Q4 2024 Intuitive Surgical Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to the Q4 2020 for intuitive earnings Conference call. At this time all participants are in a listen only mode. Please be advised that today's conference is being recorded after the speaker's presentation there'll be a question and answer session to ask a question. Please press.
Speaker Change: Star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again I would now like to hand, the conference over to your speaker today, Brandon Lam Investor Relations for intuitive surgical.
Speaker Change: Good afternoon, and welcome to intuitive fourth quarter earnings Conference call.
Gary: With me today, we have Gary <unk> our CEO.
Speaker Change: Jamie some math our CFO.
Daniel: Daniel <unk>, our senior medical officer.
Speaker Change: Dave Rosa, our president and regular participant on this call is away from the office. This week on a prior business commitment and will not be joining today.
Speaker Change: Dr. Daniel Oh, Senior Medical officer, and practicing surgeon will join us on this call to describe clinical highlights.
Speaker Change: We will also we would also like to announce that Dan economy will be joining intuitive as our VP and head of Investor Relations.
Speaker Change: Dan has worked out a global investment manager for the last 18 years and is actively call on surgical robotics since 2008.
Speaker Change: We look forward to Dan joining intuitive in early February.
Speaker Change: 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 Change: Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties.
Speaker Change: These risks and uncertainties are described in detail in our Securities and Exchange Commission filings, including our most recent Form 10-K for the fiscal year ended December 31, 2023 and subsequent filings.
Speaker Change: Our SEC filings can be found through our website or at the Sec's website.
Speaker Change: Investors are cautioned not to place undue reliance on such forward looking statements.
Speaker Change: 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.
Speaker Change: Today's press release, and supplementary financial data tables have been posted to our website.
Speaker Change: Today's format will consist of providing you with highlights of our full year and fourth quarter results as described in our press release announced earlier today, followed by a question and answer session.
Speaker Change: Gary will present business and operational highlights Jamie will provide a review of our financial results and procedure highlights Dan.
Speaker Change: And we will present clinical highlights.
Speaker Change: Then I will provide our financial outlook for 2025, and finally, we will host a question and answer session with that I'll turn it over to Gary.
Gary: Thank you for joining us today.
Speaker Change: I'll touch on our performance for the full year of 2024 and share our perspective going into 2025.
Speaker Change: 2024 was a strong year for intuitive with robust early adoption of our fifth generation multi port platform da Vinci fives.
Speaker Change: And healthy procedure growth in many of our supported indications in countries.
Speaker Change: Turning in strong financial performance for the year.
Speaker Change: Adoption of our ion in da Vinci S. P platforms continued with new global clearances and increased utilization.
Speaker Change: Our teams have been hard at work launching da Vinci fives and learning from its early experience.
Speaker Change: We are improving our products across all three of our platforms and helping our customers achieve their programmatic objectives.
Speaker Change: We started 2024 focused on four main thrusts.
Speaker Change: First we expanded indications and launches of our new platforms by region.
Speaker Change: With a particular focus on our first phase of da Vinci five launch.
Speaker Change: Second we pursued increased adoption for focus procedures by country through training commercial activities and market access efforts.
Speaker Change: Third we drove quality and gross margin improvements in our global operations and finally, we focused on increasing our productivity, particularly in functions that benefit from industrial scale.
Speaker Change: Taken together our team made excellent progress against these objectives.
Speaker Change: Moving to procedures growth for the full year was 17%.
Speaker Change: Areas of strength included general surgery in the United States and regional performance in countries, including the U K, and Ireland, Japan and Germany.
Speaker Change: Distribution markets, including Brazil, Spain, and Italy were also strong in the year.
Speaker Change: This week, we announced the acquisition from AB Medica of the da Vinci business in Italy, Spain, Portugal and related territories.
Speaker Change: We're pleased with their performance and we look forward to walk them in these new staff to our team.
Speaker Change: In the U S General surgery procedure growth was led by cholecystectomy with forgot an appendectomy procedure is rising as well.
Speaker Change: Thoracic procedure growth was also healthy in the year.
Speaker Change: Bariatric procedures fell modestly for the full year 2024, given the rise in G. L. P. One medications.
Speaker Change: Procedure growth outside the United States continued to diversify beyond urology.
Speaker Change: With nice growth in categories, including general surgery and thoracic surgery.
Speaker Change: Globally benign indications grew approximately 200 basis points faster in the year than cancer indications.
Speaker Change: Flexible robotics on procedures showed continued strength with 78% growth for the full year.
Speaker Change: As P procedure growth accelerated in the year with 72% growth over a four year, a result of healthy growth in Korea, Japan, and Europe and solid growth in the U S.
Speaker Change: On the capital front, we placed 1430 multiport systems and the full year 2024, compared with 1313 multiport systems in 2023.
Speaker Change: Hi, I'm placements for the full year were 271 versus 213 prior year end.
Speaker Change: SP placements were <unk> 96 for the full year versus 57 systems in the prior year.
Speaker Change: Globally placements were strong in the United States helped by the launch of da Vinci five.
Speaker Change: Overall, our systems portfolio of da Vinci, five da Vinci XI da Vinci X da Vinci SP and ion <unk>.
Speaker Change: Combined with our flexible financing options.
Speaker Change: How's our team to meet our customers' varying needs.
Speaker Change: Jamie will take you through placement dynamics in more detail later in the call.
Speaker Change: System utilization remains an important indicator of customer health because it is correlated to patient demand care team satisfaction and hospital financial health.
Speaker Change: Multipart utilization grew 3% in the year S. P utilization grew 12% in the year and on utilization grew 13%.
Speaker Change: Given our different platforms their procedure mix and sites of care teasing apart system utilization by customer segment becomes increasingly important going forward.
Speaker Change: For example, a mid sized community hospital lung program systems utilization can differ from a high volume community Hospital General surgery program.
Speaker Change: As robot assisted surgery moves to the back half of adoption curves in some procedures utilization growth rates may differ from prior year trends.
Speaker Change: Our performance supported revenue of $8 $4 billion for the year of which 84% was recurring and representing 17% growth over 2023.
Speaker Change: Our operating expenses were at the lower end of our spend guidance.
