Intuitive Surgical Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2023

There are 11 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Intuitive Q2 2023 Earnings Release. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. As a reminder, today's call is being recorded. I will now turn the call over to your host, Head of Investor Relations, Brian King.

Operator

Please go ahead, sir.

Speaker 1

Thank you. Good afternoon, and welcome to Intuitive's 2nd quarter earnings conference call. With me today, we have Gary Gutart, our CEO and Jamie Sumath, our CFO. 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.

Speaker 1

These risks and uncertainties are described in detail in our Securities and Exchange Commission filings, including our most recent Form 10 ks filed on February 10, 2023, and Form 10 Q filed on April 20, 2023. Our SEC filings can be found through our website or at the SEC's website. Investors are cautioned not to place undue reliance on such forward looking statements. Please note that this conference call will be available for audio replay on our website at intuitive.com, on the Events section under our Investor Relations page. Today's press release and supplementary financial data tables have posted to our website.

Speaker 1

Today's format will consist of providing you with highlights of our Q2 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. Jamie will provide a review of our financial results. Then I will discuss procedure and clinical highlights and provide our updated financial outlook for 2023. And finally, we will host a question and answer session.

Speaker 1

And with that, I will turn it over to Gary.

Speaker 2

Thank you for joining us today. The fundamentals of our business were healthy in the 2nd quarter With strong procedure and utilization growth and strong capital placements, our product operations teams continue to build capacity and deliver in a dynamic supply chain environment as customers increasingly rely upon us for routine use. Our research and development efforts continued to build momentum in the quarter, including positive development milestones for our intuitive ecosystem, including systems, instruments, accessories, digital tools and new indications. Turning first to procedures, growth in the quarter was 22%. Areas of strength included general surgery and gynecology for benign conditions, particularly in the United States.

Speaker 2

General surgery procedure growth was led by cholestectomy and hernia repair. Colon and rectal procedure growth was healthy. Global procedure growth was also strong in the quarter, led by a recovery in China and continued strength in Japan, Germany and the UK. ION procedures showed continued strength with 145% growth in Q2 of 2023. SP procedure growth was accretive with 40% global growth in the quarter driven by accelerating growth in the United States.

Speaker 2

On the capital front, we placed 331 systems in Q2 compared with 279 systems in Q2 of last year. Our clinical installed base now stands at 7,900 multi port da Vinci systems, 435 ION systems and 142 single port da Vinci systems. Overall, our capital placement trends reflected demand for additional capacity in multi port, Strong interest in our ION system and stable demand for SP as we build our SP indications. System utilization, defined as procedures per installed clinical system per quarter, grew 9% globally year over year, Reaching a new high as customers adopt a broad mix of procedures on our systems. We believe real world evidence of improvements across the quadruple lane From better patient outcomes to surgeon satisfaction and lower total cost to treat per patient episode underpin this increasing utilization.

Speaker 2

Turning to our finances. Our revenue grew 15% in the quarter. Our capital and operating expenses were within our spend guidance, reflecting continued investments in R and D to support growth of our platforms and digital tools, expansion of our manufacturing and commercial footprints and capital amortization. We will continue investing in R and D, manufacturing and commercial operations to serve our global markets at industrial scale. These investments are likely to be lumpy over the next couple of years as significant operations expansions and other projects complete.

Speaker 2

Taking a step back, we have found that the quadruple aim is the right North Star for us, focusing on demonstrable improvements to outcomes across specific As electronic medical records have been adopted, we have partnered with our customers to analyze this data, building real world evidence and big data approaches And powered by digital tools that can generate actionable intelligence from surgical data, we can help our customers analyze their programs, recommend and support This integrated business system is catalyzing our customers' goal of strong MIS programs by surfacing actionable and measurable steps. Our approach is scalable for us too, working for our da Vinci platforms and for ION and opening the door to future opportunities. Turning to our ecosystem investments, we're making solid progress extending our offerings to new clinical domains in new regions. For da Vinci Multi Port, we recently obtained NMPA registration for Xi local production in China. This means our da Vinci Xi will be able to compete for the locally sourced tender subset of the recently released updated national quota.

Speaker 2

Our da Vinci SP team achieved several milestones recently. We completed patient enrollment for our colorectal and our thoracic IDE trials, Continued our first phase of launch of SP in Japan and submitted our CE Mark dossier for SP in Europe. Turning to ION, our team installed their first ION system in the U. K. And initiated first cases.

Speaker 2

For our digital tools, we have initiated our Phase 1 launch of Case Insights, our name for our computational observer. Case Insights is a tool that works with the da Vinci system and hospital data to build AI models that find correlations between surgical technique, Patient populations and surgical outcomes. Our first phase of launch builds on work over the past few years with our clinical research partners to refine objective And link them to actionable changes to improve outcomes, shorten training times and improve surgical program efficiency. We think these computational tools can make a significant impact using real world and real time data to improve skills and outcomes and to inform future product and automation opportunities. That said, features can be built quickly, but long term validation is arduous.

