Q2 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the intuitive surgical Q2 2019 earnings release call.
At this time, all participants are in listen only mode.
Later, we will conduct a question and answer session instructions will be given at that time.
If you should require assistance during the call. Please press Star then zero.
As a reminder, this conference is being recorded.
I would like to turn the conference over to our host Mr. Calvin Darling Senior director of Finance Investor Relations. Please go ahead.
Thank you good afternoon, and welcome to intuitive second quarter earnings Conference call with me today, we have Gary good hard our CEO and Marshall Mohr, our Chief Financial Officer.
Before we begin I would like to inform you that comments mentioned on today's call may be deemed to contain forward looking statements actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in the company's Securities and Exchange Commission filings, including our most recent Form 10-K filed on February 4th 2019, and 10-Q filed on April 19th 2019.
Our SEC filings can be found through our website or at the Fccs website investors are cautioned not to place undue reliance on such forward looking statements.
Please note that this conference call will be available for audio replay on our website at intuitive dot com on the latest event section under our Investor Relations Page. In addition, today's press release and supplementary financial data tables have been posted to our web site.
Today's format will consist of providing you with highlights of our second quarter results as described in our press release announced earlier today, followed by a question and answer session.
Gary will present, the quarter's business and operational highlights Marshall will provide a review of our second quarter financial results, then I will discuss procedures and clinical highlights and provide our updated financial outlook for 2019, and finally, we will host a question and answer session with that I will turn it over to Gary.
Thank you for joining us today, the second quarter of 2019 was a solid one for intuitive with healthy customer interest and demand for our products overall procedure growth met our expectations, while capital placements exceeded them.
Global procedure growth was approximately 17% in the second quarter of 2019.
Growth again centered on general surgery in the United States with positive contributions to the global growth rate from Germany, France and Japan.
In China, we were pleased with procedure performance given the recent release of systems under the new quota.
Turning to the United States year over year growth in the quarter was 16%.
General surgery growth again accounted for the largest increase year over year, accompanied by expected moderation of growth in us urology and gynecology.
Underlying this performance, we saw continued strength and bariatrics and coal assistant to me with modest tempering of growth rate in hernia and colon resection.
Given the different types of procedures being performed by general Surgeons, we see additional demands on system access and accounts as well as increased demands on our representatives time to support different procedure types.
We believe system placements strength in the U.S. is driven in part by the desire of general Surgeons for increased access we have efforts ongoing to manage these issues Calvin will take you through global procedure dynamics in more detail later in the call.
With regard to our installed base placement of new systems in the quarter was strong with growth and total placements rising 24% from Q2 2018.
Net of trade ins and retirements are de Vinci installed base again grew 13% over Q2 2018 to approximately 5270.
The mix of system placements this quarter move towards our flagship excise system well, both sales of X systems and trade ins remained healthy.
The proportions of systems placed under operating leases was 32% this quarter compared with 33% last quarter.
We do not anticipate this quarter to quarter variance is indicative of a larger trend and leasing.
With regard to capital average sales price the mix of systems and geography is last quarter resulted in a lower ASP when compared to historical trends.
The second quarter saw a reversal of mix dynamics with more fully featured system sales and a greater proportion of system placements in direct markets, resulting in an MSP that as higher than recent quarterly averages.
As we said last quarter this variance in ASP quarter to quarter as a result of the system and regional mix not a fundamental change in our philosophy.
Turning to expenses, we continue to invest as we launch new platforms strengthen our computational capabilities and execute projects that support future scale and provide leverage opportunities as we grow.
Our spending met our expectations falling within the range of projections, we shared with you last quarter and supported by solid procedure growth and capital placements.
Financial highlights of our second quarter results are as follows.
Procedures grew approximately 17% over the second quarter of last year, we placed 273 da Vinci surgical systems up from 220 in the second quarter of 2018.
Our installed base again grew at 13% from a year ago.
Revenue for the quarter was approximately $1.1 billion up 21%.
Pro forma gross profit margin was 71.3% compared to 71.1% in the second quarter last year.
Instrument and accessory revenue increased to $579 million up 22%.
Total recurring revenue in the quarter was $780 million growing 21% over Q2 of 2018 and representing 71% of total revenue.
We generated a pro forma operating profit of $455 million in the quarter up 17% from the second quarter of last year and pro forma net income was $388 million up 18%.
As you know we measure our efforts by their ability to positively impact the quadrupling better outcomes better patient experience better care team experience and lower total cost to treat provision episode.
We believe intelligent surgery takes the integration of three elements first a deep understanding of human interactions and inform holistic system design second to development of high quality smart and cloud connected robotic imaging, an instrument systems, and lastly, informatics and AI to deliver relevant validated insights.
For our customers surgery has been digitized for the past 20 years, while we've made significant progress over our history, we believe continuous improvement as required.
And we have deployed our investment toward these things.
We designed instruments and accessories to enable repeatable high quality surgeries that are efficient and cost effective relating to total cost to treat.
Taking one example of our advanced instrument platforms, our second generation sure form Staplers are now in the market at both 60 millimeter and 45 millimeter instrument lengths and represent product families.
Our 60 millimeter stapler has four staple links available and is sold in the US Europe Korea, Australia and now Japan.
Our 45 millimeter sure form stapler has five different stable life cartridges as well as a straight tip and curved tip instrument and is available in initial launch in the United States and our direct to you markets.
Measured through Q2 surgeons have fired intuitive staplers clinically over a million times cumulatively since our stapling launch.