Speaker Change: Our spending reflects three initiatives first we continue to invest in R&D to support innovation and adoption of our platforms and digital tools globally.
Speaker Change: Second we're expanding our manufacturing and commercial footprints and lastly, we have sought to leverage our enabling functions given our increased scale.
Speaker Change: Our product margins also started to improve in the year as increased shipment volume allowed for better factory utilization as well as leverage in our component shipment and other logistics costs.
Speaker Change: Taken together, our net income grew by 29% in 2024 over 2023.
Speaker Change: Touching briefly on da Vinci five our teams have done a nice job in executing a complex launch we placed 362 da Vinci fives in the year and over 2500 surgeons have performed in total over 32000 procedures on da Vinci five in 2024.
Speaker Change: 25 has broad clinical indications and over 40 different procedure types have been performed using da Vinci five to date.
Speaker Change: We design our systems to allow for routine sequential upgrades to their capability overtime.
Speaker Change: And da Vinci, five customers will receive hardware and software upgrades going forward starting this year.
Speaker Change: This year's upgrades will focus on digital features supported by our 10000 time increase and computing power.
Speaker Change: We will share more details on these features as we bring them to market.
Speaker Change: As we enter 2025, our company priorities are as follows first we will focus on the full launch of da Vinci five its regional clearances and follow on feature releases.
Speaker Change: Second we'll pursue increased adoption for our focused procedures by country through training commercial activities and market access efforts.
Speaker Change: Third we will drive continued progress in building industrial scale product quality and manufacturing optimization.
Speaker Change: And finally, we will focus on excellence and availability of our digital tools.
Jamie: Jamie over to you.
Speaker Change: Good afternoon, I will describe the highlights of our performance on a non-GAAP or pro forma basis I will also summarize our GAAP performance later in my prepared remarks.
Speaker Change: A reconciliation between our pro forma and GAAP results is posted on our website.
Speaker Change: Q4 in 2020 full revenue procedures and system placements are in line with our preliminary press release of January 15.
Speaker Change: I will briefly review full year 2024 performance before describing our Q4 results in greater detail.
Speaker Change: 2024 financial performance was strong da Vinci procedures, and total revenue each grew 17% over the prior year.
Speaker Change: Pro forma gross margin improved 100 basis points to 69, 1% and pro forma SG&A expenses leveraged as compared to 2023.
Speaker Change: As a result pro forma operating margin for 2020, full improved 310 basis points to 37% and pro forma EPS increased 28%.
Speaker Change: Building off of that 22% increase in 2023.
Speaker Change: We placed 362 da Vinci systems in our first year of the limited launch of which 174 systems were placed in Q4, including our first replacements of da Vinci five in Korea.
Speaker Change: Turning to Q4, our financial performance was ahead of our expectations driven by revenue growth of 25% and strength across the rest of the P&L, resulting in pro forma operating margin of 38%.
Speaker Change: Q4 revenue reflected a couple of favorable dynamics.
Speaker Change: First a higher purchase mix of systems as compared to recent periods driven by multi system deals with certain U S. IV ends that prefer to purchase and a higher mix of placements through distributors.
Speaker Change: Second.
Speaker Change: We saw a higher mix of dual console placements for da Vinci five as we increased supply and we're able to support more academic customers.
Speaker Change: Finally, we saw a higher system asps.
Speaker Change: Resulting from a stronger mix of mix of da Vinci five placements.
Underlying core metrics were also strong with da Vinci procedure growth of 18%.
Speaker Change: Growth in the installed base of da Vinci systems of 15% and average system utilization growth of 3%.
Speaker Change: In Q4 U S procedures grew 15% driven by growth in benign general surgery, including accretive growth and procedures performed after hours for emergent care.
Speaker Change: Bariatric procedures in the U S declined in the low to mid single digit range similar to last quarter.
Speaker Change: Our U S procedures grew 25% driven by relative strength in India, The U K, Italy and Japan.
Speaker Change: Procedure growth in Korea improved sequentially in part driven by strong SP growth. However, our business there continues to be impacted by physician strikes.
Speaker Change: Consistent with the last couple of quarters procedure growth in China was slightly below the corporate average.
Speaker Change: <unk> a continuation of the dynamics, we have described on previous calls.
Speaker Change: Looking at our U S procedure performance in aggregate, we see strong growth in colorectal benign general surgery and thoracic CAGR is.
Speaker Change: Reviewing capital performance, we placed 493 systems in the fourth quarter, 19% higher than the 415 systems, we placed in the fourth quarter of last year.
Speaker Change: In the U S. We placed 284 systems in Q4, an increase of 75 systems as compared to last year, reflecting several large multi system placements with a number of IV Ns and an increase in the supply of da Vinci five.
Outside the U S with <unk>.
Speaker Change: Phase 209 systems in the fourth quarter compared with 206 in the same quarter last year.
Speaker Change: This quarter, we placed 89 systems in Europe with <unk>.
Speaker Change: Three in Japan, and <unk> in China.
Speaker Change: <unk> was <unk> 71 in Europe, 17, Japan, and 11 in China in Q4 of last year.
Speaker Change: Placements in the UK and Germany continued to be impacted by ongoing government budget pressures affecting health care capital spending.
Speaker Change: The <unk> system placements in Europe included 39 systems into market served by our distributors as compared to 24 systems last year.
Speaker Change: In Japan financial pressures caused some customers to delay capital investment decisions.
Speaker Change: Fourth quarter revenue was $2 four 1, billion% to 25% increase over last year.
Speaker Change: On a constant currency basis revenue growth was 26%.
Speaker Change: Systems revenue grew 36% year over year, driven by a 19% increase in da Vinci system placements are higher system Asps.
Speaker Change: And the higher purchase makes previously referenced.
Speaker Change: Additional revenue statistics and trends are as follows.
Speaker Change: Leasing represented 45% of Q4 placements compared with 58% last quarter driven by the aforementioned mix of system placements from certain <unk> in the U S who prefer to purchase.
Speaker Change: And the higher mix of placements with our distributors.
Speaker Change: However, as we look forward, we continue to expect that leasing rates will increase over time.
Speaker Change: Q4 system average selling prices were $1 $5 9 million.
