I think for us that's something that we're going to watch carefully over the next year or so. Great. And a question for Gary. I heard the comment on hospitals leasing more to preserve the upgrade option for the next-gen system. So maybe just talk high level, the pipeline comments on the FDA and supply chain bottlenecks that you saw last year.
Speaker 5: then and how you're thinking about incremental upgrade to the Gen 4 versus some of the new platforms? Sure on the on the supply chain health side we are seeing fewer pockets of challenge, but some pockets nonetheless, so there's been significant focus and attention to make sure that we're supplying our customers what they need.
Speaker 5: as we go through a pretty nice procedure growth curve. So they're calling out improvement in the breadth of supply chain challenge, but cautioning that there are still some pockets that need attention or require attention. We continue to work on multiple things. As you know, we're working on
Speaker 5: the convenience and economics of doing an upgrade versus a platform changeover. And we expect to do some of both. We are...
Speaker 5: usually working on the next two generations because of the time it takes to to develop a platform not just the next one, but the next one after that and current current time is really no different. We're pleased with the performance of our engineering teams and in prosecuting those those upgrades and technologies.
Speaker 5: What I will say is, prioritization-wise, what we care about is can we improve patient outcomes in a real way or open a new population of patients to the benefits of minimally invasive surgery? So we look at that. We look to improve the surgeon and care team experience, whether that's in their ergonomics or their workflow, and the delight with which they perceive our systems.
Speaker 5: We work to improve efficiencies of overall programs. We'll work on things that make hospital programs more efficient and we work to lower the total cost to treat per patient episode. And when we find feature sets and technologies that do that, then we get pretty excited about them and try them hard. Great, super helpful. Thanks, Gary.
Speaker 7: Okay, our next question is from the line of Robbie Marcus, JP Morgan. Let's go ahead. Yeah, thanks for taking the question. Congrats on a really nice quarter. I heard the comment on prototype expenses are increasing. So I figure I'll try my luck here and I know you're not going to tell us when the next gen or if the next gen system.
Speaker 7: that's for. Thanks.
I'm not going to be specific on the prototype expense and it's distributed across a number of programs. Prototype expenses tend to be lumpy within Q2 relative to the comparison point. It just so happened to be a quarter where that was one of the drivers of our expenditure. Nothing more than that I would say. As we've grown the proportion of the installed basis under leases, I think it's about 10
That clause generally gives customers the opportunity to change that existing lease to the lease of any new next generation technology.
And that is not a specified price by the way, that's to be negotiated. So I wouldn't say anything more about price. Great and maybe Jamie one more for you on the financial side. So we're a nice quarter of cash flow generation north of $7 billion on the balance sheet.
interest rates high, inflation high as well. How are you thinking about maximizing the cash here and how should we think about the priorities? Thanks.
With respect to capital allocation I think our priorities are consistent for how they've been for some time now. Our first priority is to invest in the business both in capital expenditures which as you've seen by our guidance are relatively high to our history this year and in organically investing in operating expenses.
Second is to acquire technology externally that gives us differentiated capability or accelerates us in the marketplace. That's generally license arrangements, IP acquisition or tucking acquisitions. And we continue to look at returning cash to shareholders opportunistically and I think that's served as well. If you look at the last 18 months.
We repurchased 12.6 million shares for 3 billion at an average price of $234. And we did that opportunistically in large part because it reflects kind of the stage of the company. We're relatively early in the robotics space where we look for growth and I think that served us well.
Great, thanks a lot.
Rick, wise people, please go ahead. Good afternoon, Gary. Hello, everybody.
Gary, I recently visited several European hospitals and robotic programs and frankly and honestly came way more impressed than ever with Intuitives European commercial presence and reputation. But I was particularly intrigued to hear one particularly high volume.
robotic surgeon talk about what's next and he seemed less focused on systems and very much focused on enabling technologies that make everything better faster clearer etc. And they included things like integrated CT image overlays during procedures and that aspect of augmented reality.
you know, tools that bring CT and surgery together. Next generation Firefly he was dreaming of. Virtual rulers, dual Sureform 45 and 60 staplers, and haptic feedback. I mean, that was a fascinating to hear. Are these the kinds of innovations that are priorities for you?