Turning to systems were in the first phase launch of da Vinci SP.
We installed 13 systems in Q2 to bring our clinical installed base of Espeed at 34.
Our teams have done a nice job resolving the manufacturing variances that slowed our installs in Q1.
The highest per person per system utilization of SP is occurring in Korea, where regulatory clearances support the access to a large range of clinical applications accrete experience with SP is encouraging with regard to the broad possibilities for our platform.
In Korea procedures in urology Gynecology general surgery in head and neck surgery are being performed.
In the United States, we have two cleared indications for SP.
Urologic and trends oral surgery.
As you know we're pursuing additional clinical clinical indications for SP and have engaged regulatory agencies regarding their requirements. These requirements are in discussion, which implies projected timelines for additional indications are not yet available.
Our pipeline of interested interested SP customers is healthy and the combination of additional indications for ASP.
And our readiness for deployment at larger scale taste, the speed of our SP commercial expansion.
In flexible diagnostics, our eye on platform is focused on the need for accurate timely biopsies to support definitive early diagnosis of suspicious lung cancers.
Lesions for lung cancer.
Hi, and received FDA clearance in the first quarter.
With five 10-K clearance we have initiated our next phase focused on clinical use customer feedback and product production optimization.
First cases on the crude system were performed at the end of Q1, and we plan a measured rollout this year.
Placements to date are at hospital sites collecting data so far three have been initiated and over 50 procedures have been performed so far.
We're pleased with the early clinical results and look forward to our customers continued progress we expect commercial placements commenced in the next few months along with the initiation of additional clinical collection sites.
We do not anticipate material revenue from our own in 2019.
Turning to imaging and analytics. This week, we announced the acquisition of the Threed robotic into scope business from our longtime supplier solely fiber optic.
The transaction is subject to closing conditions and thereafter, we look forward to welcoming their employees to the intuitive team.
Leading visualization has been a core pillar of our offerings and we believe it is essential to the future of intelligent surgery.
This acquisition strengthens our design and supply chain capabilities and increases our manufacturing capacity for imaging products.
For the balance of year, our focus remains in completing the task we set for ourselves.
First supporting adoption of da Vinci in general surgery and in key procedures in global markets second launching our SP and buy on platforms.
Third driving intelligence surgery innovation.
And finally, supporting additional clinical and economic validation in our focus procedures and countries.
Before I turn the call over to Marshall I'd like to take a moment to acknowledge our chief operating officer Mr. sell Ronya.
You announced his intention to step back from day to day operations after 20 years and intuitive.
Sal is made enormous contributions to building our product line or capabilities and in the past few years, our leadership team.
I extend my personal thanks and out of the company for his efforts over these past two decades, we anticipate working with al post transition on projects of mutual interest I will now turn the call over to Marshall, who will review financial highlights.
Good afternoon.
I would describe the highlights of our performance on a non-GAAP .
Basis, I will also summarize our GAAP performance later in my prepared remarks.
A reconciliation between our pro forma and GAAP results is posted on our website.
Key business metrics for the second quarter were as follows.
Second quarter 2019 procedures increased approximately 17% compared to the second quarter of 2018 and increased approximately 7% compared with last quarter.
Procedure growth continues to be driven by general surgery, and you asked in urology worldwide.
Calvin will review details of procedure growth later in this call.
Second quarter system placements of 273 systems increased 24% compared with 220 systems last year and increased 16% compared with 235 systems last quarter.
We still expanded our installed base of da Vinci systems by 17% to approximately 5270 system.
This growth is consistent with last quarter and slightly higher than the 12.5% increase last year.
Utilization of clinical systems in the field measured by procedures per system grew approximately 73.5%, which is slightly lower.
Then last quarter growth of approximately 4% and below the 5% growth last year.
Our revenue overview is as follows.
Second quarter 2019 revenue was $1.1 billion, an increase of 21% compared with $909 million for the second quarter of 2018, and an increase of 13% compared with $974 million last quarter.
Instrument and accessory revenue of 579 million increased 22% compared with last year, which is higher than procedure growth, primarily reflecting customer buying patterns and increased usage of our advanced instruments.
Instrument and accessory revenue realized per procedure was approximately $1920 an increase of 4% compared with the second quarter of 2018, and a decrease of 2% compared with last quarter.
Systems revenue for the second quarter of 2019 was $344 million, an increase of 24% compared with the second quarter of 2018, and an increase of 39% compared with last quarter.
Systems revenue in the quarter reflected higher system placements higher asps and higher lease related revenue.
We completed 88 operating lease transactions, representing 32% of total placements compared with 44 or 20% of total placements in the second quarter of 2018, and 78 or 33% of total placements last quarter.
As of June Thirtyth, we had 486 operating leases outstanding and realized approximately $25 million of revenue related to these arrangements in the quarter compared with $12 million last year and $20 million last quarter.
Operating leases create a future source of recurring revenue and reduce the volatility of system revenue, while the increased number of operating leases placed in the quarter Dampens short term revenue growth for the quarter in which their place.
Operating leases included usage based financings.
That we provide to certain experienced hospitals, we believe that our lease financing alternatives align with customer objectives and enable faster market adoption.
Related to systems purchased over the lease period, we earned a small premium reflecting the time value of money.
And indicated usage based arrangements the risk that those systems may not achieve the anticipated usage levels.
The proportion of these types of arrangements could increase long term and will vary quarter to quarter.