Speaker Change: As compared to $1 $42 million last year, driven by higher mix of da Vinci, five and a higher dual console mix, partially offset by lower pricing in China.
Speaker Change: We recognized $28 million of lease buyout revenue in the fourth quarter compared with $21 million last year.
Speaker Change: Da Vinci instrument and accessory revenue per procedure was approximately $1860 <unk>.
Speaker Change: Paired with approximately $800 last year.
Speaker Change: The year over year increase in <unk> per procedure reflects customer buying patterns and a higher mix of SP procedures.
Speaker Change: Partially offset by procedure mix in the U S. Given a lower mix of bariatric procedures, and a higher mix of cholecystectomy.
Speaker Change: Turning to ion that were approximately 28000 ion procedures performed in the fourth quarter an.
Speaker Change: An increase of 70% as compared to last year.
Speaker Change: In Q4, we placed 69 ion systems compared to 44 in Q4 of 2023.
Speaker Change: As a reminder, supply constraints impacted ion system placements in the fourth quarter of last year.
Speaker Change: 769 systems were placed in O U S markets.
Speaker Change: The installed base of ion systems increased 51% from last year to 805 systems and average system utilization increased 13% year over year.
Speaker Change: Fourth quarter SP procedure growth continued to accelerate growing 81% driven by Korea and early stage growth in Europe, and Japan, where we have clearance for a broad set of indications.
Speaker Change: We placed 30 SP systems in Q4, and 96 for the year up from 57 placements in 2023.
Speaker Change: Fourth quarter placements included seven in Korea, six in Europe, and four in Japan.
Average system utilization for our SP platform grew 18% in Q4.
Speaker Change: <unk> and par growth of SP in markets, where we have a broad set of indications.
Speaker Change: We have received recent clearances in the U S for thoracic and colorectal indications.
Speaker Change: However, we expect broad commercial efforts for SP in those procedure categories to commence once we obtain FDA clearance for Asp's stapler.
Speaker Change: Moving on to the rest of the P&L.
Speaker Change: Pro forma gross margin for the fourth quarter of 2024 was 69, 5% compared with 68% for the fourth quarter of 2023.
Speaker Change: The year over year improvement in gross margin reflects fixed overhead leverage given revenue growth.
Speaker Change: Lower inventory reserves and improvements in freight and logistics costs.
Speaker Change: In 2020 full we execute on our plans to significantly improved product margins for our ion and SP platforms.
Speaker Change: While we have made substantial progress ion and SP product margins continue to be dilutive and our teams have ongoing programs to deliver further improvement.
Speaker Change: With respect to our manufacturing expansion and capital investment plans in 2025, we anticipate opening new facilities for da Vinci, <unk> and ion system manufacturing in California, and new endoscope manufacturing facilities in Germany and Bulgaria.
Speaker Change: As a result, and as we have previously indicated we expect a significant increase in depreciation expense in 2025.
Speaker Change: We will also continue to transfer our mature products to facilities in Peachtree corners, Georgia and Mexicali.
Speaker Change: Given these activities, we expect elevated inventory levels during 2025.
Speaker Change: As we complete this cycle of manufacturing expansion.
Speaker Change: It is driven by our strategy to operate at industrial scale, we anticipate lower levels of capital expenditures in 2025, and 2026 as compared to recent periods.
Fourth quarter pro forma operating expenses increased 9% compared with last year, driven by increased head count higher variable compensation and increased legal expenses.
Speaker Change: Fourth quarter 2024 operating expenses included a $45 million contribution to the intuitive foundation as compared to a $40 million contribution in Q4 of last year.
Speaker Change: Looking at operating expenses for the year, we delivered on planned leverage in SG&A, which improved by 180 basis points as a percentage of revenue.
Speaker Change: While we will continue to look for opportunities within SG&A to leverage as we grow we would highlight that in 2025, we expect increased depreciation expenses given recent capital expenditures.
Speaker Change: And higher legal expenses given ongoing litigation.
Speaker Change: Innovation continues to be critical to helping our customers make progress in the quintuple aim and therefore, you should expect us to prioritize investments in R&D.
Speaker Change: Pro forma other income was $87 $6 million for Q4 lower than $94 6 million in the prior quarter, primarily driven by FX re measurement of the balance sheet.
Speaker Change: Our pro forma effective tax rate for the fourth quarter was 25%.
Speaker Change: Little lower than our expectations, reflecting net discrete benefits of $11 million related to statute of limitation expirations and other adjustments to certain tax items.
Speaker Change: Fourth quarter 2020, full pro forma net income was $805 million or $2 21 per share compared with $574 million or $1 60 per share for the fourth quarter of last year.
Speaker Change: I will now summarize our GAAP results.
Speaker Change: GAAP net income was $686 million or $1 88 per share for the fourth quarter of 2024, compared with GAAP net income of $606 million or $1 69 per share for the fourth quarter of 2023.
Speaker Change: As a reminder.
Speaker Change: Fourth quarter 2023, GAAP tax expense reflected onetime benefits of $159 million related to an increase in deferred tax assets associated with the statutory rate increase in Switzerland, Andrew.
Speaker Change: And receipt of certain tax benefits related to our Swiss operations.
Speaker Change: The adjustments between pro forma and GAAP net income are outlined and quantified on our website.
Speaker Change: We ended the year with cash and investments of $8 $8 billion compared with $8 $3 billion at the end of Q3.
Speaker Change: The sequential increase in cash and investments, reflecting cash generated from operating activities.
Speaker Change: Partially offset by capital expenditures of $312 million.
Speaker Change: With respect to the plans, we announced on Tuesday to go direct in Italy, Spain, Portugal and associated territories.
Speaker Change: The base purchase price is 219 million euros with an earn out of up to an additional 31 million euros based on 2025 procedure volumes.
Speaker Change: While our primary motivation is to develop closer relationships with customers serving a combined population of approximately 118 million people. We do expect this transaction, which we estimate to close in the first half of 2026 to be slightly accretive to pro forma EPS.
Speaker Change: Before I turn it over to Dan to discuss clinical highlights let me address the outlook for pro forma operating margins for 2025.
Q4 performance of 38% was above our expectations.
Speaker Change: Looking ahead to 2025, we anticipate pro forma operating margins in 2025 to be lower than Q4 due to several dynamics.
