Q2 2024 Intuitive Surgical Inc Earnings Call
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Thank you everyone for standing by and welcome to the intuitive second quarter 2024 earnings release.
This time all participants are in a listen only mode. Later, we will conduct a question and answer session. If.
If you wish to place yourself in queue for questions at any time. Please press one to zero in your telephone keypad, you may remove yourself from the queue by repeating the one zero command.
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.
Good afternoon, and welcome to intuitive second quarter earnings Conference call with me today, we have Gary <unk>, our CEO, Dave Rosa, our president and Jamie <unk> our CFO.
Before we begin I would like to inform you that comments mentioned on todays call maybe deemed to contain forward looking statements.
Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties.
These risks and uncertainties are described in detail in our Securities and Exchange Commission filings.
Our most recent Form 10-K for the fiscal year ended December 31, 2023 and subsequent filings.
Our SEC filings can be found through our website or at the Sec's website.
Investors are cautioned not to place undue reliance on such forward looking statements.
Please note that this conference call will be available for audio replay on our website at intuitive dot com on the events section under our Investor Relations page.
Today's press release, and supplementary financial data tables have been posted to our website.
Today's format will consist of providing you with highlights of our second quarter results as described in our press release announced earlier today, followed by a question and answer session.
Gary will introduce the call and provide an organization update.
Dave will present, the quarter's business and operational highlights.
Jamie will provide a review of our financial results.
Then I will discuss procedure and clinical highlights and provide our updated financial outlook for 2024, and finally, we will host a question and answer session.
With that I will turn it over to Gary.
Thank you for joining us today.
The fundamentals of our business were healthy in the quarter with solid procedure growth and strong capital placements, resulting in healthy financial performance.
In the quarter, we made good progress with all three of our system platforms, including take or are taking a measured rollout of da Vinci five to our next phase.
Continuing to stabilize high end supply in support of customer expansion and.
And expanding da Vinci S. P installs in Europe, while supporting S. P procedure growth across regions. So.
So multi port procedures headwinds continued from last quarter and we will describe these later on the call.
Speaker Change: Before turning the time over to Dave I'd like to thank Marshall Mohr, our prior CFO and our outgoing head of global business services.
Marshall will be taking his skills to pursuits outside of intuitive in September this year as.
As he approaches his next endeavor I. Thank him on behalf of all of US for his outstanding stewardship at intuitive for the past 18 years were.
We are pleased to announce that in addition to his role as CFO, Jamie will expand his responsibilities to leading our information technology and global facilities teams.
I'll now turn the time over to Dave who will take you through commercial and operational highlights in greater detail.
Thank you Gary.
Starting with procedures, we experienced solid growth in the quarter of nearly 17% compared with a strong Q2, 2023 which reflected the return of patients post pandemic coy.
Cystectomy colon resection lung resection, and forget procedures wed global procedure growth.
General surgery led U S procedure growth in the second quarter and outside the U S procedure growth was led by non urology procedures.
Regional performance.
Strength in Europe, led by Germany, the UK and Italy.
And in Asia, we have mixed market conditions, largely consistent with Q1.
Brian will describe these dynamics later in the call.
Turning to capital, we placed 341 da Vinci systems in the quarter of which 320, where multiport systems, including 70 da Vinci five systems.
Our teams installed 21, SP systems, and 74 ion systems in the quarter.
Solid capital placements in the U S, Japan, and India and pressure in Europe and China.
System utilization defined as procedures per installed clinical system per quarter grew 2% globally year over year for our multi port platforms.
Lower than our historical trend, reflecting procedure strength, a year ago due to patient backlogs.
Organization for SP, and ion continuing to grow into double digit range in the quarter.
Turning to our finances revenue growth of 14% in the quarter reflect solid procedure performance and strong capital placements.
Product margins were above our expectations, reflecting a combination of cost reductions.
Fixed overhead leverage and some one time nonrecurring benefits.
Speaker Change: Operating expenses reflected planned leveraging our enabling functions.
Jamie will take you through our finances in greater detail later in the call.
In Q2, we moved into the next phase of our rollout of da Vinci Si.
Jamie: Within the quarter, we placed 70 da Vinci five systems.
Our launch continues to progress in line with our plans.
Customer feedback points to improvements in precision imaging ergonomics and integration the combination of which customers indicate as way to overall efficiency improvements.
Well of course feedback encase insights bring new capabilities in analytics to surgery.
We are encouraged by early insights these capabilities are presenting.
Working hard to improve production and supply for force feedback instruments.
And smooth, our computational pipelines and workflows for case insights.
We expect these capabilities to be powerful and the maturity and evidence of impact to build over coming quarters.
We launched new products thoughtfully centered around outstanding customer experiences.
Our customers pursue operational and clinical excellence.
We continue monitoring several key metrics across our measured rollout of da Vinci five.
As we ramp our supply and respond to customer input.
We expect our measured rollout to continue through the first half of 2025.
Adoption of our digital products and services grew nicely in the quarter with routine use of my intuitive app expanding to nearly 14000 surgeons and surgeons using intuitive more than doubling versus a year ago.
The long term opportunity for computational tools is both significant and difficult.
To recognize these benefits at scale requires a foundational infrastructure that includes robust curated data <unk>.