We recognized $27 million of lease buyout revenue in the quarter compared with $12 million last quarter and $13 million last year.
These buyout revenue has varied significantly from quarter to quarter and will likely to do so.
We do not expect the second quarter.
A buyout revenue level of buyout revenue to repeat.
38% of the current quarter system placements in bulk trade ins, reflecting customer desire to access or standardize on fourth generation technology.
This is an increase in the proportion of trade ins compared to 34% in the second quarter of 2018, and 36% last quarter.
74% of the systems placed in the quarter versus Davinci, excise and 20% were Davinci X system, compared with 67% to Vinci excise and 25% to Vince GXS last quarter.
13% of the systems placed where SP systems, our rollout of the SP Surgicals measure putting systems in the hands of experienced de Vinci users, while we optimize training pathways in our supply chain.
Globally, our average selling price, which excludes the impact of operating leases and lease buyouts was approximately $1.54 million compared with 1.42 million last year and $1.31 million last quarter.
Our mix of systems and customers in the second quarter of 2019 was very favorable relative to prior periods. We had a high mix of X side versus X. and OSI systems.
We also had a low mix of distributor versus direct sales.
In the second quarter of 2019, we also had fewer multisystem arrangements, where we provided volume discounts.
The mix of systems customers and size of arrangements will vary overtime, we expect system ASP to be in the range of the midpoint of the first two quarters.
Outside of the U.S. results were as follows.
Oh U.S. procedures grew approximately 20% compared with the second quarter of 2018 and increased 4% compared with last quarter.
Second quarter revenue outside of the U.S. of 314 million increased 19% compared to the second quarter of 2018 and increased 11% compared with last quarter.
The increase compared with the prior year reflects increased instrument and accessory revenue of $34 million or 29% growth.
The increase in instrument accessory revenue was primarily driven by procedure growth in customer buying patterns.
Outside of the U.S., we placed 80 systems in the second quarter compared with 82 in the second quarter of 2018, and 81 systems last quarter.
Current quarter system placements included 30 into Europe , 24 ended Japan and ate into China.
61% of the systems placed in the quarter were Devinci excise and 33% for Davinci X systems, compared with 38% Davinci, Exide, and 44% Davinci axes last quarter.
12, the system placements for operating leases compared with six last year and 11 last quarter.
Placements outside of the US will continue to vary as some of the O US markets are in the early stages of adoption.
Some markets are highly seasonal reflecting budget cycles or vacation pattern.
And sales into some markets are constrained by government limitations.
Moving on to gross margin and operating expenses pro forma gross margin for the second quarter of 2019 was 71.3% compared with 71.1% for the second quarter of 2018, and 71.2% last quarter.
The increase compared with the second quarter 2018, and last quarter, primarily reflects higher system asps.
Future margins will fluctuate based on the mix of our new products the mix of systems and instrument and accessory revenue system, ASP and our ability to further reduce product costs and improved manufacturing efficiency.
Pro forma operating expenses increased 27% compared with the second quarter of 2018 and decreased 1% compared with last quarter.
Spending is consistent with our plan and includes an order of magnitude of increase.
Costs associated with the expansion of our O us markets.
Spending on our informatics capabilities and investment in our infrastructure in order to scale the business.
Our pro forma taxes tax rate for the second quarter was 20%.
And within our expectations of 19% to 20%.
Our tax rates will fluctuate with changes in the mix of us and our us income.
Changes in taxation made by local authorities and with the impact of one time items.
Our 2020 tax rate will increase with the return of the medical device tax.
Our second quarter 2019 pro forma net income was $388 million or $3.25 per share compared with $327 million or $2.76 per share for the second quarter, 2018, and $312 million or $2.61 per share for the last four last quarter.
I will now summarize our GAAP results GAAP net income was $318 million or 206 or $2.67 per share for the second quarter of 2019, compared with GAAP net income of $255 million, our $2.15 per share for the second quarter of 2018.
And GAAP net income of $307 million or $2.56 per share for last quarter.
The adjustments between pro forma and GAAP net income or outline and quantified on our website.
And include excess tax benefits associated with employee stock awards employee equity and IP charges amortization of intangibles and acquisition related items.
And legal settlements.
We ended the quarter with cash and investments of 5.1 billion approximately the same as March 31 2019.
Cash generated from operations was offset by stock repurchases and investments in working capital and infrastructure during the quarter.
We repurchased approximately 400000 shares for $200 million at an average purchase price of $477 per share.
In the quarter, we grew inventory by $45 million to $513 million representing approximately.
140 days of inventory.
We continue to build inventory to address the growth in the business as well as mitigate risks of disruption that could arise from trade supply or other matters.
With the growth in the business and our focus on efficiency and scale, we expect our capital expenditures will increase to over $250 million in 2019.
And with that I'd like to turn it over to Calvin who will go over procedure performance and our outlook for 2019.
Thank you Marshall.
Our overall second quarter procedure growth was 17% compared to 18% during the second quarter of 2018 and last quarter.
Our Q2 procedure growth was driven by 16% growth in U.S procedures, and 20% growth in all us markets.
In the U.S. Q2 procedure results were generally consistent with recent trends.
Q2 growth was again driven by growth in us general surgery, thoracic and benign gynecology procedures Q2, 2019, U.S. procedure growth was 16% compared to 17% last year and last quarter, reflecting anticipated slight moderation in mature urology and gynecology procedures and general surgery growth rates.