Speaker Change: First as previously stated leasing rates are expected to be higher than Q4, which resulted in revenue and profits for related system placements to be recorded over multiple years versus in the quarter of placement.
Speaker Change: Second we anticipate significantly higher depreciation expense given recent capital expenditures.
Speaker Change: And finally, we expect a higher mix of da Vinci, five ion and SP revenue, which carry product margins below the corporate average.
Speaker Change: In addition from a modeling perspective I would also highlight a couple of additional considerations.
Speaker Change: First revenue denominated in non USD currencies represents approximately 25% of our total revenue.
Speaker Change: On a revenue weighted basis using current exchange rates. The U S. Dollar is approximately 4% stronger than rates realized in Q4.
Speaker Change: As we move into broad launch of da Vinci five in the middle of the year and customers have the opportunity to upgrade their fleets. We you would expect trading credits for next Si to be significantly higher than recent periods adversely impacting system asps.
Speaker Change: Finally, given the increasing choice customers have as competitors bring robotic systems to the market and seek a geographical clearances, we may see capital selling cycles lengthen as customers evaluate alternatives.
Speaker Change: <unk> will provide our outlook for 2025 later in this call.
Dan Economy: And with that I would like to turn it over to Dan.
Dan Economy: Thank you Jamie.
Dan Economy: Like to share with you. Some recently published peer reviewed literature that we've found to be notable.
Dan Economy: In addition to the specific data highlighted on this call. We encourage you to consider the wide body of evidence detailing these topics with published scientific studies over the years.
Dan Economy: Today, we will give an update on two recent publications.
In the first study Dr <unk> and colleagues from the Massachusetts General Hospital in Boston collaborated with the research team at intuitive for the compare study published in the Annals of surgery.
Dan Economy: This landmark study compared perioperative outcomes da Vinci robotic assisted surgery.
Dan Economy: <unk> ortho arthroscopic surgery.
Dan Economy: Well as to open procedures.
Dan Economy: This was a meta analysis, which analyzes results from previously published evidence overtime.
Dan Economy: To obtain an overview of cumulative data.
Dan Economy: In this study the investigators pooled data from randomized controlled trial.
Dan Economy: Respective comparative cohort studies and large real world evidence database studies from the past 12 years.
Dan Economy: In order to evaluate whether da Vinci procedures were associated with an improvement in short term patient outcomes.
Dan Economy: <unk> seven commonly performed oncologic procedures from different specialties.
Dan Economy: Notably over 1 million patients were included in each of the da Vinci Laparoscopic Dorcas Gothic and open patient groups.
Dan Economy: And included data from 22 countries.
Dan Economy: The authors found that compared to standard minimally invasive surgery patients undergoing da Vinci procedures had favorable perioperative outcomes.
Dan Economy: Specifically da Vinci patients had a 56% lower chance of conversion to open.
Dan Economy: 21% lower chance of receiving a blood transfusion.
Dan Economy: 10% less likelihood to experience a complication within 30 days of the procedure.
Dan Economy: In addition length of stay with significantly shorter with lower 30 day readmission and mortality rates.
Dan Economy: Similar favorable outcomes were found for da Vinci patient when compared to the open approach.
Dan Economy: Even greater magnitude differences between the two approaches.
Dan Economy: The authors concluded that this meta analysis demonstrated multiple benefits for da Vinci procedures.
Dan Economy: When compared to alternative minimally invasive or open approaches.
Noting that these results will be helpful to decision makers, considering the use of robotics and multi specialty settings.
Speaker Change: And the second study Dr. Michael <unk> from Washington University School of Medicine, and other colleagues published.
Speaker Change: Published in surgical endoscopy at the results of a preclinical study using intuitive novel Force feedback technology incorporated in da Vinci five.
Speaker Change: Across 28 surgeons with varying levels of experience. This study evaluated the forces applied to tissue with having forced feedback technology on or off during core surgical tests, including retraction dissection and suturing and a tissue model.
Speaker Change: Results from this study demonstrated a significant reduction in both the average and maximum forces exerted on tissue for all three surgical tests.
Speaker Change: Irrespective of surgeon experience level.
Speaker Change: Notably when using the highest sensitivity setting.
Speaker Change: Up to a 55% reduction of the maximum force exerted on tissue during suturing was observed.
Speaker Change: The authors concluded that this study demonstrated that force feedback technology may significantly decrease the forces applied at the tissue level, when performing common surgical tests across novice intermediate and experienced surgeon.
Speaker Change: They continue to note quote this innovative technology has the potential to enable safer and gentler surgeries, resulting in better surgical outcomes for patients undergoing robotic assisted surgery and quote.
Speaker Change: To me the notable finding in this study is that the benefit of force feedback was observed not just another surgeon, which one might expect but also an experienced surgeons who have completed at least 200 da Vinci procedures.
Brendan: Now I'll turn it over to Brendan.
Brendan: Thank you Dan.
Brendan: I'll now turn to our financial outlook for 2025.
Brendan: Starting with procedures.
As described in our announcement earlier. This month total 2024 da Vinci procedures grew approximately 17% year over year to over $2 million 680000 procedures performed worldwide.
Brendan: For 2025, we anticipate full year procedure growth within a range of 13% and 16%.
Brendan: The low end of the range assumes growth in China continues to be impacted by environmental and competitive dynamics.
Brendan: European governments continue to constrain hospital capex budgets limiting the expansion of capacity in the field and bariatrics procedure declines continue at rates similar to 2024.
Brendan: At the high end, we assume China procedure growth recovers relative to 2020 for the Capex.
Brendan: Environment improves in Europe, and bariatrics procedure declines moderate.
Brendan: Q1, and full year 2025 will have approximately one fewer working days in 2024 due to the leap year.
Brendan: Turning to gross profit.
In 2024, our pro forma gross profit margin was 69%.
Brendan: In 2025, we expect our pro forma gross profit margin to be within a range of 67% 68% of net revenue.
Brendan: The lower estimate of pro forma gross profit margin in 2025 reflect significant incremental depreciation as we bring on new facilities the impact of growth in newer products and the impact of the stronger U S. Dollar.