Secure data warehousing and global privacy compliance.
Our digital ecosystem, including case insights Leverages. This infrastructure enables us to collaborate with customers on a global scale to identify meaningful insights. These.
These insights enable customers to optimize their robotic programs and ultimately reduce time to proficiency and improved clinical outcomes.
As we said before of validation to take time and are worthy pursuit.
Turning to eye on.
Our teams have made material progress resolving supply constraints on catheters and vision probes exo.
Excellence in manufacturing at scale in this space is complex and we continue to reinforce our capabilities.
Our commercialization in Europe continues according to plan.
Our teams are progressing towards commercialization in China.
Turning to S P.
Last week, we received FDA clearance for thoracic procedures.
It will be measured in our thoracic indication launch as we work to build a robust training and <unk> network as.
As well as bring stapling to our SP platform.
In closing we are committed to our 2024 priorities.
Supporting our measured launch of da Vinci, five and a rather new platforms by region.
Supporting surgeons adoption of focused procedures.
Continuing to improve product quality and margins.
And finally, improving productivity in those functions that benefit from global scale.
I'll now turn the time over to Jamie who will take you through our finances in greater detail.
Good afternoon, I'll describe the highlights of our performance on a non-GAAP or pro forma basis.
And what else is summarized that would get performance later in my prepared remarks.
Reconciliation between our pro forma and GAAP results is posted on our website.
Q2 da Vinci procedures grew 17% the installed base of systems grew 14% to just over 9200 systems and.
And average system utilization increased by 2%.
Lower than long term historical averages, reflecting procedure strength in Q2 last year as a result of patient backlogs.
U S procedures grew 14% driven by growth in general surgery.
Bariatric procedures in the U S declined in the mid single digit range.
O U S procedures grew 22%, reflecting strong growth in general surgery, gynecology and thoracic procedures.
With respect to capital performance, we placed 341 systems in the second quarter compared to 331 systems in Q2 of last year.
Jamie: In the U S. We placed 149 systems in Q2 compared to 157 systems placed last year, reflecting in part lower trade ins.
U S system placements in Q2 included 70 da Vinci five placements.
Given our planned hardware and software update to da Vinci five in the second half of this year and continued focus on maturing manufacturing and expanding capacity, we expect that da Vinci five placements will be constrained through the first half of 2025.
Outside the U S. We placed 192 systems in quarter, two compared with 174 systems last year.
Current quarter system placements included 71 into Europe.
<unk>, you want into Japan, and 14 into China.
<unk> with 76 into Europe.
Three into Japan, and 16 into China in Q2 of last year.
We also saw a relatively strong placements in India as well as market served by our distributors, including Australia.
Placements in Europe reflect health system budget constraints as several European governments resetting capital spending post pandemic.
Second quarter revenue was $2.2 billion, an increase of 14% from last year.
On a constant currency basis revenue growth was 15%.
Additional revenue statistics and trends are as follows.
Leasing represented 51% of Q2 placements relatively consistent with recent trends.
However, given customer preference for our usage based models in the U S and the launch of da Vinci five we continue to expect the proportion of systems placed under lease arrangements to grow overtime.
Q2 system average selling prices were $144 million as compared to $1 $39 million last year.
Higher year over year system ASP.
Selected a higher mix of da Vinci, five and lower trade ins.
Firstly offset by a higher mix of system placements in Japan, with a weaker yen exchange rate.
Jamie: And lower pricing in China.
In Q2 of 2023 trade ins represented 18% of total system placements as compared to 6% in Q2 of 2024.
We recognized $28 million of lease buyout revenue in quarter two.
Compared with $29 million last quarter and $12 million last year.
Da Vinci instrument and accessory revenue per procedure was approximately $800 an increase of approximately $20 compared to last quarter.
The sequential increase in <unk> per procedure is primarily a result of customer ordering patterns in the U S.
Turning to our Iot platform procedures grew 82% to approximately 23200 procedures in the second quarter.
During the quarter, we placed 74 ion systems compared to 59 last year and 70 last quarter.
During Q2, we caught up with the remaining backlog of system placements as supply of catheters and vision probes continue to improve.
The installed base of ion systems increased 56% year over year to 678 systems.
Which 275.
Operating lease arrangements.
Second core SP procedure growth accelerated to 74% with strong growth in Korea, and the U S and early stage growth in Japan and Europe.
21 of the systems placed in the quarter were SP systems, including 10 systems placed in Europe.
The S. P installed base grew 56% from the year ago quarter to 222 systems.
Moving onto the rest of the P&L.
Pro forma gross margin for the second quarter of 2024 was ahead of our expectations at 70%.
Compared with 68, 5% for the second quarter of 2023, and <unk> 67, 6% last quarter.
Second quarter pro forma gross margin reflected certain one time benefits that we do not expect to recur.
Excluding these onetime benefits pro forma gross margin would've been 69, 5%.
The sequential improvement in pro forma gross margin, primarily reflects lower inventory reserves cost reductions and certain purchase components.
Freight rates and leverage of fixed overhead.
In accordance with our plans product margins for ion and SP platforms improved in the quarter and will remain a focus for our business unit and manufacturing teams over the medium term.
As a reminder, given recent and ongoing capital investments, we expect increased depreciation expense in the second half and a significant increase in depreciation expense starting in Q1 of 2025.