In us general surgery second quarter hernia repair and colorectal procedure growth remains solid although at slightly lower growth rates than last quarter and last year. Other general surgery procedures, such as call Lisa stack to me bariatrics and liver and pancreatic cases made increasing contributions to growth in Q2 with higher growth rates than last quarter.
As anticipated use procedure growth in mature urology and gynecology procedure categories moderated in Q2 compared to last year.
US gynecology growth and urology growth.
We're in the mid single digits.
Dvp growth specifically was in the low single digit range in close alignment with the underlying incident rate for prostate cancer.
As a mature procedure category, we believe that our us prostatectomy volumes have been tracking to the broader prostate surgery market.
In other U.S. procedures adoption of lobectomy A's and other thoracic procedures was again solid during the second quarter.
Second quarter, all use procedure volume grew approximately 20% compared with 22% for the second quarter, 2018, and 21% last quarter.
Second quarter 2019, all use procedure growth was driven by continued growth in dvp procedures and earlier stage growth in kidney cancer procedures general surgery and gynecology.
Q2, Oems procedure growth based modest working day headwinds due to the timing of the Easter holiday, mostly affecting Europe and other national holidays, particularly in Japan.
Japan procedure growth remained strong, but moderated somewhat in Q2, reflecting lower growth rates in mature urology procedures as we reach higher levels of market penetration.
The impact of holidays, and the anniversary of the new procedure reimbursements.
In China after several quarters of declining procedure growth procedure growth accelerated slightly in Q2, driven by procedures performed on new systems installed under the latest system quota.
In Europe procedure growth was driven by strong results in Germany, and France overall European procedure growth was largely consistent with prior periods with variation by country.
Now turning to the clinical side of our business each quarter on these calls we highlight certainly recent published studies of note.
However to gain a more complete understanding of the body of evidence we encourage all stakeholders to thoroughly review the extensive detail of scientific studies that have been published over the years.
We are pleased to see the evidenced landscape regarding our recently cleared ion and the luminal system start to grow.
A manuscript describing the first term and use experience led by Dr., David Fielding from the Royal Brisbin in Women's Hospital in Brisbane, Australia has recently been accepted for publication in the peer reviewed medical Journal respiration.
Previously presented at the annual chest conference in 2017. This study was designed to evaluate the safety and feasibility of the ion and alumina platform.
And included 29 consecutive subjects with follow up data through six months.
Although each nodule was located in the peripheral part of the long and the mean nodule size was approximately 15 millimeters.
Approximately 97% of the nodules were reached with a tissue samples suitable for assessment obtained.
Importantly across the entire study population no instances of new more thorax bleeding or device related adverse events were reported suggesting a good safety profile.
We believe that further scientific study and clinical evidence will be essential to build the market for IHOP soon after receiving FDA clearance for ion in the U.S., we initiated a post market clinical study called precise intending to enroll 360 subjects across six key centers in the United States.
Full details regarding the cost structure of the precise study are available on the web at clinical trials Dot Gov.
In may of this year, a large scale real world Comparative study using the National cancer database was published in the journal colorectal disease. The analysis led by Dr. Ravi Karen from New York Presbyterian Columbia University Medical Center compared the results of over 41000 patients from between 2010 in 2015 by surgical approach.
The national cancer database captures data from over 1500 cancer accredited facilities and represents approximately 70% of newly diagnosed cancer cases.
The population for this study consisted of approximately 15% robotic assisted.
33% laparoscopic and 52% open procedures.
In propensity score matched analysis with over 4000 subjects in each cohort comparing the robotic lay our approach to the laparoscopic approach. The robotic LCR was associated with shorter length of stay 6.3 days versus 6.8 days and lower risk of conversion to open 7.5% versus 14.95% with multivariate analysis, showing laparoscopic LCR patients being 2.2 times more likely to be converted to open.
Compared to open LCR the robotic assisted approach had shorter length of stay 6.3 days versus 7.8 days.
A higher rate of negative margins, 97.01% versus 95.96% and higher nodal yield 17 versus 16.4.
The authors concluded and I quote.
For patients with rectal cancer robotic LCR shows recovery benefits over both open and laparoscopic LCR with reduced conversion to open compared with laparoscopic LCR and less per long length of stay compared with laparoscopic LCR and open LCR.
Robotic Les are is it is associated with short term oncological outcomes comparable to open LCR supporting its use in minimally invasive surgery for rectal cancer.
I will now turn to our financial outlook for 2019.
Starting with procedures.
Last quarter, we forecast 2019 procedure growth of 15% to 17%.
We are now refining our forecasted the upper half of this range and expect full year 29 teen procedure growth of 16% to 17%.
Turning to gross profit on our last call we forecast our 2019 full year pro forma gross profit margin to be within.
70, and 71% of net revenue.
We now expect to come in at the higher end of that range. Our actual gross profit margin will vary quarter to quarter, depending largely on product regional and trade and mix and the impact of new product introductions.
Turning to operating expenses, we continue to expect to grow pro forma 2019 operating expenses between 24, and 28% above 2018 levels.
We continue to expect our noncash stock compensation expense to range between 320 and 340 million in 2019.
We expect other income which is comprised mostly of interest income to total between 130 and 135 million in 2019.
Up from $120 million to $130 million forecast on our last call.
With regard to income tax we continue to estimate our 2019 pro forma income tax rate to be between 19, and 20% of pre tax income.
That concludes our prepared comments, we will now open the call to your questions.