Speaker 2

We're a science driven organization and we'll work through validation pathways in pursuit of long term success. We do not expect material revenue from Case Insights for the In closing, our core business has momentum. We see a significant long term opportunity to improve the quadruple aim using our integrated ecosystem powered by analytics and we are pacing our investments to catalyze that opportunity. I'll now turn the time over to Jamie, who will take you through our finances in greater detail.

Speaker 3

Good afternoon. I will describe the highlights of our performance on a non GAAP or pro form a basis. I will Global procedure growth in Q2 of 22% reflected U. S. Procedure growth of 19% and 28% procedure growth outside of the U.

Speaker 3

S. Procedures in Q2 benefited from higher patient admissions as hospitals, Consistent with our comments last quarter, contributions to procedure growth from surgeons new to the da Vinci platform was strong, reflecting both the strength of our training capabilities and an increasing number of graduates of residency and fellowship programs who are trained on da Vinci. Within one of our target procedure areas, bariatric surgery, our growth rate in the U. S. Slowed during the quarter.

Speaker 3

Some customers have indicated that they are seeing increased patient interest in weight loss drugs. It is too early to conclude if Slowing growth is a temporary pause as patients evaluate these new drug therapies or if it is a trend that continues. We believe that during the quarter, DA Vinci continued to gain market share in the bariatric surgical market. Our U. S.

Speaker 3

Procedure growth of 28% reflected strength in China, the UK, Germany and Japan. Strong procedure growth in China was driven by a continued recovery from more recent COVID related impacts and a favorable comparison to Q2 last year, which was also impacted by the pandemic. Consistent with our comments last quarter, growth in non urology procedures outside of the United States was accretive, growing approximately 35%, driven by increases in colorectal, hysterectomy and thoracic procedures. Turning to other key metrics. In Q2, the installed base da Vinci systems grew 13% to just over 8,000 systems, driven primarily by demand for additional capacity given procedure growth.

Speaker 3

Average system utilization grew almost 9% year over year, reflecting an increasing mix of shorter duration benign procedures in the U. S. And customers prioritizing use of their existing assets given the financial pressures they face. With respect to capital performance, We placed 331 systems in the 2nd quarter ahead of our expectations. Capital strength in the quarter included a higher number

Speaker 4

of placements to our distributors

Speaker 3

and a higher number of to our distributors and a higher number of multi system deals in the U. S. Relative to recent trends, reflecting in part Certain placements accelerated into Q2 from future quarters. Despite Q2 system placements being ahead of our expectations, Customers, particularly in the U. S.

Speaker 3

Appear to be cautious in their capital spending given ongoing financial pressures. We placed 279 systems in Q2 of last year, which as a reminder reflected a delay in the shipment Approximately 15 systems from June into July as a result of supply chain challenges we encountered during the quarter. Q2 revenue was $1,800,000,000 an increase of 15% year over year. On a constant currency basis, 2nd quarter revenue grew approximately 17%. Recurring revenue represented 85% of total revenue as compared to 72% for the full year 2019 and grew 20% over last year, driven by procedure growth and an increase in the installed base of systems under operating lease arrangements.

Speaker 3

Additional revenue statistics and trends are as follows. In the U. S, we placed 157 systems in the 2nd quarter compared to 150 systems placed last year. Outside the U. S, we placed 174 systems Q2 compared with 129 systems last year.

Speaker 3

Current quarter system placements included 76 into Europe, 33 into Japan and 16 into China compared with 78 into Europe, 18 into Japan and 15 into China in Q2 of last year. During the quarter, the China National Health Commission For those systems awarded to our JV under the new quota, We expect a significant majority to be placed in 2024 through 2027. We are seeing increasing Participation of local competitors in tender processes under the national quota. In addition, during 2023, We have experienced pricing pressure in China as a result of provincial government policy changes and competition. These dynamics create greater variability in the outlook for our procedure, system placement and revenue performance in China.

Speaker 3

In Q2, 60 of the 3 31 systems placed were trading transactions compared to 56 trading transactions in quarter of last year. As of the end of Q2, there are approximately 500 SIs remaining in the installed base, of which 97 are in the U. S. Leasing represented 50% of Q2 placements compared with 42% for both last quarter and last year. In the U.

Speaker 3

S, 78% of system placements in Q2 were under The higher rate of operating leases in the U. S. It's primarily driven by an increasing customer preference for our usage based leasing models, in part due to capital budget constraints and continuing financial pressures faced by many of our customers. In addition, some customers are choosing leasing And the earlier stage of our leasing program with OUS customers, we continue to expect that the proportion of placements And operating leases will increase over time. Q2 system average selling prices were $1,390,000 as compared to $1,470,000 last quarter.