Second quarter pro forma operating expenses increased 11% compared with last year, reflecting the ongoing benefit of planned leverage in enabling functions.
We continue to prioritize investments in R&D to fund innovation and future growth.
During the quarter, we added approximately 550 employees of which roughly half were in our manufacturing operations to support growth and customer demand.
Pro forma other income was $79 4 million for Q2.
Higher than 7% to $2 $5 million in the prior quarter, primarily due to higher interest income.
Our pro forma effective tax rate for the second quarter was 22, 5% consistent with our expectations.
Second quarter of 2020 full pro forma net income was $641 million or $1 78 per share compared with $507 million or $1 42 per share for the second quarter of last year.
I will now summarize our GAAP results.
GAAP net income was $527 million or $1 46 per share for the second quarter of 2024.
Paired with GAAP net income of $421 million or $1 18 per share for the second quarter of 2023.
The adjustments between pro forma and GAAP net income are outlined and quantified on our website and include excess tax benefits associated with employee equity plans in.
Employee stock based compensation amortization of intangibles.
Litigation charges and gains and losses on strategic investments.
We ended the year with cash and debt, we ended the quarter with cash and investments of $7 $7 billion higher than the $7 $3 billion, we ended last quarter.
The sequential increase in cash and investments reflected cash generated from operating activities, partially offset by capital expenditures of $309 million.
And with that I would like to turn it over to Brian.
Thank you Jamie.
Overall second quarter procedure growth was 17%.
Compared to 22% for the second quarter of 2023.
16% last quarter.
In the U S second quarter 2024 procedure growth was 14% compared to 19% for the second quarter of 2023 and.
In 2014% last quarter.
Second quarter growth was led by procedures within general surgery with strength in cholecystectomy, and forego procedures and also thoracic procedures.
Barry <unk> procedure growth declined in the mid single digit range.
Outside of the U S second quarter procedure volume grew 22%.
Compared with 28% for the second quarter of 2023, and 20% last quarter.
Growth was led by non urology procedures with strength in colon resection, hysterectomies and lung resection procedures.
In Europe second quarter growth continued to be led by procedures beyond neurology, primarily from general surgery and gynecology procedure categories.
Germany, the U K and Italy procedure performance led the region with each experiencing strong growth in colon and rectal resection, hysterectomies and other general surgery procedures.
In Asia growth in the second quarter was led by Japan and India.
While growth in China was stressed and Korea procedure growth continued to be impacted by a physician strikes.
In Japan overall procedure growth was solid with continued strength in colon and rectal resection, gynecology and lung resection procedures.
In India, while still in the early stage of adoption, we saw strength in gynecology and general surgery procedures, particularly with growth in hysterectomy cholecystectomy and hernia repair.
China procedure growth was lower than prior period averages when compared to the same quarter, a year ago, which experienced a recovery in procedures impacted by Covid.
System utilization remained strong while capital placements continued to be impacted by the late tenders and emerging domestic robotic systems.
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.
However to gain a more complete understanding of the body of evidence we.
We encourage all stakeholders to thoroughly review the extensive detail of scientific studies that have been published over the years.
Earlier this year, Dr Chang and team from the Guangzhou University of Chinese Medicine, published a systematic review and meta analysis in the international Journal of surgery that looked at open lap.
Laparoscopic and robotic assisted surgery approaches to rectal cancer management.
This meta analysis covered 56 studies and included over 25000 patients of which approximately 11000 patients receive robotic assisted surgery.
Over 13000 patients laparoscopic surgery.
Over 390 patients received open surgery.
When compared to the control group of both laparoscopic and open procedures patients undergoing a robotic assisted approach had an approximately two day shorter length of stay.
Specifically when compared to lap.
The robotic assisted group was associated with a one seven day shorter length of stay.
Relative to open surgery, the length of stay was five and a half days shorter.
Jamie: The robotic assisted <unk> was also demonstrated a protective effect for converting to an open procedure was 61% lower odds of conversion associated with robotics relative to the laparoscopic approach.
Finally, when compared to the laparoscopic and open control group.
The robotic assisted approach showed less estimated blood loss, approximately 40% lower odds of urinary retention and when compared to open a higher number of harvested lymph nodes.
The authors concluded quote.
The robotic approach emerges as the most favorable option for managing rectal cancer, when compared to open laparoscopic and transient on techniques as it delivers the finest blend of oncological functional and patient recovery outcomes.
Jamie: The digital interface of surgical robots enables a shift in the paradigm of surgical training.
Facilitating shorter learning curves that are more comprehensive and notably reducing the morbidity and mortality associated with them.
And quote.
I will now turn to our financial outlook for 2024.
Starting with procedures.
On our last call, we forecasted full year 2020 for procedure growth within a range of 14% and 17%.
We are now narrowing our forecast and expect full year 2020 for procedure growth of 15, 5% to 17%.
The low end with the range assumes further softening in bariatrics procedures, along with increasing headwinds in Asia from prolonged physician strikes in Korea.
And in China from delayed tenders and emerging domestic robotic systems impacting capital placements and therefore procedure growth.
At the high end of the range, we assume bariatrics stabilizes at current quarter rates and headwinds in Korea, and China do not get worse.
