Operator: Hello, and welcome to Intuitive's third quarter 2026 earnings release. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to turn the call over to Dan Connally, Head of Investor Relations. You may begin.
Dan Connally: Good afternoon, and welcome to Intuitive's Q3 2026 earnings conference call. Joining me today are Dave Rosa, our CEO, Jamie Samath, our CFO, Dr. Jaime Wong, our Chief Medical Officer, and Gary Loeb, our Chief Legal and Compliance Officer. Before we begin, I would like to remind you that comments made on today's call may contain forward-looking statements.
Dan Connally: 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 our Securities and Exchange Commission filings, including our most recent 10-K filed on 3 February 2026, and 10-Q filed on 21 July 2026. Our SEC filings can be found through our website at intuitive.com or at the SEC's website. Investors are cautioned not to place undue reliance on such forward-looking statements.
Dan Connally: This conference call will be available for audio replay on our website in the Events section under our Investor Relations page. We have posted today's press release and supplementary financial data tables to our website. Our format for this afternoon's conference call is as follows: Dave will review our business and operational highlights. Jamie will review our financial results and procedure highlights. Jaime Wong will review clinical highlights. I will review our updated financial outlook for 2026, and finally, we will host a question and answer session. With that, I will turn it over to Dave.
Dave Rosa: Good afternoon, and thank you for joining us today. Q3 was a strong quarter for Intuitive, with broad-based adoption across our multi-port, single port, and Ion platforms. In Q3, total procedures increased 15%, driven by 14% growth in da Vinci procedures and 31% growth in Ion procedures. In the US, da Vinci procedure growth was 10%, and outside the US, da Vinci procedure growth was 20%.
Dave Rosa: We exited the quarter with more than 13,200 da Vinci and Ion systems installed worldwide. Over time, our customers have adopted, operationalized, and standardized on the da Vinci ecosystem to provide their patients with improved care. That adoption has been driven by our commitment to innovation, robust training, and clinical evidence, and it is apparent in how customers use da Vinci today.
Dave Rosa: In the quarter, almost 7,000 customers in more than 70 countries performed da Vinci procedures at a rate of over 10,000 procedures per day. On the clinical evidence front, more than 48,000 peer-reviewed publications have evaluated the effectiveness of da Vinci surgery, including the recent Benign COMPARE Study, which Jaime Wong will discuss in more detail shortly. As I described last quarter, we continue to see increasing segmentation across our customer base.
Dave Rosa: Needs vary by procedure, site of care, geography, and healthcare system. We have been investing to support the segmentation, and we have positioned Intuitive to serve current and future customers with both our existing technologies and those in development. Meeting those needs also requires that we evolve our commercial approach to tailor how we engage, price, and provide solutions for customers in each segment. In Q3, global customer demand across our da Vinci portfolio remained strong.
Dave Rosa: da Vinci system placements increased 28% worldwide, with da Vinci 5 and SP accounting for 65% of global placements. Installations of XiR and X more than doubled in the quarter. Customers continue to adopt da Vinci 5 and its growing capabilities, with demand for both capacity expansion and system upgrades. We exited the quarter with more than 2,000 da Vinci 5 systems installed worldwide, used by over 18,000 surgeons since launch.
Dave Rosa: We continue to see strong interest in XiR, both in the US and internationally, where customers are leveraging its familiarity, capabilities, and cost profile to build programs around a focused set of procedures. Our da Vinci single-port platform is playing an increasingly important role for our customers and their patients. Our investments in additional clearances and instrumentation are yielding results as SP procedures expand in the US and internationally.
Dave Rosa: Adoption of the new SP stapler continues to broaden. In Q4, we plan to make a US submission for the SP vessel sealer, which we believe is a key enabler for wider adoption of our SP platform. Increasingly, customers that adopt both multi-port and single port describe benefits to their overall da Vinci programs, with SP opening new approaches for the surgeon while existing procedure demand fills their multi-port capacity. In Q3,
Dave Rosa: we finalized a set of pricing actions for a subset of high-volume benign procedures where cost may be a constraint to broader access to da Vinci surgery. We believe these actions, in conjunction with increased availability of XiR, will expand our addressable opportunity and enable da Vinci technology to reach more patients around the world. Jamie will describe the anticipated impact shortly.
Dave Rosa: Outside the US, we are elevating our focus and increasing our investments to help customers establish and expand their da Vinci programs. As of Q3, nearly 4,000 international customers have a da Vinci program, and nearly 25% operate 2 or more systems. These customers are moving beyond urology and cancer procedures into benign hysterectomy in Germany, cholecystectomy in the UK and India, and inguinal hernia repair in Japan.
Dave Rosa: To support this growth, we are continuing to build the foundation of market access country by country through regulatory clearances, reimbursement, training, and clinical and economic validation. da Vinci placements outside the US increased 29% in the quarter, with broad-based global demand. In Europe, Germany led the region with 20 system installations. We also placed systems in more than 20 other European countries, and benign procedures led procedure growth.
Dave Rosa: In Asia, Japan improved on both system placements and procedure growth for the second consecutive quarter, while India had another strong quarter with 42% procedure growth, surpassing 200,000 cumulative da Vinci procedures. In China, the operating environment remains challenging. To support expected long-term growth in Asia, we recently announced plans for a significant new I&A manufacturing facility in Penang, Malaysia.