Speaker 3

The sequential decrease in system ASPs was primarily driven by a higher mix of ex placements for purchase deals and geographical mix. We recognized $12,000,000 of lease buyout revenue in the 2nd quarter compared with $24,000,000 last quarter and $23,000,000 in Q2 of 2022. Da Vinci instrument and accessory revenue per procedure It's approximately $18.40 compared with approximately $17.80 last quarter and $1900 last year. On a sequential basis, higher INA per procedure driven primarily by the INA price increase we described last quarter and customer ordering patterns. Turning to our ION platform.

Speaker 3

In Q2, we placed 59 ION systems as compared to 41 in Q2 of 2022. 2nd quarter ION procedures of approximately 12,700 increased 145% as compared to last year. During the quarter, we placed our first Ion system in the U. K. Market.

Speaker 3

And in this early phase of our European launch, we are focused on the collection of Clinical data in support of our reimbursement strategy. 12 of the systems placed in the Q2 were SP systems compared to 10 systems last quarter. SP procedures grew by 40% and average system utilization growth Accelerated from last quarter's 12%, increasing by 14% compared to Q2 of last year. Moving on to the rest of the P and L. Pro form a gross margin for the 2nd quarter was 68.5% compared with 67.2% last quarter 69.2% last year.

Speaker 3

Pro form a gross margin was lower than last year, primarily due to a higher mix of Ion revenue, which currently carries significantly lower margins as compared to the da Vinci business and lower system ASP. As we described last quarter, improving product costs and manufacturing efficiency as a priority for our teams over the medium term. 2nd quarter pro form a operating expenses increased 12% year over year, driven primarily by increased headcount added throughout last year, higher variable compensation, increased Prototype expenses and increased expenses associated with customer training in support of procedure growth. Pro form a operating expenses represented 33% of revenue in Q2 compared to 35% of revenue for the full year 2022, reflecting in par planned leverage in our enabling functions. Capital expenditures in Q2 were $178,000,000 primarily comprised of infrastructure investments to expand our facilities footprint and increase manufacturing capacity.

Speaker 3

Our pro form a effective tax rate for the 2nd quarter was 22.3%, consistent with our expectations. 2nd quarter pro form a net income was $507,000,000 or $1.42 per share compared with $415,000,000 for $1.14 per share for Q2 of last year. I will now summarize our GAAP results. GAAP net income was $421,000,000 or $1.18 per share for the Q2 of 2023, compared with GAAP net income of $308,000,000 or $0.85 per share for the Q2 of 2022. The adjustments between pro form a 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 and gains and losses on strategic investments.

Speaker 3

We ended the quarter with cash Investments of $7,100,000,000 compared with $6,600,000,000 last quarter. The sequential increase in cash and investments reflected cash from operating activities, proceeds from employee stock exercises, partially offset by capital expenditures. And with that, I would like to turn it over to Brian, who will discuss clinical highlights and provide our updated outlook for 2023.

Speaker 1

Thank you, Jamie. Our overall 2nd quarter procedure growth was 22% year over year compared to 14% for the Q2 of 202226 percent last quarter. In the U. S, Q2 2023 procedure growth was 19% year over year compared to 11% for the Q2 of 2022 26% last Quarter. Q2 growth continued to be driven by strong growth in procedures within general surgery with particular strength in cholecystectomy and hernia repair.

Speaker 1

Bariatrics growth was healthy in the quarter, but as noted earlier, growth was lower than in prior periods. Outside of the U. S, 2nd quarter procedure volume grew 28% compared with 22% for the Q2 of 2022 and 28% last quarter. 2nd quarter 2023 OUS procedure growth was driven by continued growth in general surgery, primarily from strong growth in colorectal procedures, followed by growth in thoracic procedures. Growth in urology continued to be healthy, led by kidney procedures along with continued double digit growth in prostatectomy.

Speaker 1

In Europe, we experienced strong growth in the UK, Germany and Spain. In all the regions noted, procedure growth was driven by colorectal and hysterectomy procedures. In Asia, growth was led by China, where we saw a continuing recovery in procedures that were impacted by COVID and benefiting from a favorable comparison to Procedure volume that was impacted in the same quarter a year ago. Procedure growth was led by strong growth in urology, namely prostatectomy and kidney procedures. In Japan, growth was led by general surgery, with the largest Contribution is coming from colorectal and gastrectomy procedures.

Speaker 1

While still at earlier stages of adoption, India and Taiwan both demonstrated strong growth in gynecology and general surgery procedures. Now turning to the clinical side of our business. Each quarter on these calls, we highlight certain recently published studies that we deem to be notable. However, 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. This past May, Doctor.