Turning to gross profit.
We are increasing our pro forma gross profit margin to be within 68, 5% and 69% of net revenue.
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.
Turning to operating expenses, we are lowering our guidance for pro forma operating expense growth to be between 10% and 13%.
We are refining our noncash stock compensation expense to range between 680 million to $700 million.
In 2024.
We are narrowing our guidance for other income which is comprised mostly of interest income.
To total between $300 million and $320 million in 2024.
With regard to capital expenditures, we continue to estimate a range of 1 billion to $1 2 billion, primarily for planned facility construction activities.
With regard to income tax there is no change to our guidance of 2020 for pro forma income tax rate to.
To be between 22% and 24% of pretax income.
That concludes our prepared comments, we will now open the call to your questions.
Thank you now if you have not already done. So you May press. One then zero on your telephone keypad, if you wish to place yourself in queue for questions.
Once again, one followed by zero.
First question is from the line of Larry <unk> Wells Fargo. Please go ahead.
Good afternoon, Thanks for taking the question and congratulations on a really nice.
Over here.
Of course I have to start with.
Da Vinci five.
You know really strong start here.
70 placements I heard the comments about being constrained through the second half of 2025, but da Vinci Si was almost half of your U S. Placements. So it looks like a strong launch so how should we think about the ramp in davinci five placements in the second half and how should we think about trade ins going forward, which are probably a little lower than I expected. This.
Quarter in the U S and I had one follow up.
Hey, Larry its Jamie.
I would say for the second half of 'twenty four you should expect D vision five placements in the U S to increase modestly called core and that in part reflects the fact that we do have this hardware software update that we described and so you have to organize how you do that build plans through the factory carefully for that update.
Jamie: And we said we'd be in a measured rollout through than the first half of <unk>.
2025.
With respect to how we organize the measured rollout of DB five we've really focused the sales force on looking to place da Vinci five full incremental capacity for our customers versus versus the trading cycle.
We'd rather get to a broad launch where we essentially have.
On constrained supply relative to demand before we when you look at the trading cycle.
Just a couple of comments on the trading cycle.
I think the I wouldn't expect a trading cycle, just suddenly emerge and take off quickly I think what we've seen in the past is that that's progressive I know the multiples of years.
In part that will reflect the fact that.
Many customers will want to evaluate da Vinci five they'll want to see evidence grow over time in terms of its capability and feature set and of course.
That desire for da Vinci, five will depend on that their individual program and what they see the value of that in part given the higher pricing or lease costs for da Vinci Si.
That's very helpful. And then I wanted to ask about China, you mentioned, there's a couple of times on the call today.
We recently saw a new stimulus announced there and my question is is the <unk>.
Speaker Change: You talked about the anti corruption initiative is that still having an impact and how are you guys thinking about the new stimulus that was announced there will that help drive placements. Thanks for taking the question.
Hey, Larry it's Dave.
Answering the second part of your question first around the stimulus in talking to our teams. We don't see that it's going to have a material impact on the placements of systems or an impact on the quarter.
With respect to kind of the.
Environment of China, and the anti corruption that you referenced.
There's no question that the operating environment remains challenging health system in China, just kind of re basing.
Sound economics in Med Tech I think that's clear across the industry.
On the placement side customers are continuing to value our offerings, where we were.
Seeing as you know the emergence of domestic.
Systems and so.
In spite of those challenges and everything that's going on in the environment in China, and we're still seeing double digit growth and procedures. So we remain.
Confident and look forward to continue our investments and focus in China.
Thanks for taking the questions guys.
And well go to next question.
From the line of Travis Steed.
Speaker Change: Bank of America. Please go ahead.
Hey, congrats on the good quarter I wanted to maybe if there's any way you can help us understand that kind of the demand side of the D V. Five equation I know.
We're in a constrained rollout, but 47% of the placements in the U S where would <unk> this quarter.
Is there any way to kind of rank order some of the factors you need to mark often checked off the list to kind of get the full launch I heard the software hardware upgrade but assume no other variables to consider as well.
Yeah, Hey, Travis it's Dave again.
There are a couple of the factors that we've discussed in the past and its really kind of three primary areas.
Speaker Change: One is <unk>.
Making sure that we are maturing our supply chain and our manufacturing capacity. So that we're again able to get to that call.
Due to the cost of the yields that we expect as we approach a broad launch.
Part is what Jamie described around the software and hardware update where we're trying to get that integrated into our systems and balancing the factory.
And then the third thing is listening to our customers and so as these placements happen.
We're listening to our customers and responding to their feedback and we'll be releasing some software updates along the way here in order to respond to that feedback and so we want to get that in place.
Before we get to product launch.
So I would just add.
Your question part of your question was on the demand side.
I would say that in the early phase of a launch you have a tendency to see early adopters look for the latest technology and also the larger institutions are large IV ends and so you have to kind of give it some time to see the full set of customers in terms of what that interest will be in the segments of customers again that will look.
Full evidenced to build over time, so if a customer belief to build over time and so you probably need some time to see the full SAP customers in terms of what the full picture of demand for da Vinci <unk> and again that takes some time da Vinci five as a platform as we did with that Si, we'll invest in over time and so.
We'll build a set of capabilities also overtime.