Dave Rosa: We expect this facility to begin operations in 2028. Beyond da Vinci, we are investing in Ion outside the US through multi-year, country-by-country work that is foundational to broadening access and shortening the time between detection and treatment of lung cancer. During Q3, we received reimbursement for Ion in Korea, and we expect further reimbursement actions in other geographies in the coming quarters. This quarter, we received several CE marks, including force feedback instrumentation and cardiac procedures on da Vinci 5, as well as transvaginal gynecological procedures on SP.
Dave Rosa: We now have da Vinci 5 cleared for cardiac procedures in the US, Europe, India, Japan, and Korea. During Q3, we received FDA 510(k) clearance on da Vinci 5 for surgeon-initiated tool eject and multi-arm targeting, both of which bring incremental efficiency and surgeon autonomy to procedures. Surgeons have reported that these innovations support extending access to da Vinci surgery beyond traditional workdays and hours.
Dave Rosa: Recently, we submitted a cavitational ultrasonic aspirator instrument for FDA 510(k) clearance for use in liver and pancreas procedures. Last week, we received FDA 510(k) clearance for an integrated version of the da Vinci 5 handheld endoscope. In August, we received FDA 510(k) clearance for our foundational, non-commercial, next-generation flexible robotic endoscope system for use in the gastrointestinal tract. This program is early in its development, but we are encouraged by our progress and look forward to updating you as we advance.
Dave Rosa: Adoption of Intuitive Telepresence continues to increase with surgeons using these sessions to share techniques and to scale training in ways that were not previously practical. Telepresence on da Vinci 5 serves as a foundation for our efforts in telesurgery, where we expect several regulatory clearances in the H1 2028.
Dave Rosa: Our teams continue to develop additional digital and AI capabilities on da Vinci 5, including a voice-activated user interface and automated fourth-arm control to further enhance efficiency and the user experience. AI-controlled motion in surgery has the potential to improve efficiency and outcomes, but it is early and must earn the confidence of regulators, surgeons, care teams, and patients before we deploy it at scale.
Dave Rosa: Looking ahead, our objective at Intuitive is to reach more patients with the best care available by combining robotics, human expertise, data, and artificial intelligence so that minimally invasive care becomes more accessible and less variable. The problems we are working to address are significant and specific.
Dave Rosa: Minimally invasive surgery access and adoption remain uneven around the world. Patients wait too long between detection and treatment, and the care a patient receives still varies more than it should, depending on the hospital they enter and the surgeon available that day. Over time, we are focused on significantly advancing the quintuple aim to ensure that the broader patient journey can become more predictable, more connected, and less disruptive to a patient's life.
Dave Rosa: Before I pass the time to Jamie, today, we announce that we have reached an agreement, subject to court approval, with US customers who participated in the class action lawsuit on third-party remanufacturing of da Vinci instruments and third-party servicing of da Vinci systems. We believe that this no-fault settlement provides certainty for both our customers and Intuitive, and maintains our ability to advance the safety, quality, and security of our products. With that, I will turn the time over to Jamie to take you through our finances in greater detail.
Jamie Samath: Good afternoon. I will describe our performance on a non-GAAP basis, and I will summarize our GAAP results later in my remarks. A reconciliation between our non-GAAP and GAAP results is available on our website. The strength of our financial performance this quarter reflects the durability of our business model, driven by an expanding portfolio of differentiated products that provide clear clinical and economic value for our customers and their patients.
Jamie Samath: Increasingly, our da Vinci and Ion systems and the Intuitive ecosystem are being integrated into customers' core infrastructure across a variety of procedures, sites of care, and geographies, driving value for hospitals and healthcare providers, and recurring revenue for Intuitive. Today, we are also quantifying the instrument pricing actions we discussed in July, which we expect to reduce da Vinci I&A revenue per procedure by approximately 3% to 5% on a mixed constant basis once fully implemented.
Jamie Samath: This is a deliberate choice to broaden adoption in high-volume, benign procedures, and I will describe these actions in more detail shortly. Key financial highlights for the quarter are as follows. Revenue grew 22% to just over $3 billion, of which 84% was recurring revenue. Net da Vinci placements, that is placements that expand the installed base, grew 40%. Non-GAAP operating margin was 42% of revenue, or 41% excluding a one-time pre-tax tariff refund of $28 million.
Jamie Samath: Non-GAAP earnings per share grew 25% to $3 per share. Core metrics were solid in Q3. Taking da Vinci and Ion together, total procedures grew 15%, the installed base of systems grew 13%, and average system utilization increased 2%. Revenue growth of 22% against total procedure growth of 15% reflects our innovation-led strategy and growth in system placements.
Jamie Samath: As da Vinci 5, SP, and Ion become a greater proportion of our business, revenue growth benefits from a richer product mix, higher levels of integration, and incremental upgrade volumes. Additionally, the scale and cost advantages we have built allow us to broaden our platform portfolio, reach customers in more geographies, and expand access by lowering the cost of da Vinci surgery.
Jamie Samath: The price reductions are concentrated in high-volume, benign procedures where cost may be a barrier to adoption. Those procedures, particularly outside the US and in ambulatory settings, are where we see the largest opportunity to serve incremental patients. This is a strategic decision to reinvest a portion of the value our innovation creates in lower customer costs where they will have the greatest impact on adoption. We believe broader adoption creates more long-term value than near-term revenue per procedure. Turning to the clinical side of our business.