Speaker 1

Zhang from the 2nd affiliated hospital of Jiaxing University in China Published a systematic review and meta analysis comparing outcomes of robotic right colectomy procedures with outcomes associated with laparoscopic right colectomy. Published in Techniques in Choloproctology, This meta analysis evaluated a total of 15,241 patients across 42 studies With over 2,700 subjects in the robotic right colectomy group and over 12,000 subjects in the laparoscopic group and included outcomes associated with the entire population as well as outcomes for both intracorporeal and extracorporeal anastomosis. Looking at the population overall, the authors reported among other outcomes, an approximately half day shorter length of hospital stay, 51% lower risk of conversion to laparotomy and a 12% lower risk of complications with the robotic approach. Notably, in the subgroup specifically comparing outcomes for procedures with an intracorporeal anastomosis, The robotic right colectomy group was associated with a shorter length of hospital stay by approximately 16 hours robotic assisted approach was associated with a 40% lower risk of overall complications. The authors concluded in part that, The safety and efficacy of robotic right colectomy is superior to laparoscopic right colectomy, especially when an intracorporeal anastomosis is performed.

Speaker 1

Turning to a clinical study reporting outcomes for robotic assisted and video assisted thoracoscopic surgery. Doctor. Mirzabai from Danbury Hospital in Connecticut published outcomes comparing lobectomies performed with either approach using the National Cancer Database. This study focused on patients with complex etiology such as non small cell lung cancer who have received neoadjuvant therapy, had N1N2 disease or had a tumor greater than 5 centimeters and compared 9,500 subjects with over 2,100 in the robotic arm and over 7,000 in the VAPS arm. Notably, When analyzing rates of conversions to open, the authors reported a 7.7% lower rate of conversion to open in the robotic arm with an approximately 2 times higher risk of conversion associated with the Vats Group.

Speaker 1

The authors concluded, In summary, our analysis of the National Cancer Database suggests that Robotic labectomy for complex lung resections achieve similar perioperative outcomes and R0 resections as fast labectomy, with the exception of a lower rate of conversion to thoracotomy. I will now turn to our financial outlook for 2023. Starting with procedures. On our last call, We forecasted full year 2023 procedure growth within a range of 18% to 21%. We are now increasing our forecast and expect full year 2023 procedure growth of 20% to 22%.

Speaker 1

The low end of the range reflects uncertainty around the duration of elevated procedure volumes with and patient spending. At the high end of the range, we assume macroeconomic challenges do not have a significant impact on hospital procedure volumes, And bariatric growth rates in the U. S. Continue at the rate we saw in Q2. The range does not reflect significant material Supply chain disruptions or hospital capacity constraints.

Speaker 1

Turning to gross profit. We continue to expect our 2023 full year pro form a gross profit margin to be within 68% and 69%. Our actual gross profit margin will vary quarter to quarter depending largely on product, regional and Trade in mix and the impact of new product introductions. With respect to operating expenses, on our last call, We forecast pro form a operating expense growth to be between 11% 15%. We are adjusting our estimate and now expect our full year pro form a operating expense growth to be between 12% 15%.

Speaker 1

We are also updating our estimate for non cash stock compensation expense to range between $600,000,000 to $620,000,000 in 2023, Narrowing the range from our previous estimate of $600,000,000 to $630,000,000 We are increasing our estimate for other income, which is comprised mostly of interest income, to total between $160,000,000 $180,000,000 in 2023, an increase from our previous estimate of $140,000,000 $160,000,000 The increase primarily reflects the rise in interest rates. With regard to capital expenditures, we continue to estimate a range of $800,000,000 to $1,000,000,000 primarily for planned facility construction activities. With regard to income tax, we continue to estimate our 2023 pro form a tax rate That concludes our prepared comments. We will now open the call to your questions.

Operator

Thank We'll go to the first question From the line of Larry Biegelsen, Wells Fargo. Please go ahead.

Speaker 5

Good afternoon. Thanks for taking the question. Gary, just 2 for me. One big picture question on AI, and second, on procedure growth. So AI is obviously having its moment in the sun here, Gary.

Speaker 5

I'm curious, where is Intuitive spending time in applying AI? Is it imaging, Movement of the robot, training, I'd love to hear your thoughts. And then I have one follow-up.

Speaker 2

Yes. We'll start on AI. Let's talk about what it is. For us, it's a suite of digital tools that rests on a baseline and then can be built upon Using various machine learning techniques, including computer vision. We've been at it for some time.

Speaker 2

We started the Internet of Things for Surgical Robots over a decade ago, we built the baseline of cyber secure, privacy compliant pipes that allow us to get access to the data. So there's some foundational work that was important. That's kind of step 1. Step 2 is To collaborate with customers and aggregate data that is meaningful, AI is only as good as the quality of the data that you feed it. And so for us that has been robot data, some other data and electronic medical record data in partnership with our customer base.

Speaker 2

We've been doing that for several years now. From that, I think you can start to do analytic inspections. You can do analyses on the data, For correlation, sometimes it's pretty simple math that gets you big data explorations, Some simple things that we can do to help our customers become more efficient and to expose variation. Over time, you can invest further in things like computer vision, which we have been doing and into predictive analytics. The idea that you can look at surgical data Science understand the variation of patient populations and what's happening in surgery and start to create tools, digital tools that can help improve outcomes So of the things you mentioned, we have our toe in the water in many, and we've had for some time.