Okay. That's helpful and Jamie maybe on the gross margin side, you know very strong and all at one time was 50 basis points. It was kind of under the impression maybe initially gross margins would be a little lighter wood <unk> can you elaborate on the strength in margins this quarter.
Yeah, I would just say that we've kind of described from a sequential basis, what drove the improvement quote unquote it was lower inventory reserves.
Teams did an outstanding job with respect to <unk>.
Component cost performance with our suppliers and in the logistics area.
And that kind of came in earlier than we expected those are a set of teams.
For a couple of years had been working on supply because of Covid and the pandemic and what happened in terms of supply constraints and those teams in more recent periods of refocused on cost reductions and we saw that that come in early and so we're really pleased to see that.
So great performance in the quarter, you saw us improve the guidance for the year.
I would say if we as we look at the second half.
You will see an increased depreciation as I described.
You will see a high proportion of the revenue be new products da Vinci, five and ion and SP.
In Q2 of the 7% da Vinci Si placements only 11 of them were purchase arrangement, so kind of a muted effect in terms of gross margin in the call are the other placements of operating leases, where you see the economics play out overtime.
Great. Thanks, a lot.
Okay. We'll go to the next line Robbie Marcus Jpmorgan. Please go ahead.
Oh, great. Thanks.
Thanks, and now I'll add congratulations on a very solid quarter here I wanted to ask about the feedback in the field you talked about in the script a bit.
We've all talked to doctors and and have heard from them I'd love to hear from you.
Both with what the physicians are saying, but also what the institutions are saying you're clearly demand is there 70 units. This fast is really strong, but what's the pushback if any for centers, how do they feel about the ability to drive better economics and faster procedures and better outcomes.
With da Vinci, Si then and the feedback so far from the physicians.
Yes, Rob maybe I'll start this is Dave.
Just starting with some of the feedback that we've discussed before you look at what customers are immediately appreciating and it is if some of the things you would expect around ergonomics increases in precision and vision.
The head any wide onscreen graphics, and other things and so it's taken together each one of those features are leading to.
Some efficiency gains.
Particular in sort of console time.
And that has been kind of noticed across the customer base and I think that's where we're starting we're hearing a little bit about what can that mean in terms of adding a procedure of day, increasing utilization of the system.
So that's what both our surgeon customers and our executive customers are noticing.
A result of their investment in and da Vinci five.
Some of the other features case insights force feedback.
We're excited to work with customers and we know thats going to take time to develop and really quantify some of those impacts.
In terms of pushback.
Today, what we're seeing is a little bit with Jamie talked about we're starting customers will have to evaluate the value of da Vinci five.
We have these early adopters that are excited about what it can be and as we move in through our measured launch will continue to help to underscore and reinforce the value that it brings.
And communicate that to executives and their teams.
I'll just jump in and add a little.
Uh huh.
We expect to be evaluated against the quadruple or quintuple aim with regard to D V live and.
We're confident that we're going to get there I think we're going to develop the.
The data to support that perspective.
Speaker Change: The the apples to apples price differences arent that great. Once you add insufflator and some of the other things that are built in and we've just got to justify that difference.
One of the questions I would ask you Dave you can answer it as is.
Are there any procedures that physicians prefer using da Vinci Si to da Vinci five in other words is there any preference to stay with what they've got.
Yes.
Gary and all of my discussions and with the team.
Surgeons prefer the use of da Vinci bonds for the reasons, we talked about so.
On the administrative side as long as you can demonstrate that the quadruple aim or the quintuple aim is being satisfied that they're getting value for the relatively modest apples to apples price increase.
We feel pretty good.
I would say on forest reflection handle on case inside these are powerful foundational new.
Capabilities that are going into the market.
And.
I think that's really interesting and we will work with leading customers to start evaluating where do they make sense of where don't take we of course believe that they're gonna be procedures and patient populations, where they make a ton of sense and they generate real value. So early it's about data generation and research and feedback and later, we will start to dry.
That through clinical publications and other.
Other thing so I think it was a left hand, right hand here and some of it is what you get today you get precision you get imaging you'd get ergonomics, you get throughput and Theres. Some things that in this platform you get to participate in its research and development and that will come later and then it's a core technology platform upon which we can build.
Jamie mentioned it earlier, so it's that set of sequences that.
It gives us some confidence to keep pushing hard.
Well, Gary you anticipated my follow up question. So let me ask another one here.
You know what are the are the items that feedback I've heard from physicians is that case in sites in the <unk> sensing can help existing physicians be better, but more importantly, it could help our.
Physicians that do a lot of lab procedures are open procedures make it easier for them to adjust to robotics is that something you're hearing I know it's early in the launch here, but how do you think about those features and the ability to get more conversion from lab to robotic.
So I do think there are several ways to consider force feedback and think about it one of them is we do think it can have an impact on learning curve and so.
Laparoscopic surgeons or newer surgeons to the platform adopt it we believe that force feedback and looking at force feedback through pace insights can improve their time to proficiency on on the robot.
When it comes to.
Kind of longer term clinical outcomes, and what force feedback and the data surrounding it. So what Gary's described we actually we believe it to be a powerful component of looking to the future and saying how do we improve surgical outcomes, just general or surgery imparting less force on tissue.