Brendan: Our actual gross profit margin will vary quarter to quarter, depending largely on product regional and trade in mix and pricing.
Brendan: The range does not include any potential impact of new tariffs on our business, which could be material.
Brendan: Turning to operating expenses in 2024, our pro forma operating expenses grew 10%.
Brendan: In 2025, we expect our pro forma operating expense growth to be within a range of 10% and 15%.
Brendan: The growth in operating expenses reflects increased depreciation from new facilities investments in innovation to drive our growth objectives, and an increase in legal expenses.
Brendan: We expect our noncash stock compensation expense to range between $760 million and $790 million in 2025.
Brendan: We expect other income which is comprised mostly of interest income to total between $370 million and $400 million in 2025.
Brendan: With regard to capital expenditures, we expect the range to total between $650 million and 800 million primarily for planned facility construction activities.
Brendan: With regard to income tax in 2024, our pro forma income tax rate was 21, 4%.
Brendan: As we look forward, we estimate our 2025 pro forma income tax rate to be within a range of 22% and 23% of pretax income.
Brendan: That concludes our prepared comments, we will now open the call to your questions.
Brendan: Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment for questions.
Speaker Change: Our first question comes from Larry <unk> with Wells Fargo. You May proceed.
Larry: Good afternoon, Thanks for taking the question and congrats on a really strong finish to the year.
Speaker Change: One for Gary one for Jamie So Gary Historically, you said procedures.
Five placements.
Speaker Change: The second half of 'twenty four.
Speaker Change: System placements grew over 35%.
Speaker Change: Utilization was about 2% is this a leading indicator of more procedures.
Speaker Change: Or will we have a digestion period to restore normal utilization and I had one follow up.
Speaker Change: Yes, I think a couple of things are going on there one of them is the as I said in the prepared remarks, as we get to the back half of some curves of the.
Speaker Change: Expectations of some of those programs may be different in terms of utilization.
Speaker Change: As they participate in other words not every account is going to be a high volume account.
Speaker Change: That's okay I think the economics can work and I think we can supply them. So some of that is going on I think the other thing is.
Speaker Change: New new capital opportunities New capital features Ken.
Speaker Change: Pull forward or otherwise have people delay a little bit and then and then acquire systems that can put a wave or a ripple through utilization and we're just going to have to see if that ripple plays through so both of those effects are likely going on it is actually extremely hard analytically to teach them out.
Speaker Change: I think in the U S over time, youre going to see utilization growth rates.
Speaker Change: Multiport start to settle a little bit I don't think they'll keep galloping.
Speaker Change: At the same time, I think SP utilization has room to run in an iron utilization has room to run.
Speaker Change: Thanks, Gary and Jamie on the Q3 call you said the gross margin will be a little lower in 2025 versus 2024, I think there is 57% to 68% guidance was probably a little bit.
Speaker Change: Lower than expected can you quantify the drivers for the $69. One this year in 2024 to <unk>, 67% to 68% and how to think about the path back to your goal of 70%. Thank you.
Speaker Change: Yes.
Speaker Change: Three drivers Larry the largest of which is the impact of depreciation expense and associated fixed costs. So there is deleverage in.
Speaker Change: And the 24 to 25 comparison roughly ish depending on way you have the revenue model for 25, and that's about a point of the $160 Delta. If you go from 24 actual to the midpoint of 25, the other two dynamics roughly equally in terms of impact.
Speaker Change: Product mix with TV, five ion and SP being a greater proportion of the revenue. They all carry currently margins below the corporate average so have a dilutive effect from a mixed perspective.
And then I think what's new from the last call as the impact of FX.
Speaker Change: So those three things are the drivers there are some offsetting.
Speaker Change: Cost reduction is the teams are delivering within that kind of gross margin range I think what we've said with respect to gross margin is over the midterm. We think we can get back beyond 70%.
Speaker Change: That is going to require us.
Speaker Change: Once we get past this kind of incremental depreciation to leverage over a multi year period as we grow.
Speaker Change: We also have as we said to work on product margins in ion and SP.
Speaker Change: That's still somewhat to be done there.
Speaker Change: And then on a more routine basis.
Speaker Change: <unk> has to deliver cost downs.
Speaker Change: Thanks, Jamie.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Robbie Marcus with JP Morgan You May proceed.
Robbie Marcus: Oh, great. Thank you and I'll echo congratulations on a fantastic quarter.
Robbie Marcus: Two from me first.
Speaker Change: Maybe for Gary.
Speaker Change: You gave a lot of detail on the call about mid year fall line churn trade in cycle.
Speaker Change: I'd like to just get your qualitative comments around how youre thinking about the mix da Vinci five birth side going forward.
Speaker Change: The necessity or the speed with which an upgrade cycle can start and how youre thinking about X sight first da Vinci five placements in terms of mix.
Speaker Change: Going forward outside the U S. Once approved will start rolling in.
Speaker Change: It all has implications for the model so I'd love to get your thoughts on that.
Speaker Change: Was going to say all I will tell you a little bit about I think perhaps the environmental asps.
Speaker Change: Aspects of that kind of the the wrapping around it I'll turn it over to Jamie for.
Jamie: Any modeling implications.
Speaker Change: Just.
Speaker Change: What goes to two things are driving what we call broad launch one of them is getting our supply chains up to scale and volume for what we expect.
Speaker Change: Demand could be when.
Speaker Change: When we start going out and looking at things like trade ins and also starting to to get clearances around the world. So thats exciting. The next one is software updates and those software updates reflect both feedback from the field and then the integration of some of the technologies in our digital space from hub to some of the imaging things. We can do to start to come out in the first set of <unk>.
Speaker Change: <unk>, which is really great I think those are digital tools that our customers and surgeons will appreciate and starts giving them a lot of access to date.
Speaker Change: Data that helps them analyze the performance of themselves and of their programs. How compelling that is we'll determine how fast customers won't upgrade I think the upgrade cycle.
Speaker Change: It comes down to this kind of a question of differential value X and XR outstanding machines. They work. They are workhorses. They work really well, we're delighted to support them and support our customers who use them as they found increasing value in the features and content, we bring to da Vinci, five whether it's analytics or force reflection or ergonomics for better.