Speaker 2

As I said In the script, the feature content can be moved pretty quickly. I think the validations take real time to do well, particularly outcome based or interventional validations. And so we're going to go through and do that with real rigor. So expect us to continue down that pathway.

Speaker 5

That's very helpful. And then on procedures, I'm just wondering, you talked about some catch up In Q2, how are you thinking about how much of the backlog of deferred procedures is still left? You talked about the diagnostic Procedures on the last call and any color on what you're assuming for bariatrics here for the rest of the year. And does that mean international will continue to be stronger than the U. S?

Speaker 5

Thanks for taking the questions.

Speaker 2

Let me talk a little bit about, I think, the patient population that moved to the sidelines during the pandemic and then I'll turn The assessment over to Jamie. On the kind of the pandemic response, It's hard to exactly estimate how many folks would have been in diagnostic pipelines that did not get their tests. We do look at the data that's available to do that. I don't think it will clear in just 1 quarter. I think our past experience on these things is that Lower utilization happened over a several year period and it will probably take many quarters for it So fully recover.

Speaker 2

How long that is, I think it's very, very hard to estimate. So far so good. You asked a question about Bariatrics, I'm going to turn that over to Jamie. He spoke about it a little bit in his prepared remarks.

Speaker 3

Yes. What we saw in Q2 was that growth rate slowed. We have some input from customers that the level of patient interest is such that Patients are now considering drugs versus surgery. It's unclear yet based on that set of inputs from customers, The duration of that evaluation by parents and patients and obviously it's layered. So what we did for our guidance was we just said at the high end For the remainder of the year, the bariatrics growth rate in the U.

Speaker 3

S. Is consistent with what we saw in Q2. And at the low end, we said that The growth rate continues to slow a little bit over the course of the year as patients become increasingly educated about the weight loss drugs. And obviously, there's a number of factors that Patients have to consider with respect to those drugs, cost, side effects, what happens if they come off the drugs and regain weight, etcetera. But I think from Our perspective, we're early in understanding what the longer term impact will be.

Speaker 3

Customers have said that, They have confidence that there is a role for surgery in weight loss and that, that will endure over kind of the longer term. What happens in for the rest of the year, I think We'll see.

Speaker 6

Thank you.

Operator

And we'll go to the next question. Go to the line of Travis Steed, Bank of America. Please go ahead.

Speaker 4

Hey, I did want to ask about China and The China quota, and how you think the opportunity is now that there's more local players, but you also have the local version of Xi. And on the bariatric, just a quick follow-up on that too. Is that around 100,000 procedures? Just trying to think about sizing that bariatric surgery opportunity or impact?

Speaker 3

We've said the market size in the U. S. Is about 200 ks procedures annually for what we think is a good match for robotics. And in terms of where we are in penetration, we're kind of at the if I put it in quartiles, we're at the beginning of the second quartile. What was your first question, Travis?

Speaker 4

It was on China and the China quota and how to think about that opportunity there versus last Given there's more local players, but now you have the local version of Exai?

Speaker 3

Yes. I mean, obviously, There's increased opportunity in the sense that this quarter is 5.59 systems relative to the prior quota of 2.25 systems, But you also have now 5 local players. There will be government interest in success of local players. We do believe that surgeons cared about capability and feature set. And so the extent to which da Vinci continues to be differentiated, I think is to our advantage.

Speaker 3

In the and we are seeing those local players increasingly participate in tenders. With respect to how that, quota will be allocated, so it gets allocated from the central government to the provinces and then it goes through tender processes. So there is some time before that results in placements. And that's why we said in our prepared remarks, we think the bulk of, the subset of that quote, our JV wins will be in 2024 through 2017. I also described some dynamics that create greater variability with respect to pricing pressure and increasing competition.

Speaker 3

So I think for us, that's something that we're going to watch carefully over the next year or so.

Speaker 4

All right, great. And a question for Gary. I heard the comment on hospitals leasing more to preserve the upgrade option for the next gen system. So maybe just talk high level, the pipeline comments On the FDA and kind of supply chain bottlenecks that you saw last year and then and how you're thinking about incremental upgrades to the Gen 4 versus kind of new platforms?

Speaker 2

Sure. On the supply chain health side, we are seeing fewer Pockets of challenge, but some pockets nonetheless. So there's been significant focus and attention to make sure that we're supplying our customers what they need as we go through a pretty nice procedure growth curve. So they're calling out improvement in the breadth of supply chain challenge, but cautioning that there are still some pockets that need attention or require attention. We continue to work on multiple things.

Speaker 2

As you know, we're working on next generations of Our platforms in general, it is a routine activity for us. How we make the decision between upgrading a current generation And versus moving it to the next generation really is around customer value of that switch and The convenience and economics of doing an upgrade versus a platform changeover. And we expect to do some of both. We are Usually working on the next two generations because of the time it takes to develop a platform, not just the next one, but the next one after that. And Current time is really no different.