Have a difference in outcomes our hypothesis strongly yes, and so that's what it's going to take multiple quarters and time to develop but I do believe theres kind of two segments workforce feedback can have that impact.
Thank you very much.
And we'll go to the next line.
And that is in line of David Roman.
Goldman Sachs. Please go ahead.
Thank you and good afternoon, everybody I wanted to start on an ion question appreciating some of the supply chain dynamics that may have contributed positively to growth in the quarter, but maybe you could go into a little bit more detail about what youre seeing in the field from.
From an adoption perspective to what extent you're seeing.
Higher diagnostic yields on ion and result in earlier intervention for patients.
Whether those interventions are taking place.
Utilizing davinci or not.
Yeah. So.
With respect to getting a patient into.
The diagnostic pipeline that Sky I was kind of an independent variable from ion Android da Vinci and so that's through screening or incidental findings, but once they're in there then ion is offering.
Really really effective way to go in biopsy that lesion and so we look at kind of two main variables. There one is the size of the lesion.
One is the diagnostic yield.
The important part of this is to diagnose smaller and smaller lesions.
<unk> lesion it is correlated to cancer stage, and that's where if you get it at stage. One a you can have very very high survival. So we're pushing towards smaller lesion size and then diagnostic yields that are.
Good.
Good as possible.
Approaching <unk> levels or Cte guided biopsy levels and eventually we hope to exceed those and so those together.
<unk> is proving to be a really effective tool at doing that well, while maintaining an improved safety profile over Cte guided.
Needle biopsy and so.
When somebody is diagnosed with ion.
And it is deemed to be cancer, then oftentimes.
They may move to a da Vinci procedure, it's really up to the tumor board in that position about the best way.
To treat that patient and maybe with da Vinci It may be with radiation or some other alternatives. So oftentimes there are a couple but not all the times.
That's very helpful context, Thank you and maybe I could ask a financial question on the follow up here I think it is look at the operating expense targets for the year most of the reduction actually looks like it's been back to what might've been a slower start to the year I think he grew opex about 7% in Q1 and saw an acceleration here.
In Q2, but maybe you could just help.
Unpack, a little bit about a little bit of the dynamic underpinning the operating expense growth for the balance of the year.
I was just thinking about sort of normalized opex growth is that sort of the seven number where you started the year kind of a low double digit number where you're trending now and then I don't know if youre willing to offer any perspective on the incremental depreciation, but you were kind of in like the $90 million range in Q.
$100 million range excuse me in Q1 of this year like are we talking about a $10 million to $10 million per quarter increased $20 million at any framing you can give it might be helpful on that side as well.
Yes of course, it can be a little lumpy depending on those expenses the kind of.
Not consistent across calls so I'd just say if you take the first half Opex grew 9% and you look at the updated guidance. It says the second half grows 11 to 15 16 ish percent. So an acceleration in the second half from a framing perspective, roughly we're looking to maintain R&D.
About revenue growth and its been at 11%. The last couple of years first half is about 11% and then you've seen us describe how we've been leveraging enabling functions.
In terms of then what the Opex guidance was on the last call versus what it is today. There are some of those lumpy expenses are no longer in the year just because of timing.
Have looked at.
Some head count that we had planned for the year that we've pushed into 2025, that's really around focus around anything other than focus.
Where you see opportunities to continue to leverage maybe at greater rates than we expected then we'll realize those those efficiency benefits.
But we do expect second half operating expenses to be higher in the first half of that is primarily driven by depreciation.
Not not ready to be specific about what the relative increase in depreciation expenses, but it is contemplated in that ramp up in second half operating expenses.
Great. Thank you very much.
And we'll go to next line.
And that will be the line of Rick wise.
Stifel. Please go ahead.
Good afternoon, everybody, Hi, Gary Hi, Dave.
Just.
I was hoping that you could talk a little bit more about the prestige your growth outlook broadly you you gave us.
You bumped up the range and we're very clear about the low end factories that the low and the high end.
But I was just curious I'm not sure I understand from your perspective.
Is.
Our very accurate our DLP, one pressures leveling off here or have they leveled off.
You know how.
Reasonable is it to think you could get to.
The upper end and sort.
The same question for the <unk>.
Trying to Asia pressures, you would talk about it as well.
Could you just elaborate a little bit on that thank you.
Yeah with regard to how to think about the range I'm going to ask Brian to step in and do that so Brian do that and then we'll come back to talk a little bit about <unk> or perhaps take that and then I think on China or ticket to Dave.
So Rick I'm just going to.
Reemphasize or restate what the range was so just reemphasize 15, 5% to 17% is procedure procedure guidance for the year at the low end, we're assuming that periodically procedures continues to soften we did talk a bit about even last.
Quarter in this quarter in Asia around physician strikes that were impacting them.
Procedures in Korea, along with delayed tenders.
Impacting procedure or capital placements in China, which therefore impacts overall procedures.
Our future growth and at the high end of the range were really assuming that that Barry I trick.
<unk> essentially stabilizes at current quarter rates, and again that Korea, and China do not get any worse.
Yeah speaking to bariatrics.
Two effects going on to the GL.
<unk> ones are changing to the surgical market and even within that there's some share change between laparoscopy and robotics, that's going on so you have two things that are coming through and they net out.