Ladies and gentlemen, if you wish to ask a question. Please press Star then one on your Touchtone phone, we'll hear a tone, indicating you have been placed in Q you made a move yourself from you at any time by pressing the pound key using a speakerphone. Please pick up the handset before pressing the numbers.
Once again, if you have a question in the press Star one at this time and our first question comes from the line of Bob Hopkins with Bank of America. Please go ahead.
Okay, great and good afternoon.
Hello.
First question I wanted to ask about.
U.S procedure growth.
By our math the overall Q2 us growth on the procedure side accelerated a little bit when you take into consideration the year ago comp, but you called out some slight moderation in hernia and colorectal. So I was wondering if you could just talk about that a little bit.
Was that was the growth you experienced in hernia and colorectal this quarter different than you expected and how do you manage through this issue of kind of managing access. Thank you.
Yes. This is Gary we saw.
A tad of moderation I think demand remains strong and what we're really seeing is what we indicated to you. We have two things going on one is.
There are a lot of different procedure types and now in busy centers competition for system access.
We can of course solve that with additional systems placed as well as work with folks on efficiency of abuse.
And we are doing both and you've you've heard that from us over the last several quarters.
And the next one is our commercial teams have been growing.
In the United States to support the growth of the company.
And it takes some time to to have teams.
Come up to full productivity and we were the percentage of new folks in new territories has been ticking up the last couple of quarters and it's the new the new ratio is.
Amongst the highest we've had in the last few.
Employee retention has been great it's really around increased.
Need to get increased case coverage and so there it's supporting our our new folks in the field with.
Tools in and some of it is just time on task.
Yes, Bob you know from a just a pure mathematical standpoint, you know we track adoption curves pretty regularly around here and it's it's a mathematical reality that that really all points along the curve the rate of growth actually declines. So our results here in Q2 is aligned with what we would've expected and.
Clearly there is a lot of substantial remaining opportunity in both hernia and colorectal procedures and our checks with surgeons generally indicate healthy demand.
That's great. Thank you for the color and then just one on the system side because revenue growth from system sales. This quarter was was.
Much higher than the first quarter due to mix as you called out.
But the placement numbers and the placement growth in both quarters suggest very strong underlying demand for your systems in both quarters. I was just wondering if you could talk a little bit about the differences you saw from Q1 to Q2 in that in that mix dynamic.
And what that suggests about the outlook for the rest of the year on system side. Thank you.
Yes, we are.
This is Marshall, we we have seen.
As you suggested.
Reasonable strength in terms of system placements I don't think there's anything really different quarter to quarter other than the mix and in other words, the be buying behaviors of customers as a haven hasn't changed we're seeing.
Nice cycle on trade outs and.
But we did see again more exercise this quarter, and then theres volatility or variability between quarter to quarter as it relates to.
Particularly our distribution channel and so we saw fewer just distributor sales this quarter and more direct sales in our direct sales are at a higher price than what we sell to our distributors since they incur the selling cost associated with those systems.
So thats really that's the color that we would provide on on systems revenue.
Great. Thank you.
Marshall is is it fair to look at it and say if you view the first half as a whole rather than in different quarters, you get a better picture that's true Gary.
You should when you look at the ISP as you should think about the combination of the two because 1.31 was a low point and 1.54 is a high point.
Next question comes from the line of Tyco Peterson with Jpmorgan. Please go ahead.
Hey, Thanks, maybe I'll just follow up on that last question well why should ask Steve I will take a little bit of a step back you know you did you skew more toward fully featured system sales. Obviously your procedure mix is expanding wide wide logically should ASP stepped down a little bit.
You should you should expect that the.
Again, the distributor sales tend to be variable quarter to quarter. So I think you should blend the first quarter in the second quarter when Youre looking at.
What level of the distributor sales.
You should expect and then I think same thing with the mix of X. I Nx.
Just depending on the geography axis targeting.
Geographies, where reimbursements are pressured and so.
This quarter, just based on mix, we wound up selling fewer axis and that should even out as well.
And we've had a couple of quarters now operating leases and kind of the low thirtys. It was 29% at the end of last year is this kind of the new norm in your view or or how should we think about operating leases in terms of mix going.
Think about it as a norm I think that theres going to be variability quarter to quarter.
And yes, Q2 is a slightly lower if not close to being the same as Q1, but I think overtime, we will accommodate customers and we think that.
On the other hand leases are positive for the company in the day and as I said in my prepared remarks that it increases the recurring revenue it eliminates volatility it also.
Enables a upgrade cycle when and if a new systems come out so.
We think it's a positive and so we will we will supply those to customers as they asked for them.
I would guess that over over time, we're predicting over time that there's the possibility that the percentage actually will increase.
Okay, and then on Iris I know, it's early days I didn't really hear you bring it up on the comment but can you just talk a little bit about interest level for for kidney and liver and how we should think about the expanded use of that going forward.
I think the.
Interest from the the forward leading surgeons is very high I think in general people looking out say additional access to data.
Iris just to reminder, for everybody is the integration of pre operative imaging three tier three D imaging into a case in real time.
Were not in the clinic, yet we do have our five 10-K clearance were working through agreements with first customers. We don't expect revenue.
This this year.
I think directionally there is quite a lot of support of.
I think part of what we want to develop in the in the market as we go forward, our use cases and really getting the value statement for them in terms of what drives either accuracy or efficiency or both.
Early response is great, but these things take a little time to develop and and.
And to develop the evidence base that goes behind it.