Speaker 2

We're pleased with the performance of our engineering teams in prosecuting Those upgrades and technologies. What I will say is prioritization wise, what we care about is can we improve patient comes in a real way or open a new population of patients to the benefits of minimally invasive surgery. So we look at that. We look to improve the surgeon and care team experience, whether that's in their ergonomics or their workflow, And the delight with which they perceive our systems, we work to improve efficiencies of overall programs. We'll work on things that Make hospital programs more efficient and we work to lower the total cost to treat per patient episode.

Speaker 2

And when we find feature sets and technologies that do that, then we get pretty excited

Operator

Okay. Our next question is from the line of Robbie Marcus, JPMorgan. Please go ahead.

Speaker 7

Yes. Thanks for taking the question and congrats on a really nice quarter. I heard the comment on prototype expenses are increasing. So I figure I'll Try my luck here, and I know you're not going to tell us when the next gen or if the next gen system is coming. But I want to ask around Just implications if and when one does.

Speaker 7

You have a lot of leases now. Do they have the option to upgrade? And will that come through at higher revenues? And how do we think about the prototyping expense and really what's that for? Thanks.

Speaker 3

Yes. I'm not going to be specific on the prototype expense and it's distributed across a number of programs. Prototype expenses tend to be lumpy within Q2 relative to the comparison point, it just so happened to be a quarter where that was one of the drivers of our expenditure, Nothing more than that, I would say. As we've grown the proportion of the installed base is under leases, I think it's about 2,000 systems now that are under released in the installed base. Generally, they have a technology obsolescence clause.

Speaker 3

That's kind of in part A reflection of customer feedback from when we launched Xi, so that's routinely in our operating lease arrangements. And that clause generally gives customers the opportunity to change that existing lease to the lease of any new Next generation technology. And that is not a specified price by the way, that's to be negotiated. So I wouldn't say anything more about price.

Speaker 7

Great. And maybe, Jamie, one more for you on the financial side. Another nice quarter of cash flow generation, North of $7,000,000,000 on the balance sheet, interest rates high, inflation high as well. How are you thinking about maximizing the cash here and how should we think about the priorities? Thanks.

Speaker 3

With respect to capital allocation, I think our priorities are Consistent for how they've been for some time now, our first priority is to invest in the business, both in capital expenditures, which As you've seen by our guidance, they are relatively high to our history this year and in organically investing in operating expenses. 2nd is to acquire technology externally that gives us differentiated capability or accelerates us in the marketplace. That's generally license arrangements, IP acquisition or tuck in acquisitions. And we continue to look at returning cash to shareholders opportunistically, and I think that's served as well. If you look at kind of the last 18 months, we repurchased 12,600,000 shares for 3 $1,000,000,000 at an average price of $2.34 And we did that opportunistically in large part because it reflects

Speaker 7

Great. Thanks a lot.

Operator

Okay. Our next question is from the line of Rick Wise, People. Please go ahead.

Speaker 6

Good afternoon, Gary. Hello, everybody. Gary, I recently visited several European hospitals and robotic programs. And frankly, and Honestly, I came away more impressed than ever with Intuitive's European commercial presence and reputation. But I was particularly Intrigued to hear one particularly high volume robotic surgeon talk about what's next.

Speaker 6

And he seemed less focused on systems and very much Focused on enabling technologies that make everything better, faster, clearer, etcetera. And they Things like integrated CT image overlays during procedures, that aspect of augmented reality, Tools that bring CT and surgery together, next generation Fireflies, he was dreaming of virtual rulers, Dual SureForm 4560 Staplers and haptic feedback are I mean that was a it was Fascinating to hear, are these the kinds of innovations that are priorities for you? And are these kind of things you want to make Docs like that excited about? Is that what you're the kind of stuff you're working on?

Speaker 2

You had a long list. I think that Several of those are important and things that we have talked about and have shared with the world. I think the idea of Higher confidence, ability to identify tissue in real time for the surgeon and we can do that a few different ways. So For us, this imaging that you described and other advanced imaging technologies that give surgeons the ability to see beyond the surface of the tissue and Beyond what you can see with normal white light imaging, we absolutely think that's helping clinical outcomes And we're excited about and investing in image fusion or data fusion and that's the CT overlay, the Segmentation of preoperative MR and CT scans and the ability to use that in real time during the case, we think can change outcomes and change Efficiency in the OR, other types of analytic and sensing capabilities we think are really powerful and important. And to the earlier question about AI, machine learning, machine vision, these things work together.

Speaker 2

So High definition images that show you things beyond the surface of the tissue plus computer vision Plus AI models can give you some predictive analytics that I think are really powerful and would help surgeons get to better outcomes, reduce complications. So I am like that surgeon quite excited.