Oh, it is not the impact of G O P ones on the bariatric surgery market from our perspective in aggregate has not bottomed yet.
And the reality is I don't think anybody knows.
When and where that will exactly.
Settle for.
For a couple of reasons I think some of it is looking at the puts and takes of effectiveness and and you have constrained access to the drugs in and you have some new drugs in the pipeline. So that will play out over time and if somebody told you. They knew the answer up I'm not sure I believe them.
Having said all of that we're not depressed about it I think that it will play out I think there's a role for parametric surgery and I think in.
Our.
Customers hands with our systems I think that surgery is done well. So I think we're just gonna have to all go through it together I think we're gonna look that experience together.
With regard to kind of a longer term outlook of procedures in China overall sentiment.
Dave I'll kind of kick too yeah.
What I would say about the longer term kind of outlook here is our offerings.
Before a highly valued in China. The systems are are utilized.
At a high clip and we're.
There is value that surgeons and patients place on high quality minimally invasive care and so that's the I think the draw of this in terms of some of the headwinds to me there are kind of two areas one is the.
Capital environment that we talked about and with.
A constrained capital environment and placements it has an impact on procedure growth.
And then this other areas around this kind of re basing by the government around economics, and so it has various impacts that could have impacts in provinces around charge codes.
And that is another headwind for us in terms of procedure growth and utilization of long term.
One two comments I'd make on both the headwinds I think at some point I would expect both of them to be time limited.
There'll be an equilibrium that'll be that'll be found between.
<unk> and surgery at some point I also feel like the re baseline and the economic Rebase lining in China.
The integration and emergence of domestic systems, but those things will start to find Nicaragua. I'm also how long is that going to take us I think what's underlying this question and the answer is we don't know, but I think that minimally invasive surgery in China is highly valued there's a belief in robotic assisted surgery as being important.
And our products and ecosystem is back so I think that we're enthusiastic about completing them.
Speaker Change: Yeah.
Gary if I could just one follow up.
The question I have gotten I think most frequently post the launch of <unk>.
What new procedure, what new incremental Tam will da Vinci five unlock I had the privilege of interviewing Dave.
Who might be near at hand today.
Question, Srs and <unk>.
Said the way Davinci.
Unlock the general surgery Tam.
What will davinci, five unlock and David very eloquently said, it's going to unlock the routine use of robotic surgery every day.
Do you agree with that.
Speaker Change: And is that are your customers understanding that vision or.
We're getting that Thats, what youre aiming at any reaction to those thoughts I'd appreciate it. Thank you Dave.
Youre welcome Rick Yeah I'll start.
I agree with the no.
Oh sure.
<unk>.
Maybe just to reiterate.
Our position.
There is two different ways that it can help grow long term.
One way is to go deeper into the procedure base, we're in already to the health care teams and physicians, who have thus far not wanted to adopt or have chosen not to adopt or have had a barrier to adoption to help them adopt and that can be through some of the functionality of DB.
And what it does.
Little bit of easier access to other capital.
For example of XR has become more used in more places. It can it can release access constraints together as a portfolio those are powerful things and that speaks to what Dave spoke about.
We don't think we're done getting additional indications on on D. V. Five and those are things that could happen in the future and as we get closer and see what those opportunities will describe them.
Thank you.
Okay. We'll go to the next line.
Drew ranieri.
Morgan Stanley. Please go ahead.
Andrew Christopher Ranieri: Hi, Thanks for taking the questions.
Maybe just something that we also heard from Srs.
What is that.
D D.
The Davinci side is still very well considered in the field and their surgeons would still want to get their hands on it. So just can you talk a little bit more about some of the underlying demand for X side in the U S.
Jamie I think you pointed out to you kind of expect D vision to sequentially improve throughout the year. So maybe just talk to us about what that means for correct Si given that youre, adding broader conversations with hospital administrators and surgeons as they are thinking about building capacity for robotic surgery.
Yes, I would just say in the U S demand for Si kind of has two segments to it.
Have customers that need incremental capacity.
The Vinci five vision available in the time that they need it and so theyre entering into arrangements with us to take X I know to serve that expansion of capacity. They need and then they have the upgrade right into the arrangement to move to da Vinci five when it becomes available likely in broad launch you have a.
Other segment of customers in the U S, who are kind of wait and see with respect to what the value will be of da Vinci five and again, they look full building evidence and kind of a broadening of customer belief and part of that consideration is the profile of that customer what that strategy is what that procedure mix is and of course as <unk>.
The consideration that theyre looking at the incremental price.
Which as Gary described when you do the full stack isn't actually that significant.
Those customers that have tight capital budgets, who like X side, which is a capable system.
More of a wait and see so I think in terms of as you look forward that that will evolve with respect to.
How da Vinci, five capacity expands and the extent to which thing more customers can take that system, but there is a segment of customers that really like Si.
And as there been any change in thinking about bringing davinci five to the broader global markets and that that Youre working on a couple of regulatory filings right now, but any update on timing or further market expansion. Thanks for taking the questions.
Yes, just in terms of our O U S plans I think it's consistent with what we've communicated which is we're in discussions with Korea, and Japan and don't expect to launch in Europe before the end of next year and so as we as we look beyond that.
It's just too early to detail out those plans and we'll let you know as they get a little bit more of a focus here.