Jamie Samath: In the US, total procedures increased 11%, reflecting 10% growth in da Vinci procedures and 29% growth in Ion procedures. US da Vinci growth of 10% was consistent with the expectations we described in July and reflects in part the 16% growth in the prior year quarter, our most difficult comparison of the year. Multi-port procedures and benign gynecology procedures other than hysterectomy continued to lead growth.
Jamie Samath: da Vinci 5 accounted for more than a quarter of US procedures in Q3, up from 13% a year ago, and da Vinci 5 systems continue to run at utilization above our Xi base. Looking ahead, we believe the breadth of surgeon adoption, the continued expansion of benign general surgery, and a growing da Vinci 5 and SP install base, together with procedures earlier in adoption, including emergent general surgery,
Jamie Samath: cardiac and nipple-sparing mastectomy, positions us for durable US procedure growth over the long term. In the short term, we continue to monitor the impacts from lower ACA enrollment, changes to Medicaid eligibility, and potential changes to 340B. Outside the US, total and da Vinci procedures grew 20%, with Europe up 20%, Asia up 19%, and rest of world geographies up 22%. In Europe, growth was led by the UK, Germany, and Italy.
Jamie Samath: In Asia, India and Taiwan led growth, and Japan procedure growth accelerated, reflecting early signs of a response to the June reimbursement changes. Procedure growth in China was roughly in line with the corporate average, reflecting lower recent capital placements. In rest of world markets, growth was led by Canada, Australia, and Brazil.
Jamie Samath: Within OUS results, da Vinci adoption for benign procedures continued to accelerate, growing 41% in Q3, up from 37% in Q2 and 34% in Q1, with the strongest growth in hernia repair and cholecystectomy. Benign procedures represent over a quarter of our international volume today and the significant majority of the gap between our current international volumes and the addressable opportunity, which is why they are a focus of our investments.
Jamie Samath: As we build local clinical and economic evidence, a growing number of customers in OUS markets are recognizing the clinical benefits of da Vinci for these procedures, and our tiered system portfolio, including XiR, together with the pricing actions I will describe shortly, provides customers the flexibility to right size their programs relative to local reimbursement.
Jamie Samath: Third quarter SP procedure growth was 55%, reflecting accelerated growth in the US of 50% and growth of 40% in Korea, our largest SP market. We now have 487 SP systems installed across 27 countries, and procedures in the 25 markets other than the US and Korea nearly doubled from Q3 last year. Total I&A revenue in Q3 grew 18% to $1.8 billion.
Jamie Samath: da Vinci I&A revenue per procedure was approximately $1,860, compared to $1,800 last year, primarily driven by higher SP procedures and da Vinci 5 specific I&A, partially offset by procedure mix. With respect to instrument pricing, there are two developments to describe. The first is a set of pricing actions we will implement beginning in H1 2027, including the expansion of our extended use program announced in May.
Jamie Samath: The second is a policy-driven price reduction in China that starts to take effect next month. As Dave described earlier, customer needs are increasingly segmented. In complex procedures, value comes from innovation and clinical capability. In high volume benign procedures such as cholecystectomy and inguinal hernia repair, it comes from reliability, efficiency, and economics, and that's where our pricing actions are focused.
Jamie Samath: Beginning in H1 2027, we will extend the useful lives of a subset of core EndoWrist instruments on our fourth and fifth generation platforms and introduce volume-based pricing. Both lower our customer's cost per procedure. Years of investment in instrument design and manufacturing scale enable us to preserve the quality and reliability customers count on.
Jamie Samath: In the US, the extended use instruments require a 510(k) clearance, which is in process. In China, the charge code policy changes we described last quarter will result in a significant reduction in our I&A prices in that market beginning in November. We continue to engage with provincial governments on implementation and to progress through the green channel process for SP and da Vinci 5.
Jamie Samath: Taken together, we expect these pricing actions and the China price reduction to lower da Vinci I&A revenue per procedure by approximately 3% to 5% on a mixed constant basis once fully implemented, meaning holding procedure, product, and geographic mix constant to isolate the pricing changes themselves. For reference, that is less than the 7% we estimated when we launched our first extended use program in 2020.
Jamie Samath: The accretive dynamics we described last quarter, including force feedback adoption and the mix shift toward da Vinci 5 and SP, are not included and will be positive contributors to I&A revenue per procedure. In terms of timing, the China reduction takes effect in Q4, while the extended life instruments as part of our broader I&A pricing actions will roll out by country beginning in H1 2027.
Jamie Samath: The remaining impact will build progressively over 2027 rather than as a step function. Turning to cleared procedure categories that we expect to be future growth drivers, cardiac procedures grew 40% in Q3, and during the quarter, we received CE mark for use of da Vinci 5 in cardiac procedures in Europe.
Jamie Samath: We now estimate that the line of sight cardiac opportunity is between 300,000 and 400,000 procedures a year in the regions we are cleared. Separately, breast surgery grew 42%. Both remain early-stage opportunities whose near-term pace is linked to the training of surgeons and the accumulation of clinical evidence, and we are investing in both. Today, these procedure volumes are still small relative to our total volume.