Speaker 6

Great. Just a follow-up quick follow-up. I think if I remember correctly, Took a 5% across the board price hike on instrumentation. I don't know if I'm remembering correctly, that was to kick in like June 1. Did that happen?

Speaker 6

Did it help the quarter? And should I assume that it's going to be a little bit of an offset or a little bit of an instrument tailwind in the Thank you, Gary.

Speaker 3

Thanks Rick. It was largely implemented in Q2, Rick. It wasn't effective at the beginning of I'd say roughly half of the quarter benefited from the price increase. Our estimate for the impact of Price increases consistent with what we said last quarter, roughly about $100,000,000 impact to revenue and profit for the year. Again, you get kind of half an impact in Q2 and the full impact in Q3 and Q4.

Speaker 6

Great. Thank you.

Speaker 2

And a reminder of Our motivations on that, we've been quite conservative on pricing. Our input pricing in the last few years has gone up in terms of raw material and labor content. We have offset most of that through efficiency and scale advantages, but we felt like it was time to Share some of that with our customers and that was the motive behind the price increase.

Speaker 3

Thanks again.

Operator

We'll go to the next line. I have Richard of Truist Securities. Please pronounce your last name, sir.

Speaker 8

Thank you. Richard Newitter here. And thank you for taking the questions. Jamie, maybe for you On the guidance, 20% to 22%, very healthy. I'm just curious on thinking about the low end of the range there.

Speaker 8

You Specifically mentioned you contemplate bariatric surgery growth trends eroding a little bit From the 2Q levels, what's the pace of erosion there that you're thinking about That would get you to the low end. Like how much erosion? How did you establish a baseline for yourself?

Speaker 3

Yes. I don't want to get too specific there, Rich, given just the relative size of bariatrics in the U. S. To our overall procedures. We can obviously see the progression between Q1 and Q2.

Speaker 3

I'd call it a moderate Steady progression in the model, in Q3 and Q4. The overall impact on that is obviously a function of The size of the bariatrics business for us, it's not some dramatic fall off.

Speaker 8

Okay. That's helpful. And just maybe sticking on The same topic here on bariatrics. Just thinking about the areas that you could offset that As we think of procedure categories geographically or by category that could be nearing an inflection point like bariatric several years ago. What procedure categories or geographies would you call out that you think Could lead to overage there to offset any potential incremental slowdown in bariatrics, if any.

Speaker 3

Yes. I'm not going to answer that in terms of overage, but I'll Say, where we're seeing healthy growth. If you take our largest 7 markets, which is a focus for us, so China, Japan, South Korea, Germany, France, UK and Italy, what you're seeing in those markets is generally a progression beyond urology into the next set of cancer procedures. It's market by market, but generally that's hysterectomy, thoracic and colorectal procedures. And we're Seeing them on the early stages of an adoption curve and that's why we've talked about our OUS business now is about half Outside of urology or beyond urology, this quarter it grew 35%, that subset, that's consistent with what we saw in Q1.

Speaker 3

That subset also grew 35 So I think we're excited in those larger markets where we have that focus and continue to drive the adoption curve in that next set of procedures. If you look at market by market, you have some unique dynamics in China. You see liver and PANCREAZE procedure is doing well in Japan, treatment of stomach cancer. In Korea, for example, you see thyroid. But it's really that next step procedures.

Speaker 8

Thank you very much.

Speaker 2

Just I want to just step back a little bit on We've had a few questions on it, just to make a point. As we go out and talk to surgeons, we talk to obesity physicians and pharmacologists, which we do in terms Our diligence. The sense here is that the market is going to adjust to the change in treatment pathway as it relates to drugs. However, It doesn't look like the drugs are a cure and may not be a fast path to cure and A strong consensus among those we speak to, including people who are not surgeons, physicians who are not surgeons is that The surgery and other interventions are going to remain an important part of the interaction. As In the near term, I think the market will adjust to understand what role the drugs will play, but they're not cures and the discontinue rate remains Pretty high and the populations of patients who don't get any benefit from the drugs also remain significant.

Speaker 2

So I think there's an adjustment period here And we should be aware of it. But that may become a tailwind in future quarters as folks work through those sets of pathways and look at Long term and durable solutions into the obesity challenges.

Speaker 8

Thank you very much.

Operator

Okay. We'll go to the next line. Line of Ryan Zimmerman, BTIG. Please go ahead.

Speaker 9

Good evening. Thanks for taking the question. Maybe one for Jamie. On the expense management standpoint, I mean procedures are going up a little bit faster than expense or OpEx guidance by about 50 basis points or so in that. And so I'm just wondering, Jamie, kind of what your views are on expense management and Letting some of that leverage flow through as we think about not just the back half of the year, but into 2024 versus maybe reinvesting that in R and D?