Yeah.
Okay, and we'll go to the next line here.
Adam mater.
Piper Sandler. Please go ahead.
Hi, good afternoon. Thank you for taking the questions and congrats on the nice quarter.
Two from me. The first one is on <unk> five and I, specifically wanted to ask you about the hardware and software changes that you plan to make in the back half of the year what are you hoping to improve upon.
What are the magnitude of the changes that you plan to implement it sounds like they're relatively minor but wanted to confirm that and then I had a follow up. Thank you sure sure I'll take that so some of the near term additions that we're talking about include the integration of hub capabilities of intuitive hub.
Speaker Change: And then from the surgeon, having its head and experience when they are in the console there'll be able to start accessing and controlling intuitive three D models being able to manipulate them from the console with the controls there and also they will have the ability to access a replay enter.
Proppant a video.
And then we will also include an integrate in simulation. So that kind of gives you a flavor I think some of the pieces that were adding that we've talked about it in these hardware and software upgrades. In addition, there will be some software upgrades that include responding to customer feedback as well on some of the things that we've heard is.
So I went through a measured launch here.
And then if you look a little further out.
Some intraoperative technology building blocks that we're working on such as procedure step mapping and three D depth mapping that we'll use some AI and ml algorithms and leverage this compute power of <unk>.
Da Vinci <unk> and those things will set us up for some more advanced features in the future that leverage that foundation.
Really good color, Dave Thank you for that and for the follow up wanted to ask you about SP.
Congrats on the thoracic indication I'm.
I'm curious how much you think that expands the opportunity for SP here in the states.
I know you're also working on colorectal. So curious if you have timelines there.
And then together does that kind of gave you the indication base to push asps more.
<unk> in the U S. Thanks for taking the questions.
Yeah in terms of thoracic.
The early period.
That procedure actually.
As optimal when you have a stapler and we're in development for a stapler for SP and so we will be able to work with early adopters on the thoracic indication.
It's really when the state with terms that you were able to to kind of.
Small robustly drive adoption.
One of the advantages vantages of SP is of course, then the opportunity to.
Access to body in ways that does less damage to healthy tissue.
Today in the U S. In terms of thoracic for multi pool, we're already relatively highly penetrated and so really the question then is relative value of SP compared to Si what was the second part of your question I'm, sorry, if you could repeat it.
Yes happy to I was just asking about colorectal timing I think you have the the IDE study thats ongoing and you know.
I think that'll be a fourth indication once the colorectal indication is in hand, so does that kind of give you critical mass.
Yes from an indication standpoint, they kind of push more aggressively with SP in the U S.
The work on the IV <unk>.
<unk>, we don't have any additional detail at this point.
Obviously that then adds another category with respect to the set of indications in the in the U S and I think it does have to give us the opportunity to both.
Supplement SP procedure growth in the U S and add to the growing utilization, we see of the SP platform.
Speaker Change: In the U S. But I think we also have the opportunity for additional indications over time in the U S.
Colorectal like like thoracic will also require the SP stapler.
Operator, we'll take one more question from one more caller and then we'll wrap.
Okay that would be from the line.
Speaker Change: Richard <unk> choice Securities. Please go ahead.
Richard: Thanks for taking the question.
Speaker Change: Maybe for Jamie just.
Jimmy in the past you've talked about a long term.
In the intermediate to long term three four year timeframe to get back above sustainably, 70% gross margin a correct me if that's not true, but I'm pretty sure. That's what you've said in the past I'm. Just curious just with some of the some of the initiatives maybe paying dividends earlier than expected and faster I know you have some.
Texturing.
Speaker Change: Transition going on for ion disposables, that's a big initiative.
Is it possible, where we're moving towards that goal a little faster sooner.
I'd love to hear any thoughts there.
Specifically, 70% gross margin that's not sustainable in the short term it continues to be our aspiration to have gross margin at 70% in the medium term.
There's work for us to do over that period with respect to obviously da Vinci five costs, we have to continue to progress on ion and SP costs and as we've said we have incremental depreciation in the second half and most significant incremental depreciation.
Next year and so that will also require us to then the manufacturing capacity related which you build in chunks.
Speaker Change: We'll have to revenue leverage that incremental depreciation over a period of time.
Certainly in terms of the baseline of where we are at the cost reductions. We described on component costs and logistics costs have come in a little earlier and that's why we've raised the guidance for gross margin for this year, but the aspiration for 70% to 70% gross margin is still a medium term aspiration.
Thanks.
If I could just maybe just.
Okay wrap it there thank you.
That was our last question in closing, we believe that there is a substantial and durable opportunity to fundamentally improve surgery and acute interventions.
Our teams continue to work closely with hospitals physicians and care teams in pursuit of what our customers have now turned the quintuple in.
Better more predictable patient outcomes better experiences for patients better experiences for their care teams better access to great care and ultimately a lower total cost of care.
We believe value creation in surgery and acute care is foundational <unk> human it flows from respect for and understanding of patients and care teams their needs and their environment.
We envision the future of care that is less invasive and profoundly better where diseases or identified earlier and treated quickly. So patients can get back to what matters. Most thank.
Thank you for your support on this extraordinary journey, we look forward to talking to you again in three months.
Yeah.
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