Jamie Samath: Turning to capital performance and starting with our da Vinci business, we placed 546 da Vinci systems in Q3, an increase of 28% compared to 427 systems in Q3 last year. Demand was broad-based across our platform portfolio: 315 da Vinci 5 systems, 87 Xi, 65 XiR, 42 SP, and 37 X systems. da Vinci 5 placements included 41 in OUS markets, up from 12 last year,
Jamie Samath: as da Vinci 5 becomes available in more countries. In the US, we placed 335 systems, up 27% from the 263 systems placed last year, driven by an increased number of multi-system deals as customers continue to convert to da Vinci 5. Building on our focus on ambulatory surgery centers, we installed 18 systems at US ASCs in Q3, including 15 XiR systems.
Jamie Samath: This is an early-stage, multi-year effort, and placements will be uneven quarter to quarter, but our pipeline of ASC opportunities continues to build, informed by customer familiarity with XiR's capabilities and reliability and its favorable cost profile. Outside the US, we placed 211 systems, an increase of 29% compared to the 164 systems placed last year.
Jamie Samath: By region, we placed 115 systems in Europe, up 83% from 63 last year, 78 in Asia, up 30% from 60, and 18 in rest of world countries compared to 41 last year. Rest of world placements tend to be uneven quarter to quarter. Europe's performance reflected our broadening focus with record quarterly placements in Portugal, Turkey, and Austria, and solid growth in Poland, Croatia, and Romania.
Jamie Samath: Across all geographies, we placed 37 X systems and 65 XiR systems, with purchased ASPs of approximately $0.5 million and $1.2 million, respectively, demonstrating our ability and willingness to compete effectively across the broad spectrum of customers and their economic objectives. Over the last three years, we have entered new geographies including Croatia, Peru, Morocco, and Lithuania, and in 2027, we plan to accelerate our expansion into additional countries we do not serve today.
Jamie Samath: Given increasing investments in OUS markets and planned expansion into new geographies, in January, we plan to update our estimate of the long-term opportunity in soft tissue surgery. We placed a record 42 SP systems in Q3, including 21 in the US and 12 in Korea, and the installed base of SP systems increased 42% from the year ago period to 487 systems.
Jamie Samath: For our Ion platform, we placed 56 systems in Q3 compared to 50 systems last year. Given our capital performance, Q3 systems revenue grew 30% to $769 million. The average selling price for purchased da Vinci systems was approximately $1.6 million,
Jamie Samath: flat to last year, as a higher mix of da Vinci 5 was primarily offset by a higher mix of XiRs. Q3 service revenue increased 22% to $482 million, reflecting the increased install base of da Vinci and Ion systems and a higher mix of da Vinci 5. Turning now to the rest of the P&L. Non-GAAP gross margin for the quarter was 69.9%, an increase from 68% in Q3 of last year. Q3 results included a one-time benefit of $28 million from the refund of previously paid IEEPA tariffs.
Jamie Samath: Excluding this benefit, non-GAAP gross margin would have been 68.9%, an improvement of 90 basis points year over year. The underlying improvement primarily reflects product cost reductions and fixed overhead leverage, and our engineering and operations teams continue to execute on cost reduction programs across each of our platforms. Q3 non-GAAP operating expenses increased 18% year over year, driven by increased variable compensation reflecting our results, higher headcount, and higher prototype expenses as several programs advanced in development. R&D again grew faster than SG&A.
Jamie Samath: A portion of the increase reflects the timing of expenses between quarters. Given the progress our R&D teams are making and the opportunities in front of us, we will continue to prioritize incremental investment in our existing and new platforms and in advancing our AI capabilities, which we believe will meaningfully differentiate our solutions and expand the number of patients we can serve.
Jamie Samath: Non-GAAP other income was $75 million for the quarter, compared to $83 million last quarter, reflecting lower average cash balances following our share repurchases. Our non-GAAP effective tax rate for Q3 was 21.4%, consistent with our expectations. Now turning to our GAAP results. GAAP net income for the quarter was $523 million, or $1.49 per share, compared to $704 million or $1.95 per share in Q3 of last year. Our GAAP results reflect the $450 million litigation settlement that Dave described earlier.
Jamie Samath: This settlement is subject to court approval. We do not expect that decision until next year. We ended the quarter with $6.8 billion in cash and investments, down from $8.6 billion last quarter. Cash generated from operating activities was more than offset by stock repurchases of $2.9 billion at an average price of $377 per share and capital expenditures of $113 million. With that, I'll turn it over to Jamie to discuss recent clinical publications.
Jaime Wong: Thank you, Jamie. It's a pleasure to speak with you this afternoon. As we routinely do on these calls, I'd like to share with you recently published peer-reviewed literature that we found to be notable. In addition to the specific data highlighted on this call, we encourage you to consider this data alongside the wider body of evidence detailing these topics and others in published scientific studies over the years.
Jaime Wong: On our Q4 2024 earnings call, we described the landmark COMPARE study, a meta-analysis where the authors reported multiple benefits for the da Vinci approach when compared to alternative minimally invasive or open approaches in commonly performed oncologic procedures.
