Chief Financial Officer at Intuitive Surgical
Good afternoon. I will describe the highlights of our performance on a non-GAAP or pro forma basis. I will also summarize our GAAP performance later in my prepared remarks. A reconciliation between our pro forma and GAAP results is posted on our website.
In Q3, growth in procedures, the installed base of da Vinci systems and average system utilization was healthy. The strength of these key business drivers resulted in a pro forma operating margin of 36% and pro forma EPS of $1.19. Simultaneously, we saw headwinds from the strong U.S. dollar lingering supply chain issues and inflation, which together negatively impacted pro forma operating margin by approximately 2 percentage points compared to the third quarter of last year. I will take you through these details.
Q3 procedure growth of 20% reflected an increase in U.S. procedures of 18% and OUS procedure growth of 24%. U.S. procedure growth reflected a favorable comparison to the year ago quarter, given the impact of the Delta variant last year. On a three-year compound annual growth rate basis, U.S. procedures grew approximately 13%.
In China, our second largest market, during the quarter, procedures continued to recover from the impact of COVID-related lockdowns that we described on last quarter's earnings call. However, we continue to see regional lockdowns occur as COVID cases rise.
Turning to capital. We placed 305 systems in the third quarter, 9% lower than the 336 systems we placed last year. Third quarter system placements included approximately 15 systems that were delayed at the end of last quarter due to component supply delays. There were 71 trading transactions in the quarter as compared to 136 in Q3 of 2021, reflecting the decline in the number of Si's remaining in the installed base. As of the end of Q3, there were approximately 739 Si's remaining in the installed base, of which 191 are in the U.S.
Excluding trading transactions, global system placements grew 17% from last year. The installed base of da Vinci systems grew approximately 13% year-over-year, consistent with recent trends. The utilization of clinical systems in the field, measured by procedures per system, increased almost 7% compared to last year. Using a three-year compound annual growth rate, third quarter utilization was consistent with historical averages, increasing almost 5%. Average system utilization in the U.S. grew 6% year-over-year, an improvement from the 1% decline in utilization in Q2. As a result of our procedure and capital performance, Q3 revenue was $1.56 billion, an increase of 11% from the third quarter of 2021.
On a constant currency basis, third quarter revenue grew approximately 15%. In the third quarter, revenue denominated in non-USD currencies represented 22% of total revenue. On a revenue-weighted basis, using current exchange rates, net of hedges in place for Q4, the U.S. dollar is approximately 3% stronger than the rates realized in Q3.
Additional revenue statistics and trends are as follows: in the U.S., we placed 175 systems in the third quarter, lower than the 227 in Q3 of 2021, reflecting a decline of 66 systems associated with trade-in transactions and a challenging macroeconomic environment. Outside the U.S., we placed 130 systems in the third quarter compared with 109 last year. Current quarter system placements included 54 into Europe, 32 into Japan and 14 into China compared with 47 into Europe, 20 into Japan and 17 into China in the third quarter of 2021. As of the end of Q3 2022, there were 40 systems remaining under the current quarter in China, which is also available to the three domestic competitors that have completed local registration with NMPA.
Markets that are served through distributors have represented approximately 10% of system placements so far this year. Our distribution partners purchase product from us in U.S. dollars and sell in their local currencies. While we have not experienced a significant impact so far, the strengthening of the U.S. dollar reduces distributor margins and may cause delays in capital purchases.
Leasing represented 37% of Q3 placements compared with 42% last quarter and 41% in the third quarter of 2021. The lower lease mix is a function of customer and regional mix. And while leasing will fluctuate from quarter-to-quarter, we continue to expect that the proportion of placements under operating leases will increase over time.
Third quarter system average selling prices were $1.5 million, consistent with last quarter. System ASPs were negatively impacted by a higher trade-in mix and the impact of FX, offset by a higher mix of Xi dual console placements. We recognized $17 million of lease buyout revenue in the third quarter compared with $22 million last quarter and $25 million last year. Lease buyout revenue has varied significantly quarter-to-quarter and will likely continue to do so.