Are these the kind of things you want to make docs like that excited about? Is that what you're, the kind of stuff you're working on? You had a long list. I think that several of those are important and things that we've talked about and have shared with the world. I think the idea of
higher confidence ability to identify tissue in real time for the surgeon and we can do that a few different ways. So the fluorescence imaging that you describe and other advanced imaging technologies that give surgeons the ability to see beyond the surface of the tissue and beyond what you can see with normal white light imaging.
We absolutely think that's helping clinical outcomes and we're excited about and investing in image fusion or data fusion and that's the CT overlay, the segmentation of preoperative MR and CT scans and the ability to use that in real time during the case that we think can change outcomes and change.
efficiency in the OR. Other types of analytic and sensing capabilities we think are really powerful and important. And to the earlier question about AI, machine learning, machine vision, these things work together. So high definition images that show you things beyond the surface of the tissue plus
computer vision plus AI models can give you some predictive analytics that I think are really powerful and would help surgeons get to better outcomes, reduce complications. So I am like that surgeon, quite excited.
Great. Just a follow-up, quick follow-up. You, I think, if I remember correctly, took a 5% across-the-board price hike on instrumentation. I don't know if I'm remembering correctly, that was to kick in, like, June 1. Did that happen? Did it help the quarter?
Should I assume that it's going to be a little bit of an offset or a little bit of an instrument tailwind in the second half and beyond? Thank you, Gary. Thanks, Rick. It was largely implemented in Q2, Rick. It wasn't effective at the beginning of the quarter. I'd say roughly half of the quarter benefited from the price increase. Our estimate for the impact of the price increase is consistent with what we said last quarter.
roughly about $100 million impact to revenue and profit for the year. Again, you get kind of half an impact in Q2 and the full impact in Q3 and Q4. Great, thank you. Now a reminder of our motivations on that. We've been quite conservative on pricing. Our input pricing the last few years has gone up in terms of raw material and labor content. We have offset most of that through efficiency and scale advantages.
But we felt like it was time to share some of that with our customers and that was the motive behind the price increase Thanks again We'll go to the next line I Have a richard of truest security, please pronounce your last name sir
Thank you. Richard Neuert here. Thank you for taking the questions. Jamie, maybe for you on the guidance, 20 to 22%, very healthy. I'm just curious on thinking about the low end of the range there. You specifically mentioned, you contemplate, you know, bariatric.
surgery growth trends, eroding a little bit from the two Q levels. What's the pace of erosion there that you're thinking about that would get you to the low end? Like, how much erosion? How did you establish a baseline for yourself? Yeah, I don't want to get too specific there, Rich, given just the relative sizes.
of bariatrics in the US to our overall procedures. We can obviously see the progression between Q1 and Q2. I'd call it a moderate steady progression in the model in Q3 and Q4. The overall impact on that is obviously a function of the size of the bariatrics business for us. It's not some dramatic fall off. Okay, that's helpful. I'm just maybe sticking on that same top.
lead to overage there to offset any potential incremental slowdown in bariatrics, if any.
I'm not going to answer that in terms of overage, but I'll say where we're seeing healthy growth. If you take our largest seven markets, which is a focus for us, so China, Japan, South Korea, Germany, France, UK and Italy, what you're seeing in those markets...
is generally a progression beyond duology into the next set of cancer procedures. It's market by market, but generally that's hysterectomy, thoracic, and colorectal procedures. And we're seeing them on the early stages of an adoption curve, and that's why we've talked about our...
OUS business now is about half outside of urology or beyond urology. This quarter it grew 35 percent, that subset, that's consistent with what we saw in Q1, that subset also grew 35 percent. So I think we're excited in those larger markets where we have that focus.
and continue to drive the adoption curve in that next set of procedures. If you look at market by market, you have some unique dynamics. In China, you see liver and pancreas procedures doing well. In Japan, treatment of stomach cancer. In Korea, for example, you see thyroid. It's really that next set of procedures.
Thank you very much. Just, I want to just step back a little bit on bariatrics. We've had a few questions on it, just make a point. As we go out and talk to surgeons, we talk to obesity physicians and pharmacologists, which we do in terms of our diligence.