Jaime Wong: Last month, Dr. Thomas Shin and colleagues from the Mass General Brigham and the University of Virginia School of Medicine, in collaboration with researchers from Intuitive, published the Benign COMPARE Study comparing perioperative outcomes of benign, minimally invasive, laparoscopic, da Vinci robotic, and open procedures, a systematic review and meta-analysis of evidence in Annals of Surgery Open. This Benign COMPARE Study looked primarily at standard perioperative and 30-day clinical outcomes of 13 high-volume benign procedures across general surgery,
Jaime Wong: gynecology, urology, and bariatrics, including but not limited to benign hysterectomy, cholecystectomy, benign colon, and various hernia repairs. In many of these procedures, conventional laparoscopy has long been the standard of care. This meta-analysis included data from 366 studies across 32 countries, published between 2010 and 2024, and included randomized controlled trials, prospective and retrospective cohort studies, and large real-world database studies.
Jaime Wong: In total, the analysis covered roughly 1.5 million da Vinci patients, 10.7 million laparoscopic patients, and 1.7 million open patients. Results identified lower conversions to open surgery as the most clinically important and consistent finding. Compared with laparoscopy, da Vinci procedures were associated with 54% lower odds of conversion, with significant reductions observed in benign hysterectomy, ventral inguinal hernia repair, myomectomy, cholecystectomy, and benign colon surgery.
Jaime Wong: As the authors noted, conversion to open surgery is an important intraoperative event associated with increased morbidity and prolonged hospitalization, which has negative implications for patients and healthcare systems. Da Vinci patients also had 13% lower odds of blood transfusion and a shorter length of stay than laparoscopic patients, with the largest reductions in benign colon surgery, adrenalectomy, and benign hysterectomy.
Jaime Wong: Rates of 30-day complications, readmissions, and mortality were comparable between da Vinci and laparoscopy, while average da Vinci operative time were about 24 minutes longer. Compared with open surgery, da Vinci was associated with larger differences across nearly every studied measure, including 46% lower odds of postoperative complications and hospital stays that were nearly 2 days shorter. These differences have positive implications for patients and healthcare systems.
Jaime Wong: The authors concluded that da Vinci was associated with fewer conversions, less pain, and faster recovery compared with open and laparoscopic surgery, supporting its effectiveness for benign indications. From my perspective as a surgeon, this large-scale analysis of millions of patients provides meaningful data on the expanding use of da Vinci surgery beyond oncology. These clinical correlations point toward a compelling value proposition for the use of da Vinci in these commonly performed high-volume benign procedures. With that, I'll pass the time over to Dan.
Dan Connally: Thank you, Jamie. Our updated financial outlook for 2026 is as follows. Starting with da Vinci procedures. In July, we forecast full year 2026 procedure growth to be within a range of 13.5% to 15.5%, with an expectation to be closer to the midpoint. We are narrowing our forecast to be within a range of 14% to 15%, with an expectation to be closer to the midpoint.
Dan Connally: Our range continues to consider the impact of changes to ACA premium subsidies on patient behavior in the US, as well as tender volumes and competitive intensity in China, among other factors. Turning to gross profit. On our last call, we forecast non-GAAP gross profit margin to be within a range of 68% and 69% of revenue, including an estimated 100 basis point impact from tariffs, as well as related refunds.
Dan Connally: We are updating our estimate to be within a range of 68.7% and 69.3% of revenue, including an estimated 90 basis points impact from tariffs, as well as related refunds. Factors impacting the range include faster growth of newer products in da Vinci 5 and Ion, partially offset by product cost reductions.
Dan Connally: We continue to forecast higher input costs in certain areas like freight and semiconductor memory. Our actual non-GAAP gross profit margin will vary depending largely on product, regional, and trade mix, and pricing. For operating expenses, we continue to expect 2026 non-GAAP operating expense growth of 11% to 13%.
Dan Connally: As a reminder, in Q4 2025, we made a $70 million multi-year contribution to the Intuitive Foundation. We do not expect to make a contribution to the foundation in 2026. Throughout the year, and in Q3 in particular, we grew R&D at a rate above SG&A. We expect that trend to continue over the remainder of the year. We now estimate non-cash stock compensation expense between $860 million and $870 million.
Dan Connally: We now forecast non-GAAP other income, which is comprised mostly of interest income, of between $300 million and $310 million, due primarily to the impact of share repurchase activity in Q3. With regard to income tax, we expect our non-GAAP effective tax rate in Q4 to be 22%, plus or minus 50 basis points. That concludes our prepared remarks. As we open the line to your questions, we ask that you limit yourselves to one question so that we may reach as many analysts as possible.
Operator: Thank you. Ladies and gentlemen, as a reminder to ask a question, please press star 11 on your telephone, then wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Lawrence Biegelsen with Wells Fargo. Your line is open.
Lawrence Biegelsen: Good afternoon. Thanks for taking the question. I will just keep it at one here, focused on U.S. procedure growth. Jamie or Dave, U.S. da Vinci procedure growth was stable, the stacked 2-year basis. But the 10% growth in the quarter was the lowest we have seen since COVID. Shipments were strong, and it sounds like you have a ton of innovation, and the extended use program is coming. Are we seeing a temporary lull in U.S. da Vinci procedure growth, and the innovations and the pricing actions will help accelerate U.S. da Vinci procedures as soon as next year? I would love any color on that. Thank you.
Dave Rosa: Well, hey, Larry. This is Dave, and I appreciate the question. Let me frame up the U.S. opportunity a bit, and then Jamie can dive in with some specifics. For me, the U.S. opportunity really breaks down into two areas. The first is about the addressable opportunity right in front of us that we are going after on a daily basis.