Speaker 3

Yes. For this year, we have specific objectives with respect to leveraging our enabling functions, which we've described previously, and that's a set of objectives that I think we intend to fulfill. Largely what you see in the adjustments we've made to our operating expense guidance for this year is a function of Our top line performance, both in variable compensation and in the number of reps we need in the field to support a higher procedure base. For the rest of kind of the operating expense set of investments, we're holding to our we're largely holding to our plan for this year. When you project into 2024, I'm not going to kind of describe the direction of where spend will go relative to procedural revenue, we'll do that in January.

Speaker 3

But you have a couple of dynamics. We have a significant CapEx investments this year, dollars 800,000,000 to $1,000,000,000 that will start to Create incremental depreciation expense next year. A chunk of that will be in COGS and a chunk of that will be in operating expenses. So you have kind of an operating expense headwind coming there. And those investments being largely facilities, They are planned for the medium term, meaning they're inefficient for a period until you get to full occupancy or full utilization.

Speaker 3

On the other side, we'll continue to look to leverage our enabling functions into 2024. Where that shakes out, we'll do in January because We have to complete our planning process in the back half of this year.

Speaker 9

Okay. That's very helpful. And then, I noticed and this is kind of directed at Gary and you I commented on this a little earlier, but you disclosed for the first time, I believe, the proportion of lease agreements that are Usage based versus fixed operating lease agreements. And I'm wondering, Gary, what that says and the trends that we see there about the health of your customers and what their preference is over time?

Speaker 2

Yes. It's a good question. I think we see That one size doesn't fit all. There are some folks for whom they still remain Happy about capital purchases. They see it as the cheapest way for them to access systems.

Speaker 2

They have high confidence and they're going to buy. There are some folks for whom capital is tight, Scarce and or they're interested in future technology protection clauses and they would rather lease. And there are Folks who are looking at expansions are a little bit unsure about how fast volume might ramp and for them usage based arrangements Give them some protections about ramp timing and speed. Our analytical capabilities are pretty good and our Finance flexibility is pretty good and as a result, we'll have that conversation pretty direct way. And I think the market starts to settle where it settles.

Speaker 2

If you ask, do we have a strong preference for one of those models? The answer is not really.

Speaker 3

The motivation by the way for the new disclosure was simply The rate at which those adoption of those models have grown, we felt like it was important to be transparent as to what portion of operating leases and placements That structure was, if you kind of assess all of our usage based arrangements in aggregate life today relative to Usage patterns and economic objectives in total on average, they're slightly above our expectations. So they performed well so far. That's obviously a blend across different customers and systems. Some are over performing, some are underperforming. But I think part of the way that we've operated the program Is to look carefully, is it actually reducing barriers for accelerated growth of our customers?

Speaker 3

And is it producing the economic results And as we end customers have gained confidence, that's part of the reason why it's expanded the way it has.

Speaker 9

Thank you.

Operator

And we'll go to the next line. Go to the line of Drew Ranieri of Morgan Stanley. Please go ahead.

Speaker 10

You're squeezing me in here. Maybe just one other follow-up question on bariatrics, but maybe a different angle. I mean, we've talked to some general surgeons too that I mean, they're kind of suggesting that these new drugs might even open up potential procedure categories where these patients Might not have been suited to have surgery. Gary, kind of like what are your views on this? Do you see some near term Disruption from GLP-1s on the bariatric side, but maybe this opening doors for other procedure categories?

Speaker 10

Thanks.

Speaker 2

Yes. That's That's a little bit of the narrative we're hearing too. We go out and canvas our customers pretty widely. There may be a role for kind of new adjuvant use of drugs. And then as you say, that may condition some patient populations to be Beneficiaries of surgery downstream, there may be folks who start the drugs, get the benefits that they were hoping for, but either the side effects or the costs Or the changed lifestyle that the drugs are implying, make it hard to sustain.

Speaker 2

There's a fair amount of that in the literature. So that may that population may look I think we're just going to have to work through it and see. What we don't see yet is a magic pill, One that cures it and doesn't require behavior change or other lifestyle modification and that and it seems unlikely. And as a result, I think we're going to see an adjustment. How long that adjustment period lasts, none of us know.

Speaker 2

But we know that there will be a role for surgical and mechanical intervention after the fact. And I think we're well positioned. And as Jamie had mentioned, It looks like even in the current environment, share continues to move our way. So we're going to stay close to it.

Speaker 10

Is there any procedure The categories that are coming up in your conversations that stand the most benefit?

Speaker 2

It's a good question. We're probing, probably too soon for us to give you

Operator

Thank you.

Speaker 2

Right. That was our last question and thank you. In closing, we continue to believe there is 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 termed the quadruple aim, better more predictable patient outcomes, better experiences for patients, better experiences for their care teams and ultimately a lower total cost We believe value creation in surgery and acute care is foundationally human. It flows from respect for and understanding of patients and care teams, their needs in their environment.

Speaker 2

At Intuitive, we envision a future of care that's 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

Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining. You may now disconnect. Have a good day.

Powered by Quartr
Earnings Conference Call
Intuitive Surgical Q2 2023
00:00 / 00:00