Okay. Thank you.
Next question comes from line of David Lewis with Morgan Stanley . Please go ahead.
Hi, good afternoon.
Yeah, a couple questions here I'll start with Gary you know Gary last year. She just begin to inflect momentum perspective, and they still remain pretty strong as you think about the next inflection for procedure growth I mean, do you think it's more likely that it comes from new systems, Obviously SP eye on.
Creating this access you've already talked about on this call are or accessing new geography, as your Japan, and China I notice you already mentioned that comment that it just a few systems in Japan, sorry in China.
Was able to drive some demands across those three buckets Gary systems access geographies what is the most likely driver of the next wave of procedure inflection.
I think in the near term access and core markets.
It's going to be important in other words whats been nice here in the last few years is the procedure base has been building so.
Healthy.
So double digit growth rates and procedures.
An absolute growth numbers are.
Starting to become substantial and making sure that those surgeons, who want access to the system habit has been important that's been one of the drivers for our increased flexibility and agility in capital acquisition models.
As you look at SP and high on both of those are interesting platforms that I think over time will expand the total available market for robotic assistance in diagnostics and.
In a single quarter single access surgery.
They take some time to develop in the speed with which they develop as I said in the script.
Paced by.
Additional indications and manufacturing scale longer term I think those things are exciting, but it will take some time to go through a geography, we've seen real successes, but they take time, Japan has been a great success, they're doing a really nice job.
But it is really heavy lifting to do all the things required.
To to build market access from monitoring networks to training centers to clinical evidence base to support additional adoption. So I think those things are important we have invested in them and we'll continue to do so.
So short answer maybe not a perfect modeling answer, but I'll leave that to you.
Okay, and then just to me if obviously, Gary just trying to get a sense of.
Thinking about the SP rollout and the iron Rod your eye on commentary was fairly consistent with the first quarter.
Am I thinking about the first four quarters of SP, obviously axing out the manufacturing issues last quarter.
Do you see eye on Rolling out my system placement perspective in a similar fashion to ASP is there a reason why it would be faster in the first.
First four quarters or commercialization or slower thanks, so much.
Yes, Hi, I'd anticipate.
A measured in this first first four quarters of launches as we optimize our our systems on our side and and also our gathering more data.
After that we'll see I don't think I predicted one way or another for you.
The indications and ion we feel pretty good about to get started.
I think of the size of that market is is real and.
So, we'll we'll see a year from now I think as to how fast we want to move on SP.
It has I think great long term potential if it requires additional.
Clearances to in the U.S. anyway keep keep moving in so we'll do that in in sequence.
Next we'll go to line of Amit Hassan with Citigroup. Please go ahead.
Hey, good afternoon, guys and let me start with one on the quarter and just to follow that to that.
So on the quarter, the I. M&A versus procedures, the eye and 8.2% procedures that 70% that's the widest gap.
I can recall in in a while you touched on it a bit but maybe just a little bit more color is is that the new and advanced instruments strategy something that's sustainable or are they one time things in there that we should consider.
Yes, I think in general we have seen increasing.
Revenue instrument accessory revenue per procedure, obviously, there's variability by quarter based mostly on the timing of of customer orders, but in general you know weve been gradually increasing and.
And the biggest aspect of that has been the increasing usage up to dance instruments from vessel sealing the vessel sealer extend we launched recently now to stapling as well in the 60 millimeter stapler, we launched or last year and up more more fully available this year in the U.S., So I think that.
That's been the biggest factor that that's probably been more than offsetting most everything else, whether it's you know more procedures in general surgery, hernia repair and others that maybe a lower lower.
Total usage, so I think that that's the biggest factor there.
Just a slightly longer term question on flexible enough to be with surgical instruments. One of your bigger future robotic competitors has been talking about this publicly now for the first time in just the past month or so.
Can you talk to how much about priority. This is for you to is what you can tell us about the opportunity from a robotic perspective.
Sure.
In general as we've described before we like to think in platforms and what I mean by that is if we can build some core technologies from advanced imaging to how great precision to great software than we can mix and match those core capabilities to pursue.
Different endpoints clinically.
And so you look at SP SP is.
Exceptionally powerful system that brings together.
Four instruments through a single access point.
If you look at on an island has exquisitely sensing and a flexible.
Endoscopy or a flexible.
Diagnostic platform overtime, I think those two different sets of ingredients give us a lot of opportunity and optionality.
And so I think those things are interesting and they could you opened for us additional.
Clinical markets over the long term.
That said.
[noise] product design is settled and architectural choices are really really important.
Doing it right I'm getting a great clinical outcome comes down to.
Sub millimeter precision and micro second timings of these electronics.
And as a result, we want to make sure that we really deliver on the things we put in the market from SP to island.
So.
We're not sprinting to go as broad as possible, we really want to make sure we deliver against the commitments, we make and for their customers who purchase our products, there's a fair amount of.
[noise] history out there of companies that have failed to attend to the details and started strong in Peter out and so we're pretty careful and thoughtful about it.
Okay. Thanks.
Next question comes from the line of Larry.
Gilbertson with Wells Fargo. Please go ahead.
Hi, Thanks, guys. Thanks for taking the question.
First down could you talk about the strategic and financial implications of the fiber optics acquisition and I had one follow up.
Sure I'll speak to why why we did it.
[noise]. This this is a.
Surely is a strong team and [noise].
And supply chain partner that that has been important for us over many years clearly.
Great imaging.