Dave Rosa: The second is a longer-term opportunity to expand the indications that da Vinci can have an impact in. If we look at the first part for the procedures that we know where the U.S. procedure opportunity is significant, particularly in benign general surgery. When I am talking to customers, in order for them to adopt robotics across the benign general surgery areas as well as other benign indications, they really want to see how it compares to the alternatives.
Dave Rosa: Where laparoscopy is well entrenched, like Jamie described, and against open surgeries sometimes, they want to see how is it doing clinically, how is it doing economically. That is something we have invested in for a long time. We have worked hard to provide customers the data that they need from Intuitive,
Dave Rosa: combine it with their data so they can understand how those modalities are doing against each other. in Q3, I had the opportunity actually to meet with about five large IDN customers. When I was meeting with them, what I am seeing is now they are developing their own real-time dashboards, looking at the economics and the clinical outcomes of da Vinci relative to laparoscopy and open.
Dave Rosa: I think that's a shift that I believe is worth noting because it's moving from anecdotes and sort of episodic data that they may look at once a year, they're looking at it on a routine basis. When I saw those data and talked to those customers, robotics is comparing favorably as compared to the other modalities. You take that sort of foundation of data.
Dave Rosa: You get directional data from studies like COMPARE, but you get the actual data in our customer's hand through these interactions like I'm describing. Combine that with our portfolio, the rest of our ecosystem, with the commercial performance of our capital teams expanding capacity, with the focus of our commercial teams broadly, clinical service training, and in the pricing actions that Jamie described. I think that's the foundation of a durable U.S. procedure growth into that significant opportunity.
Jamie Samath: Larry, I might just add, the way we think about it, the unit opportunity in front of us in the U.S. is significant. I understand investor attention on the U.S. kind of growth over the last several quarters. There's four things that we're focused on that we're driving, maybe just to add some color. First is adding capacity, particularly to support the benign general surgery growth.
Jamie Samath: What you saw in this quarter was U.S. net placements increased 41%, that's a little bit of a change from what we've seen in more recent quarters. Second thing is, as we've talked about, we've more recently added a focus on the ASC opportunity.
Jamie Samath: If you look at the number of systems we've placed in ASCs last two quarters combined, that's more than we've placed in ASCs in almost the last three years, we think that continues to be an attractive opportunity for us. Those first two areas are supported by both the I&A pricing actions that we've described and our tiered portfolio.
Jamie Samath: If you want to invest in da Vinci 5 in the hospital with a capability that will only grow every year as we do software updates and extend the ecosystem, that's a good investment. But our tier portfolio offers those customers an XiR in an HOPD or an ASC. The other two areas that we're driving, we're focused on over longer horizons, three is to progress cardiac and breast along the early-stage adoption curve it's in, that requires both investment and execution.
Jamie Samath: The fourth is what Dave described. We have programs today in R&D that have the potential to add new indications in the U.S. and elsewhere, and those are moving along and progressing, and those are quite interesting. They are on longer-term horizons.
Operator: Thank you. Our next question comes from the line of Robert Marcus with JPMorgan. Your line is open.
Robert Marcus: Oh, great. Thank you for taking the question. I want to follow up on the extended use, and it is great. I appreciate the 3% to 5% headwind over the total enactment period, both between that and the China pricing. How do we think about necessarily the timelines? Will there be any stocking ahead of the implementation of this? How do we think about it down the P&L, both from a gross and operating margin? If I could add one more there. Last program, you did have a price elasticity benefit on volumes. How are you thinking about volumes in response to the pricing actions? Thanks a lot.
Jamie Samath: You are probably going to have to remind me of your questions, Robbie, as I go along. There may well be a little bit of stocking, kind of customer ordering pattern volatility across the period in which we launch. I would not expect that at this point to be significant, and obviously, we will call that out as that occurs. In terms of the impact on gross margin, I would say that it would be a modest impact on gross margin that we will look across 2027 to offset with the cost reduction programs that we have in play.
Jamie Samath: Therefore, whatever impact there is on gross margin can fall through to operating margin, but I expect that to be small and offset at some point in the year. With respect to elasticity, I would just say we believe that these actions will drive elasticity.
Jamie Samath: That's the underlying intention because where we're applying them to the greatest extent is where there are cost sensitivity or cost is a barrier to adoption. The benefit for those high volume benign procedures is quite a bit greater than the blended 3% to 5%. Obviously, that's our intention. We have looked back at the first EUP program that we did in 2020, and our data supports the existence of elasticity, and we have confidence that that implementation was successful.
Jamie Samath: That, of course, is looking at our own data, but also getting feedback from our customers. So over time, as we address economics, and you think about how we frame our line of sight opportunities, as we address economics and bring costs down, we expect to increase the addressable market for Intuitive. So those are the underlying intents. I think we have relative confidence in the elasticity. That doesn't obviously turn on immediately in 2027, but over time.
Dave Rosa: I know that pricing is a focus of the question as it relates to benign procedures and addressable opportunity. I also want to make sure that we are recognizing the value of our entire portfolio. So da Vinci 5 and its innovation, we're pricing such that innovation is correlated to the value it creates.
Dave Rosa: So we have that thrust and that focus in our portfolio while actively doing the lowering of costs that Jamie described, because that's where broader access matters. So it's not a trade-off. It's our strategy to really expand our addressable market and serve more patients around the globe. We're confident that it's going to make a difference as we look forward.
Operator: Thank you. Our next question comes from the line of Travis Steed with Bank of America. Your line is open.