Speaker Change: <unk>.
Speaker Change: That drives the trading cycle. The question that I understand your modeling question well of how fast is it all move and what does that look like can be difficult to predict.
Speaker Change: Jamie.
Jamie: Turn it over to you and let you add your commentary, yes, while we don't have a specific percentage.
Jamie: Impact of moving to broad launch the impact of getting additional geographical clearances. Obviously, then says directionally over time, the proportion of placements that DB five generally should should increase although I would I would recognize that <unk> is a capable system and at some point, we have the opportunity for refurbished Si.
Jamie: With respect to trade ins.
Jamie: You don't really see trading start to.
Jamie: Pick up until you get to a broad launch which is the middle of the year and it's going to be a function of the dynamics that.
Jamie: Gary indicated of course, we can look back at what happened on the XI launch and how those upgrades win and we have some indication from customers in our pipelines.
Jamie: I think the best that we can say at this point given it's so early is there any trading cycle would be progressive.
Speaker Change: Final point I'll make and I think you had asked Robert question as part of this is is there an opportunity for depreciated assets like <unk>, which are highly capable we know how to service we know how to to support to those open or create other opportunities in other markets that may be more capital price sensitive in the answer to that is yes.
Speaker Change: Great maybe just one quick follow up Gary you always give.
Give us a general state it again on the health of the capital.
Speaker Change: Environment around the World U S O U S and I'm, particularly thinking of.
Speaker Change: China, where you had really strong placement quarter in fourth quarter.
Speaker Change: So any thoughts there would be great as we head into 2025.
Jamie: Yes, I think Jamie usually does that Jamie why don't you take care of that.
Speaker Change: Firstly I don't think we characterize the 20 systems replaced in China in Q4 is a strong.
Jamie: Maybe it is on a year over year comparison basis, but.
Jamie: The environment in China continues to be dynamic and challenging as we've said.
Jamie: Impacted by both domestic competition.
Jamie: And Seth activity activities implemented by the government.
Jamie: I characterize the environment is relatively consistent and challenging I mean in terms of capital overall I think in the U S. It's been strong part of that is interest in da Vinci five given it's a new product.
Jamie: And you see to some extent less sensitivity to capital budgets, given just the proportion of placements in the U S. In particular the at least.
Jamie: We've highlighted the challenges in the UK and Germany, and new for US in Q4 for Japan was some delays because of the profitability in certain customers there.
Jamie: So I'd say, we've seen relative strong strength in the U S.
Jamie: Some mixed dynamics in the U S markets.
Jamie: We don't really have enough Tvs to predict how that plays out in 'twenty five.
Jamie: Thank you very much.
Jamie: Thank you.
Jamie: Our next question comes from Travis Steed with Bank of America Securities You May proceed.
Travis Steed: I'll Echo my congrats as well Gary I wanted to ask a bigger picture question, you're kind of crossing over $1 billion a year in R&D now and even after launching DB five so maybe help us understand the R&D investment opportunity over the medium term and potentially moving into kind of new green space or is that going to be more through then to aluminum.
Jamie: For them or are they still chunky categories like cardio that.
Jamie: That could be a minimal to robotics or is it more about geographic expansion side of care just thinking into understand kind of the true opportunity left out there to capture.
Jamie: I think it's sort of a.
Jamie: A mix of all three of the things you. Just described I think there are innovations in technology, some of which are extensions to platforms. You know about some of which are platforms that are are years away and you don't know about that I think open new opportunities for us over time.
Jamie: Dan.
Jamie: We are diligent about them they take a while they take some investment and they take false.
Jamie: There are.
Jamie: The existing <unk>.
Jamie: Platforms that could use additional indications and those can be geographic in which case.
Jamie: There is the regulatory and clinical work to secure those.
Jamie: Those indications and so we spend money on that and go do it.
Jamie: And then there is additional indications that come from things like additional instruments and accessories and imaging capabilities on existing platforms that if we develop them.
Jamie: We can bring to market and open the market for others.
Jamie: We also spent some money, making sure that that late comers to robotics.
Speaker Change: What they need it's not just that late comers just need time December and sooner or later they come find you.
Speaker Change: They sometimes have different needs, whether those needs are learning needs or economics needs and it takes some work.
Speaker Change: But we think that work is is worth it and some of the things you've seen in da Vinci fiber or those types of things so.
Speaker Change: Short story is that we see opportunity in all of those buckets, we run a process that tries to balance those opportunities. So we're.
Speaker Change: Not totally overexposed to one or the other and that and said we have multi year horizon.
Speaker Change: Multi specialty horizon, and it's geographically mixed.
Jamie: Helpful. Thanks, and then Jamie maybe just a shorter term opex question.
Jamie: The 15% growth kind of a high end low end, how much of that's R&D versus ethane and then any color there.
Jamie: On how that can shape up and kind of what drives the high end low end and potentially because you did mentioned tariffs just kind of curious.
Jamie: How does that or potentially a way to mitigate that if he can.
Jamie: Just wanted to kind of follow up on Larry's margin question. Thank you.
Jamie: Yes, with respect to how R&D and SG&A might grow I'd characterize it as similar similar ish in terms of for that 10% to 15%. Obviously R&D is a priority as we've stated.
Jamie: In SG&A, what Youll see is us.
Jamie: Add reps and commercial folks to support the procedure growth.
Jamie: We also have said there'll be higher legal expenses in SG&A given.
Jamie: Given ongoing litigation and a portion of the Capex resulted in depreciation that goes into into our SG&A expenses and so.
Jamie: They'll grow roughly about the same rate.
Jamie: In terms of the range of 10% to 15% most of that is driven by the procedure range, meaning obviously to some extent will manage our expenses in accordance with how our business plays out.
Jamie: There are some opportunities for us to invest incrementally in R&D, but we will do that as we make progress and.
Jamie: Achieved milestones.
Jamie: In terms of tariffs.
Jamie: Obviously, we see a lot in the news we're monitoring those events closely we are internally evaluating the impact of any potential tariff might be and therefore, how we might respond we can say that the significant portion of our instruments are currently manufactured in Mexico.
So to the extent there are significant tariffs implemented that could have a material impact for us.
Jamie: And of course, one response than any company might consider is what would you do with pricing.