Instrument and accessory revenue per procedure was approximately $1,800 compared with approximately $1,900 for both last quarter and last year. On a year-over-year basis, FX negatively impacted I&A per procedure by approximately $50. The remainder of the year-over-year reduction was primarily a result of customer ordering patterns. During the quarter, our distributors and customers in certain OUS markets reduced their inventory as supply chain predictability moderately improved. We
Placed 50 Ion systems in the quarter as compared to 28 in the third quarter of last year. The installed base of Ion systems is now 254 systems, of which 112 are under operating lease arrangements. Third quarter Ion procedures of approximately 6,400 increased 211% on a year-over-year basis. Ion is in the new MDR regulatory review process in Europe. And during the quarter, we submitted Ion into the regulatory process in China. As a reminder, regulatory review time lines in China are lengthy.
Moving on to the rest of the P&L. Pro forma gross margin for the third quarter of 2022 was 69.8% compared with 71.3% for the third quarter of 2021 and 69.2% last quarter. Q3 pro forma gross margin included a onetime benefit of approximately 50 basis points related to the favorable conclusion of certain indirect tax matters. Pro forma gross margin was lower than last year, primarily due to the stronger U.S. dollar, manufacturing and logistics inefficiencies as a result of the supply chain environment, higher component pricing and increased fixed costs relative to revenue. Indicators of supply and inventory held modestly improved in the quarter but remained well below pre-pandemic levels.
Pro forma operating expenses increased 24% compared with third quarter of 2021, driven by increased headcount, higher R&D-related project costs and higher travel costs. Growth in operating expenses has been primarily in support of our Ion platform, next-generation robotics capabilities, our digital capabilities and expansion of our infrastructure to allow us to effectively scale. We are also seeing higher regulatory costs as a result of increased regulatory requirements globally and expansion of our new platforms into OUS markets.
As Gary mentioned earlier, during the quarter, we slowed our hiring pace, adding approximately 530 employees, lower than the 700-plus employees we have added per quarter in the last three quarters. As we look forward to 2023, we expect our operating expense growth will be lower than the growth for this year. The slowing growth rate of operating expenses reflects the completion of some of our infrastructure and business process improvement investments and planned leverage in our enabling functions.
As part of our planning process, we are also conducting a review of our capital expenditure priorities and we'll provide an update as to the outcome of this review on the next call.
Within this framework, we will continue to invest in our new platforms, Ion and SP, next-generation capabilities and our digital ecosystem given the return profiles we see for those investments.
Pro forma other income was $7.2 million for Q3, lower than $10.4 million in the prior quarter, primarily due to the impact of foreign exchange losses from remeasurement of the balance sheet resulting from the continued strengthening of the U.S. dollar. Our pro forma effective tax rate for the third quarter was 23.4%, in line with our expectations.
Third quarter 2022 pro forma net income was $429 million or $1.19 per share compared with $435 million and also $1.19 per share for the third quarter of last year. Capital expenditures in Q3 were $153 million primarily comprised of infrastructure investments to expand our facilities footprint and increase manufacturing capacity.
I will now summarize our GAAP results. GAAP net income was $324 million or $0.90 per share for the third quarter of 2022 compared with GAAP net income of $381 million or $1.04 per share for the third quarter of 2021. The adjustments between pro forma and GAAP net income are outlined and quantified on our website and include excess tax benefits associated with employee stock awards, employee stock-based compensation, amortization of intangibles, litigation charges and gains and losses on strategic investments.
We ended the quarter with cash and investments of $7.4 billion compared with $8.2 billion at the end of Q2. The sequential reduction in cash and investments reflected share repurchases and capital expenditures, partially offset by cash from operating activities.
During the quarter, we completed a $1 billion ASR in addition to the $607 million of shares repurchased in the first half. Since the end of 2021, our diluted share count has decreased by approximately 7 million shares or 2% and we have a remaining authorization to repurchase our shares of $2.5 billion.
And with that, I would like to turn it over to Brian, who will discuss clinical highlights and provide our updated outlook for 2022.