Travis Steed: Hey, thanks for the question. Maybe just a pipeline question, especially with this quarter being probably the biggest quarterly buyback you've ever done. So congrats on that. There's a lot of focus on U.S. procedures, and one of the things I've thought about is there are things that in the pipeline that can add revenue for procedure. As we're looking at the pipeline, I don't know if there's anything you'd like to point to or what could be coming on AI use cases or imaging things or even anything that's interesting on the GI robot or lung cancer that could be helpful for investors at this point.
Dave Rosa: Yeah, thanks, Travis. It's a great point and one that we've described a couple of times in previous quarters. Starting maybe with Ion, actually, the two active development programs that we have that are progressing strongly. One is around a ROSE system, and that's on-site cytology so that the physician and the care team can understand if the cells may be cancer or not real time.
Dave Rosa: So they can get better answers than they do today and do it more quickly. The second program there is endobronchial ultrasound integrated into the Ion platform. So that allows us to do staging. Both of those should bring value to the Ion program, speed up the time, we think, from detection to diagnosis and ultimately treatment, but will be accretive to the revenue per case on the Ion platform.
Dave Rosa: You mentioned vision is another area that we're very excited about when it comes to da Vinci. So we have multiple programs going there with advanced visualization technology around hyperspectral imaging of fluorescing molecules and some AI features that we do think will bring that incremental value, and we're going to be able to add some revenue per procedure as a result. So it is exactly my point of this is where innovation can bring outsized value to the customer and then bring some accretive revenue on a per-procedure basis to Intuitive. We have that across our portfolio.
Operator: Thank you. Please stand by for our next questioner. Our next question comes from the line of Rick Wise with Stifel. Your line is open.
Rick Wise: Hi. Good afternoon. Hi, Dave. Hi, Jamie. Another question about the ASC opportunity. Can you talk about your progress and what is next and maybe frame the contribution to future growth and how these next-generation extended use approach maybe impacts the opportunity? Related to that, maybe you can touch on now just with the Stryker CMR news, we have two competitors likely offering modular systems in the ASC. How do the competitive dynamics play in there? Does Intuitive need a modular offering of some kind? Just help us think through those various points. Thank you.
Dave Rosa: I appreciate the question, Rick. Maybe I will break it down into two parts because one is around the ASCs. Again, we have described this before. If you talk to ASC customers, what they are asking for is not a particular architecture.
Dave Rosa: What they are asking for is something that can be repeatable, easy to learn, easy to use, reliable, and serve the procedures that they are targeting for the ASCs in a very consistent way because it is about volume, and it is about getting patients out in a repeatable and knowable way. If you use that as the problem to be solved in the ASC environment, now you can start saying what kind of technology matches that and best serves that problem or solves the problem to be solved.
Dave Rosa: If you look at how might customers look at robotic competitors and make a choice, for me, it comes down to basically three areas. One is it has got to be the right architecture for the ASC. It has got to have the right portfolio of systems so that it can be priced in a manner that fits their economics. You have got to have that broader ecosystem because we know that is what leads to good outcomes.
Dave Rosa: Then you have to have the supporting infrastructure, all the teams and capabilities that are required to make sure a program runs at pace. Customers understand this. They are now looking across potentially multiple solutions, and they understand that it takes more than a robot. It does take an ecosystem, but the robot is front and center.
Dave Rosa: You asked about the architectures, and if I look back over our 30 years, we have engineered and tested just about every form of architecture there is out there, and that includes modular, table-mounted, and other types of robots. We brought in customers to assess them and to evaluate them side by side with us, and we continue to believe that a cart-based architecture consistent with da Vinci is the best option, is the best balance of capability and usability no matter where you look.
Dave Rosa: It might be in the main OR or in the ASC environment. We believe that it is not required to have a modular type of architecture to serve the needs of the customer in these segments where they are doing benign procedures and maybe increasingly complex procedures over time. We are well-positioned with our portfolio, the pricing that Jamie described to serve the needs of our customers there. We look forward to earning their first choice.
Jamie Samath: Rick, maybe just some framing in terms of numbers. These are a bit lagged, but we think a little under 10% of the US soft tissue surgery business is in ASCs today. That is growing. About 70% of those volumes are ASCs associated with or affiliated with existing IDNs, so they are customers and surgeons that we know. That is our initial focus. Our penetration of all of the ASC opportunity is low in Q1, and that is why now that we have XiR and we have the supply for XiR, it is a focus of ours.
Operator: Thank you. Our next question comes from the line of Adam Maeder with Piper Sandler. Your line is open.
Adam Maeder: Hi. Good afternoon. Thank you for taking the question. I wanted to ask about EUP 2.0 and specifically one of the potential offsets for sensing instruments. If I heard correctly, it does not sound like there is any offset assumed in the 300 to 500 basis point headwind for these. I would love just any update on force sensing instrumentation. Where is adoption today? What percentage of procedures are being done with force sensing, and how do you think it could evolve over time? I would also just appreciate any color in terms of primary use cases for the force sensing technology. Thank you.
Dave Rosa: Hey, Adam. I appreciate the question. Maybe I will start with a quick story that just happened. A few weeks ago, we hosted this surgeon event here where the early surgeons that were involved with da Vinci came to our campus, and we had a nice event.