Imaging manufacturing capability design capability image processing.
Is a core part of surgery of the future and.
Interventions are the future.
As we've grown we've wanted to make sure that we can continue to invest in that.
Space, both on the design side and on manufacturing and production capability side.
It's been a great partnership with that team, we respect them and.
And have been very productive with them and so that gives us additional optionality and agility going forward in a core part of our business.
Yeah on more of the.
Deal specifics and logistics I'll turn it over to Mark.
So we entered into an agreement to acquire certain assets and operations from Shirley.
For cash consideration of approximately $100 million, the exact amount into the consideration and timing of the closing.
Is subject to certain closing conditions, and so that will that will occur.
Over the next future periods and the employees will transfer after each of the closing events occurs.
Thanks, Marshall and on eye on we haven't heard you talked about the opportunity or timing outside the U.S.
What's the status, particularly in China.
And rest of the world. Thanks for taking the questions guys.
Yeah on the.
Specifics on China, we're in discussions.
With the Chinese regulatory agencies about how best to bring it to market and timing there I don't have a definitive answer for you yet, but its an active discussion clearly we believe there or.
End user.
The opportunities and value and health care value to bring in China and in Europe and in other markets and we will take it in sequence.
We think this is a powerful set of technologies in a powerful platform. We are still in the early days our greatest organizational focus right now is on really understanding the technology and the use of it.
Carefully the early clinical results are great and they are differentiated relative to other products in the market.
So far in these early days, that's really important to us.
We will focus there and as we build strength and.
And experience and scale then it gives us a lot of opportunities to engage the rest of world.
Next we'll go to line of Lawrence Keusch with Raymond James. Please go ahead.
Great. Thanks. This is John Hsu on for Larry.
Maybe if we could start without providing guidance for 2020 can you give us some help guide post for how we should generally think about investment spend.
Next year going into 2019, you obviously have a lot of products on your on your plate. This year, but just any high level color would be greatly appreciated.
Well, we'll get we'll give you a better color when it comes to the JV read about what's going to happen next year, but the things that we're investing in are not short term investments they take they occur over a long period and so you should expect that spending will continue to.
Continue on those and on a other other matters going forward and as we grow the company of course, there is an increased amount of support this necessary to grow the company, particularly on the sales side in terms of personnel and commissions and so I think.
Spending will increase I wont give you anything more specific than that until we get later in the year, maybe I'll just speak for philosophy, a little bit.
We think the opportunity for.
Improved performance and therefore opportunities for the business are substantial.
And what pieces of us as to how we decide how much we'll invest in wind is that which we we think we can do.
With with excellence.
Generally speaking, we see more opportunity than we think we can pursue we wind up seeing no.
To some things that are probably good ideas, but we don't know that we can perform them well and so thats what balances are.
[noise] investment portfolio.
And we'll continue to use that philosophy as we plan out 2020 and go forward.
Great and then just on the balance sheet, you, obviously have a 5 billion plus in cash you bought back some stock in the quarter. You also did a tuck in acquisition for imaging capabilities can you just remind us how you think about your capital.
The planning priorities at this point.
Yeah, the philosophy and approach to capital deployment hasn't really changed but to remind you.
We think about that yeah cash obviously to operate the company, we're making investments in our future you know the we want we want cash the market is a volatile in terms of.
The environment is volatile in terms of tariffs and other things going on we want to make sure. We've got proper investments to be able to to deal with those and then ultimately we look for opportunities to to buy back stock and return cash to shareholders.
Okay, Great and then just I could speak one last one in on on the tax rate I think you mentioned the the medical device tax coming back in 2020 by my estimate I think we're coming up with.
The impact of roughly $30 million is that a decent ballpark for how you're thinking about the impact of product gross margin in 2020, yeah. When we're talking about medical device tax and we we were recognizing in the past we charge that expense item to cost of sales. So it impacts our gross margin there.
You know we saw an impact you know around 70 to 100 basis points then.
It's probably a similar kind of impact should or should that be reenacted.
Okay, great. Thank you.
Thanks, you go to line of JP Mckim with Piper Jaffray. Please go ahead.
Hi, Good afternoon. Thanks for taking my question I wanted to ask one on just this push to the on trade ins and upgrading installed base to cogeneration for I think.
After last quarter I think half installed base is still older generation. So can you give us an update on where that is today and then just how strategically how important is that to you to get everyone on Genfour ahead of.
Competition that in theory should come sometime next year or after that yeah, I'll give you the numbers and I'll, let Gary talk to the strategy you heard on this call. It was another 38% of our system sales involve trade ins. This quarter, it's likely to continue to be a significant part of our capital sales in future periods.
At this point in time it is about 45% of our installed base of 50 270 systems that are genthree and prior mostly I size.
We think it helps I mean after the strategy, we think are our customers appreciate it.
Many customers now are multi system owners or across their integrated integrated delivery network.
They have systems at different hospitals were where surgeons visit.
So having consistency helps them.
Gen four products have.
Greater access to advanced instruments, and other technologies and and our well appreciate it so in that sense. We think we can lean in and help those organizations go do it.
There's a different set of regulatory clearances in different countries around the world there were different trade in economics in each country. So as you think about the analysis, you think a little bit about.
Which region, and which country and Ken can move most quickly and we work through that as well.
Okay, and then if I could ask one on just the comments you made on the general surgery or dynamics attorney in some of the items that tempering based on just law of large numbers, but [noise].