The sense here is that the market is going to adjust to the change in treatment pathway as it relates to drugs. However, it doesn't look like the drugs are a cure and may not be a fast path to cure. And a strong consensus among those we speak to including.
people who are not surgeons, physicians who are not surgeons, is that the surgery and other interventions are gonna remain an important part of the interaction. In the near term, I think the market will adjust to understand what role the drugs will play, but they're not cures, and the discontinue rate remains pretty high, and the
the populations of patients who don't get any benefit from the drugs also remain significant. So I think there's an adjustment period here and we should be aware of it. But that may become a tailwind in future quarters as folks work through those sets of pathways and look at long-term and durable solutions into the obesity challenges.
Populations of patients who don't get any benefit from the drugs also remain significant. So I think there's an adjustment period here, and we should be aware of it. But that may become a tailwind in future quarters as folks work through those sets of pathways and look at long-term and durable solutions into the obesity challenges. Thank you very much.
Okay, we'll go to the next slide. Line of Ryan Zimmerman, BTIG. Please go ahead.
Good evening. Thanks for taking the question. Maybe one for Jamie. On the expense management standpoint, I mean, procedures are going up a little bit faster than OpEx guidance by about 50 basis points or so. And so I'm just wondering, Jamie, kind of what your views are on expense management and letting some of that leverage flow through as we think about
not just the back half of the year, but into 24, versus maybe reinvesting that in R&D.
Yeah, for this year we have specific objectives with respect to leverage in our enabling functions, which we've described previously, and that's a set of objectives that I think we intend to fulfill. Partially what you see in the adjustments we've made to our operating expense guidance for this year is a function of our top-line performance, both in the operating expense
variable compensation, and in the number of reps we need in the field to support a higher procedure base. For the rest of kind of operating expense set of investments, we're largely holding to our plan for this year. When you project into 24, I'm not gonna kind of describe the direction of where spend will go relative to procedural revenue, we'll do that in January .
being largely facilities, they are planned for the medium term, meaning they're inefficient for a period until you get to full occupancy or full utilization. On the other side, we'll continue to look to leverage enabling functions into 24. Where that shakes out, we'll do in January because we have to complete our planning process.
in the back half of this year. Okay, that's very helpful. And then I noticed, and this is kind of directed at Gary, and you commented on this a little earlier, but you disclosed for the first time, I believe the proportion of lease agreements that are usage-based versus fixed.
operating lease agreement. And I'm wondering, Gary, what that says, and the trends that we see there about the health of your customers, and what their preference is over time. Yeah, it's a good question. I think we see that one size doesn't fit all. There are some folks for whom
They still remain happy about capital purchases. They see it as the cheapest way for them to access systems. They have high confidence in they're gonna buy. There are some folks for whom capital is tight or scarce and or they're interested in future technology protection clauses and they would rather lease. And there are some folks who are looking at expansions who are a little bit unsure.
about how fast volume might ramp, and for them, usage-based arrangements give them some protections about ramp timing and speed. Our analytical capabilities are pretty good, and our finance flexibility is pretty good, and as a result, we'll have that conversation pretty direct way, and I think the market starts to settle where it settles.
If you ask do we have a strong preference for one of those models the answer is not not really The motivation by the way for the new disclosure was simply the rate at which those Adoption of those models have grown we felt like it was important to be transparent as to what portion of operating leases and placements that structure was If you kind of assess all of our usage based arrangements in aggregate life today
relative to usage patterns and economic objectives in total on average. They're slightly above our expectations, so they've performed well so far. That's obviously a blend across different customers and systems, some are overperforming, some are underperforming, but I think part of the way that we've operated the program is to look carefully at is it actually reducing barriers for accelerated growth for our customers, and is it producing the economic results for us and our customers.
And as we and customers have gained confidence, that's part of the reason why it's expanded the way it has. Thank you. And we'll go to the next line. Go to the line of Drew and Raniere. Morgan Stanley , let's go ahead. Drew, squeezing me in here. Maybe just one other follow-up question on bariatrics, but maybe a different angle. We've talked to some general surgeons, too, that they're kind of suggesting that these new drugs might even open up potential procedure categories where