Dave Rosa: I had the opportunity to meet with a very well-versed prostatectomy surgeon who has done over 10,000 cases, and he showed me his results that were a comparator between Xi and da Vinci 5. He was showing the return of potency, in this case, from time zero through 12 months. You watch it gradually increase from about 50% or so out of the gate to above about 80%. He has very good data. He is one of the world's leading surgeons.
Dave Rosa: He laid his recent da Vinci 5 experience on top of it, and it moved the entire curve up by about 10 points. I asked him why, and he attributed that to force feedback and the ability to sense those forces and be that much gentler around the nerve-sparing portion of the prostatectomy, which led to those results. That is maybe a little bit of color about how force feedback can make a difference in outcomes and even with surgeons who are very high up in their use of da Vinci.
Jamie Samath: In terms of adoption this quarter, about 8% of da Vinci 5 cases involve force feedback. That has been a slow increase from where we have started. We only got full supply later in the quarter, so that affected the 8%. I would say this, our ambitions are for that penetration number to be quite a bit higher. Obviously, to some extent, that requires us to create the evidence that supports the value propositions.
Jamie Samath: The teams are working hard on that, and we have our eye very close in terms of how that gets adopted and that the actual value of using the force feedback instruments is well understood. I would just say there are other offsets as we describe. The SP I&A per procedure is quite a bit higher than the multi-port, and obviously, those procedures are growing at a much higher rate.
Jamie Samath: On da Vinci 5, because of the integrated insufflation, when integrated insufflation is used, which is about 85% of the time, there is an additional about $100 per procedure for the tube sets that connect to the insufflator. Those three can drive offsets in terms of the 3% to 5%, and they generally would be expected to grow at a faster pace than the base I&A.
Operator: Thank you. Our next question comes from the line of Jayson Bedford with Raymond James & Associates. Your line is open.
Jayson Bedford: Good afternoon, and thanks for taking the question. Maybe just for Jamie. On the EUP, how long will it take you to fully implement the program? Meaning, when do you expect to see the 3% to 5% gross impact on revenue per procedure? Is there any way to kind of frame the expected impact in 2027? Thanks.
Jamie Samath: It will be country by country. The first is the U.S. As I said, that submission is in process. We would expect to start to roll that out sometime later in Q1, depending on, obviously, when we get clearance. Europe, it would be next, and that is not till the H2 2027. Some of the other markets are just before or just after that. I do not think we get to the full impact till the end of the year, frankly.
Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Matt Taylor with Jefferies. The line is open.
Matt Taylor: Hi. Thanks for taking the question. I did want to follow up on the settlement that you talked about today. You mentioned it is one time, no faults, and just provide some certainty for your customers. I guess, just wondering what this practically means for your customers and how they move on from that. If you could just talk about remanufacturing in general and whether that has been any kind of real headwind.
Dave Rosa: Maybe I will start, and Gary will hopefully weigh in.This settlement really is an agreement with our customers, specifically regarding third-party instrument remanufacturers and third-party service providers. I think the important part here is that it provides a clear framework on how we will continue to work together in those two specific areas.
Dave Rosa: It lets us focus on really the things that are important, so advancing the safety, quality, and security of our products for surgeons, care teams, and their patients. We believe that this certainty that it provides allows us to move forward and really focus on building value with our customers.
Gary Loeb: Yeah, just to add briefly, I think the resolution really strengthens our customer relationships, and it just provides a defined framework for how we work together on instruments and services.
Operator: Thank you. Our next question comes from the line of Chris Pasquale with Barclays. Your line is open.
Chris Pasquale: Thanks. I appreciate you taking the question. I wanted to ask about margins. You guys have done a great job improving profitability over the past few years. This quarter was better than expected. Street's modeling operating margin flat next year. While I appreciate you don't really want to get into 2027 in detail right now, you talked about offsetting the gross margin headwind from extended use. Are there any other considerations that we should take into account as we think about profitability and your ability to continue to expand margins here going forward? Thank you.
Jamie Samath: Yeah, I think what we've said for some time now is kind of the range of where we'd expect to be on operating margin is between 35% and 40%, and I think that's frankly best in class in med tech. As we think about it from a strategy perspective, our lean is to invest. Invest in areas where we can innovate and bring differentiated capability to our customers and their patients,
Jamie Samath: but also to support investments that allow us to grow at accelerated rates so that we can, again, serve more patients. Where we are right now, 41%, 42%, we have the capacity to invest. As we finish our planning process, then we'll evaluate that carefully. I'm not ready to say what we'll do on operating expenses. But certainly if there are opportunities for us to do what I just described, then we'll use that capacity to invest. We'll provide that guidance obviously in January.
Dave Rosa: Okay. That was our last question. Thank you for the questions. In closing, we continue to believe there's a substantial and durable opportunity to fundamentally improve surgery and acute interventions. Our teams continue to work closely with hospitals, physicians, and care teams in pursuit of what our customers have termed the quintuple aim: better and more predictable patient outcomes, better experiences for patients, better experiences for their care teams, lower total cost of care, and finally, increased access to care.
Dave Rosa: We believe value creation in surgery and acute care is foundationally human. It flows from respect for and understanding of patients and care teams and their needs in their environment. At Intuitive, we envision a future of care that is less invasive and profoundly better, where diseases are identified earlier and treated quickly so patients can get back to what matters most. Thank you for your support on this extraordinary journey. We look forward to talking with you again in 3 months.
Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