Jamie: Nothing that we've decided.
Jamie: And obviously, we're balancing the needs of our customers and their objectives with the needs of our own business. So.
Jamie: Stay tuned is what I'd say.
Jamie: Great. Thank you.
Jamie: Thank you.
Speaker Change: Our next question comes from Rick Wise with Stifel. You May proceed.
Jamie: Okay.
Speaker Change: Thanks, Good afternoon.
Jamie: Gary.
Speaker Change: And you were very thoughtful comments during the Jpmorgan conference you.
Jamie: Thank you talked about.
McVeigh: New digital features then you said mcveigh again.
McVeigh: And software digital features coming I was hoping to hear.
McVeigh: We're not ready to give us.
McVeigh: Truly specific specifics on all of these but.
McVeigh: Maybe help us understand.
McVeigh: Okay.
McVeigh: What areas.
McVeigh: In what way.
McVeigh: Enhanced.
Speaker Change: Da Vinci five will it open up new procedures will it be about productivity.
McVeigh: It would be.
McVeigh: About <unk>.
McVeigh: Enable you to.
McVeigh: Use the da Vinci <unk> and the different setting how does this expand the vision or the possibilities to 55 in the near term and then I'll have a follow up if I could.
Speaker Change: Yes, and early thinking here.
Speaker Change: Think of it in three categories. If we can make it easier to get great outcomes for more care teams by giving them tools in the or just real time tools, we think that creates opportunities for them I think it builds confidence I think you'd get better care teams faster that way yes.
Speaker Change: And this kind of does that give you access to new procedures I think the way to say that as it probably gives you access to more patients are they new procedure category is not always but there are patients that become.
Speaker Change: Easier for those surgeon and care teams to reach because they are more confident to reach them. So can it help us that way, yes, I think it can I think that's one set of categories. The next one is.
Speaker Change: Building confidence and care teams quickly as is in everybody's best interest.
Speaker Change: It's great for the hospital gives them faster returns on higher confidence, it's great for the care teams, they build confidence and they get there faster and I think a lot of our tools can help can help through that can help.
Speaker Change: Accelerate learning not just for the surgeon, but for others and then finally I think a lot of these tools allow for.
Speaker Change: Value analysis by the customer using their own data in their own hands and that I think builds confidence also in.
Speaker Change: Eliminates opportunity for them and that helps them and it helps us so for <unk> five in kind of the space. We're in right now that's how you ought to think about it.
Speaker Change: One of the neat things that.
Speaker Change: I used to say it is right is that every time you build the capability.
Speaker Change: And then.
Speaker Change: And then secure that you have it you understand it well it opens a new door because the surgeon Dr. Rowe here will take that new capability and start to explore with working with <unk>. What can I do next and I think some of the things that we're working on in <unk>. Some of the imaging and augmented reality things will start to see.
Speaker Change: <unk>.
Speaker Change: The next set of surgeons.
Speaker Change: And with that inspiration comes opportunity.
Speaker Change: Great and if I could follow up briefly with Jamie Jamie obviously ion SP both had.
Speaker Change: Terrific years last year.
Speaker Change: What accelerates.
Speaker Change: What drives the next phase of growth there and specifically when.
Speaker Change: What level of sales or what has to happen is it a year or a five way when are these two excellent products can no longer.
Speaker Change: A margin drag.
Speaker Change: Thank you.
Speaker Change: Yes in terms of the.
Speaker Change: The overall business was driving procedures and revenue.
Speaker Change: If I look at ion with 28000 procedures in Q4, you can see that as a run rate of over 101000 procedures.
Speaker Change: Almost entirely in the U S. So you're starting to get up the adoption curve in the U S for ion.
Speaker Change: And a significant remaining portion is in.
Speaker Change: Trans thoracic needle aspiration in terms of the approach versus Bronchoscopic approaches in terms of where we've adopted in the early period.
Speaker Change: So what you see based on where you are in the adoption curve in the U S for biopsy.
Speaker Change: One is customers will tend to more focus on improvements in utilization and as you get to that point in in the adoption curve again biopsy in the U S. You just naturally on the <unk> start to see procedure growth rates come down and you've seen that if you look at the last three or four quarters, and so far our iron business.
Kind of net net set focus obviously, we got finished the U S is the markets in which we're launching internationally.
Speaker Change: With the clearance in.
Speaker Change: Europe Korea and China.
Speaker Change: And.
Speaker Change: On a longer term basis, there is the opportunity for iron as a platform to get into new indications that would be in the lung first and there's potential for other places in the body down the road.
Speaker Change: From a from a cost perspective, it is a set of programs that take.
Speaker Change: Quite some time as the everyday battling the manufacturing team and there is some engineering work that needs to happen to kind of get to that part of the cost and I would say that's also.
Speaker Change: In the mid <unk>.
Speaker Change: Consistent with our overall gross margin objectives.
With respect to SP adoption.
Speaker Change: Again, we've also got international launches that Europe, and Japan, both with broad indications you see Korea, which we've had in the marketplace for some time, we had a strong utilization and so for SP. It's really as we look to the U S.
Speaker Change: The additional indications, we've got thoracic and colorectal you have the opportunity to extend that.
Speaker Change: Some period.
Speaker Change: You see the growth rate accelerate nicely in SP.
Speaker Change: Margin work in NSP is let's say not the same level of effort as eye on because we're more leverage.
Speaker Change: <unk> and envision consoler common with Si.
Speaker Change: But nevertheless, what to do that is also I characterize as something that happens over the midterm.
Jamie: Thank you Jamie.
Jamie: Thank you.
Jamie: Our next question comes from David Roman with Goldman Sachs. You May proceed.
Speaker Change: Alright, Thank you and good afternoon, everybody I wanted just to start with.
Speaker Change: A comment you made in the prepared remarks regarding competition at selling cycles is this something that you are observing today as you talked to customers outside the U S or even in the U S or are you just calling out a theoretical impact of what might happen as new entrants come to market and then I had one that one follow up.
Speaker Change: We have seen it clearly in China with the increasing number of domestic competitors there.
Speaker Change: Say that in terms of.