The shift to bariatrics and more on Kohli, who I mean, the shift internally on general sort of what does that do for your instantaneous pieces are they are they more advanced instruments as you shift to a different procedures in general surgery.
Highly variable and you look at coli those are lower revenue per procedure cases, you look at bariatrics at the other side, where a lot of staple fires or use so.
Yeah, it's a highly variable landscape.
Very Patrick's is in early innings, and so as we start to optimize the the instrument kit.
They ran we're seeing really pulled from the market there.
We havent changed our priorities in Oh.
The U.S. Salesforce with regard to general surgery.
Continue to believe there is opportunity in and value and of course hernia and colorectal procedures.
The the bariatrics side are really customers coming to us and and starting to move that along.
Thank you.
Next we'll go to line of Richard.
No winter with SVB Leerink. Please go ahead.
Hi, Thanks, I have two and housekeeping with the housekeeping can you just quantify what the selling day headwind was what your procedure growth would have been excluding the or not to sell and give us some of the headwinds that you would describe it related to the holiday timing and whatnot and then.
Gary I was I was wondering if there with respect to the the capacity issues you know just getting robot time.
Are there certain types of the procedure mix.
Cases, or certain types of institutions, where you can practically get in front of those capacity issues.
To get there before they occur and is there any kind of characteristic of the institutions procedure mix that specifically is leading to the capacity constraints.
Yeah first on the on the working days really minor in the quarter not not a big thing we mentioned in the commentary or overall, you know, maybe a 30 ish basis point impact on.
On procedure volume with a a much larger portion attributable outside the U.S. due to the timing of Easter.
On the on the capacity side as Weve said in the past.
Our customer base doesn't have a one size does not fit all knotty each institution runs with different operating cadences within their organization.
So in some places we see extremely efficient capital utilization.
Really helpful actually approach.
Where they have very high predictability and get a lot of procedures out of the system. We're delighted to support that and we helped to benchmark that and teach others as they needed we see other institutions that for various reasons.
Our operating at lower capital capacity.
For some reasons that are quite good so maybe teekay teaching institutions, some baby institutions that take on the most complex cohort co morbid.
ER patient sets, where predictability of procedure duration is difficult.
So you can imagine if you're sharing a system between a thoracic surgeon news performing lung cancer procedures and.
And a general surgeon, who is doing a hernia repairs.
Cadences rhythms and scheduling are quite different and you're going to get less optimal scheduling.
To the extent that we can have those conversations upfront and help them optimize we do.
That's something we've been strengthening over time, so I think we can do better than we do today.
Great. Thanks, if I, if I get one more in just a bit.
The China utilization pick up on just ate systems placed under the quota did that surprise you that it was able to translate into a pickup in volumes. So quickly I. It was also an impression that you needed. There is can be a lag time to train institutions. If you could comment there. Thanks.
I don't know if we're surprised I'd say we were pleased.
That tells you the level of commitment and and.
Motivation of those customers to make their investment productive.
Last.
Last questioner please.
That's the last question comes from the line of Enron, So far with Deutsche Bank. Please go ahead.
Hi, good afternoon. Thanks, a lot for taking my question first question is on Japan, I believe you.
Noted some moderation in procedure growth there, but at the same time, we're still seeing some very strong capital equipment placement numbers. This quarter can you just sort of give us some color on what's driving these placements is it more.
Sort of Greenfield robotics programs that are looking to get into presumably urology or is it is it the established customers wanting to get more into general surgery.
In light of sort of the west went into incentive that they have I'm just wondering if there's any.
If the growth should continue to slow going forward in general surgery.
Yeah, It's a combination of Greenfields for where you have hospitals.
That are positioning themselves to do the newer procedures that were approved for reimbursement last year and are still trading cycle going on in Japan. Our distributor had sold a size on a on leases and as those leases are coming up or coming due then we see a customers wanting to upgrade to to the newer technology.
Okay. Thank you and then we've heard some mentioned from awesome some surgeons on some.
Third parties that hospitals can ship.
Instruments to that are you know that are approaching the end of their useful life.
And that this limited.
A useful life can be extended presumably you have some sort of a soft for intervention or something.
Is this something that you are seeing any impact from or is there any regulatory.
Preclusion that that would limit the ability for companies to do this kind of stuff.
Oh on the on the Oh, good an idea is it the.
The.
People are reprocess like that are bound by the same regulatory framework that we are in terms of assuring the quality of that product and and making sure. It's not sold as an adult rated product and they have to.
Take on that burden than it is a sophisticated one.
Calvin I'll, let you respond no yeah I think that's that's essentially in terms of materiality at all when you look at our revenue per procedure I mean, it's and we've talked about that a little bit and I don't think we've seen any any impact on that.
Great. Thanks for taking my question. Thank you that was our last question in closing we believe there is a substantial and durable opportunity to fundamentally improve surgery and acute intervention. Our teams continue to work closely with hospitals physicians and care teams in pursuit of where our customers have termed the quadruple aim.
Better more predictable patient outcomes better experiences for patients that are experiences for the care teams and ultimately a lower total cost T to treat.
We believe that accomplishing the same takes the integration of three elements first a deep understanding of the human interactions across the continuum of care.
Second smart and connected systems imaging instruments that augment care teams and third the ability to measure impact through analytic insights and translation of these insights into action driving positive change.
Thank you for support on this extraordinary journey, we look forward to talking with you again in three months.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using ATM T. Executive Teleconference Service you may now disconnect.