Speaker Change: Impact of competition to selling cycles in other international markets has been relatively stable, but what youre seeing is an increasing number of number of competitors get get clearances in various markets.
Speaker Change: <unk> in the U S. There are a number of competitors in the U S.
Speaker Change: Obviously this one larger company, that's looking to make a submission.
Speaker Change: And so we're just acknowledging that as competition increases there is the possibility outside of China, the selling cycles could could lengthen.
Speaker Change: Yeah.
Robbie Marcus: That's helpful and maybe just kind of a segue on that one as you think about the opportunity in instruments and accessories, either on a per procedure basis or a total addressable market basis can you help us think through which parts of sort of the surgical ecosystem, you've captured today and may.
Robbie Marcus: Can you give us some sense of where that might be going over time, and we understand is the <unk> piece of the launch with <unk> and how that might impact basically an upgraded instrument and corresponding asps within that R&D line, but as you look at kind of other parts of the surgical ecosystem that you can capture.
Robbie Marcus: Further entrench yourself can you help us understand what those might be and maybe size some of them and how kind of if you think about that when you kind of your marketing and strategic planning teams.
Robbie Marcus: Yes, maybe I'll start with kind of the principles, we use to think about how we can bring additional value to procedures, we already participate in.
Robbie Marcus: I think you have a modeling question and I'll, let I'll, let Jamie take that.
On the principal side, we look around and see.
Robbie Marcus: Say, if theres something going on in the operating room that our.
Robbie Marcus: Our customers are currently spending on they are buying from somebody else.
Robbie Marcus: And we think that either we have design capabilities, our integration capabilities that would make for that experience to be better for them.
Robbie Marcus: And value, creating consider clinically value, creating where it's economically value creating.
Robbie Marcus: And then we will seek to do that sometimes in partnership you see that she has to do with that with the <unk>.
Robbie Marcus: Ron table in and.
Robbie Marcus: And sometimes it's something that we will try to do ourselves taken house the way we've done some some things like the Cumulus seals.
Robbie Marcus: And stapling, so while we look across it if we see a real place that its true value creation, not just something where it changes the revenue line by doing exactly what somebody else does we are not very interested in that but if we think the integration or the design creates a better outcome for <unk>.
Robbie Marcus: The customer either economically or clinically hopefully both then we will step forward and we'll do that we don't think we're done if you look at Davinci five you saw some things come into da Vinci five that were benefited by integration and we think it's working great.
Robbie Marcus: We look for those things they take a while they are not immediate.
Robbie Marcus: Our strategy and our product planners are looking for value creation opportunities there, but it doesn't start with how fast can the revenue growth be.
Robbie Marcus: It starts with what's the value creation and what could that be.
Robbie Marcus: Of course for sensing instruments force, reflecting instruments are such an example, they are more complex. They have a higher ASP, we think they bring value we have to demonstrate that value and half ago.
Speaker Change: Jamie I think the modeling question is super hard, but im going to give you a shot.
Speaker Change: So I would just say the two examples I had referenced in terms of where you could lets take a greater share of wallet. If you can bring value force feedback instruments and installation both on da Vinci five.
Speaker Change: Full feedback, we don't expect to be kind of.
Speaker Change: Broad supply until the end of a 25, so the kind of net impact that has on <unk> procedures is gated by when we get to build supply.
Speaker Change: With respect to inflation so.
Speaker Change: So far the proportion of cases that use that has been pretty high and that can have an impact as da Vinci procedure volumes grow I would just say if I zoom out in terms of IAA per procedure in total the largest driver is going to be procedure mix.
Speaker Change: The proportion of kind of where we see growth coming from is in benign procedures, Gary kind of.
Speaker Change: Describe that.
Speaker Change: More recent results, but when you think about cholecystectomy and other benign procedures youll have a procedure mix dynamics.
Speaker Change: It means that we think at least over the next couple of years Ina per procedure drifts down slowly over time.
Speaker Change: We have time for just one last question.
Speaker Change: Thank you.
Unknown Person: And our last question comes from Patrick Wood with Morgan Stanley You May proceed.
Speaker Change: Beautiful thank you so much.
Speaker Change: But if we had conceptual one I'm just kind of curious about but if you think of the efficiencies from your installed base sense fee. So over time, as you're placing more and more systems.
Speaker Change: And in individual areas and regions. The install based entities going up like is that really a margin implications for that for more efficiencies in selling into the customer base servicing the systems can you see that in some areas or regions or markets, where you've got a lot of.
Speaker Change: Density versus those where you have slightly less scale I'm, just conceptually trying to understand the effect of that over the long term. Thanks.
Speaker Change: Well generally the IMA revenue are at higher margins then.
Speaker Change: Of the capital and so as you drive utilization growth than a greater proportion of the revenue over some period comes around the higher profit streams.
Speaker Change: And so well let me ask Patrick is that is that in the essence of your question.
Speaker Change: It was more around the service and the efficiency of driving into those existing accounts rather than the mix between the two.
Speaker Change: I'll answer quickly just in light of time.
Speaker Change: We do get some advantages of scale with geographic density in terms of cost to support an account.
Speaker Change: So service service depots sales support training support as that gets becomes does that becomes more dense it does give us some cost advantages to serve them is that where you're headed.
Speaker Change: That's the way thank you so much.
Speaker Change: Okay. Thanks, so much that was our last question in closing we believe there is a substantial and durable opportunity to fundamentally improve surgery and acute intervention.
Speaker Change: Our teams continue to work closely with hospitals physicians and care teams in pursuit of what our customers have termed a quintuple aim.
Speaker Change: Better more predictable patient outcomes better experiences for patients that are experiences for their care teams better access to great care and ultimately a lower total cost of care.
Speaker Change: We believe value creation in surgery, and acute care is foundational to human.
Speaker Change: Flows from respect for and understanding of patients and care teams their needs and their environment and.
Speaker Change: And intuitive we envision a future of care that is less invasive and profoundly better where diseases are identified earlier and treated quickly so patients can get back to what matters most.
Speaker Change: Thank you for your support on this extraordinary journey and we look forward to talking with you again in three months.
Speaker Change: Okay.
Speaker Change: Thank you. This concludes the conference. Thank you for your participation you may now disconnect.
Speaker Change: Okay.
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