The operator introduces the Intuitive Surgical Q3 2023 Earnings Release conference call and hands it over to the host, Head of Investor Relations, Brian King. He introduces the CEO, CFO, and Chief Medical Officer and mentions that comments may contain forward-looking statements. The format of the call will consist of highlights of the third quarter results, a question-and-answer session, and updates on financial outlook for 2023. The CEO will present business and operational highlights, the CFO will review financial results, the Chief Medical Officer will discuss clinical highlights, and the host will provide procedure details and financial outlook.

In the third quarter, there was strong growth in procedures performed by customers, new system placements, and utilization of digital tools. General surgery for benign conditions, particularly in the United States, and broad regional growth were areas of strength. China procedure growth was in line with global average. U.S. dermal surgery procedure growth was led by cholecystectomy and colon resection. Ion and SP procedures showed continued strength, with 125% and 54% growth, respectively. 312 systems were placed in Q3, with a total clinical installed base of 8,127 multiport da Vinci systems, 490 Ion systems, and 158 single-port da Vinci systems. Leasing rates accelerated, reflecting convenience and maturity of Generation 4 multiport systems. Leasing allows customers to build clinical capacity and provides pathways for new technology.

In the third quarter, there was a 6% growth rate in system utilization, which is slightly lower than the previous quarter but still above historical rates. This is due to strong procedure growth and increased use in benign indications, which shortens average procedure times and improves scheduling. The company's revenue increased by 12% and operating expenses were in line with expectations. Investments were made in research and development, manufacturing, and commercial expansion. The da Vinci platform is operating at a global scale and the Ion platform is seeing strong acceptance. The company is also focused on lowering product costs, particularly in the Ion program, SP accessories, and advanced instrument lines. However, there may be some variability in gross margin in the coming quarters due to ongoing projects and facility completions.

In the fourth quarter, the company saw a growth in customer use of their digital tools and channels, with strong subscription renewal rates for their surgical simulators and high usage of their My Intuitive app. They also experienced growth in installations and captured surgical cases for their Intuitive Hub media management system. The company remains focused on improving their ecosystem internationally and driving down product costs. The company's core demand is healthy and they are investing in their ecosystem to improve the quadruple aim. In terms of finances, the company saw a 19% increase in global procedures, a 21% growth in recurring revenue, and a 36% operating margin. In the U.S., procedures grew by 17% but the growth rate for bariatric procedures has slowed due to patient interest in weight loss drugs.

In the third quarter, there was a modest decrease in growth rate compared to the previous quarter, but bariatric procedures still represent a significant portion of global procedures. The company continues to gain market share in the bariatric surgical segment. Outside of the United States, non-neurology procedures and colon resection procedures are growing rapidly. There was a delay in system placements in China due to anticorruption efforts by the government, and revenue increased by 12% year-over-year, driven by procedure growth but partially offset by a decline in systems revenue. On a constant currency basis, revenue growth was also 12%. The U.S. dollar is currently stronger compared to the average rates in the third quarter.

In the third quarter, approximately 24% of the company's revenue was in non-USD currencies. In the US, 159 systems were placed compared to 175 in the previous year, while outside the US, 153 systems were placed compared to 130 in the previous year. 62 of the 312 systems placed were trading transactions. There are currently 440 systems in the installed base, with 85 in the US. Operating leases accounted for 52% of placements, with 70% in the US. The average selling price for systems was $1.4 million. $17 million of lease buyout revenue was recognized. The average revenue per procedure for da Vinci instruments and accessories was $1,830.

In the third quarter, Ion procedures increased by 125% compared to the previous year, with 16 new systems placed, 12 in the U.S. and 4 in Korea. Gross margin remained consistent with the previous quarter, but decreased compared to last year due to a higher mix of Ion revenue, which has lower margins. Inventory levels were higher than usual due to increased targets and investments in manufacturing facilities. Operating expenses increased by 8% due to higher headcount-related costs.

In the third quarter, the company's head count increased by 489 employees, primarily for manufacturing operations. SG&A expenses decreased as a percentage of revenue, primarily due to planned leverage in enabling functions. Pro forma other income increased due to higher interest rates and cash balances. Capital expenditures were primarily for expanding facilities and increasing manufacturing capacity. The pro forma effective tax rate was consistent with expectations and pro forma net income increased compared to the same quarter last year. GAAP net income also increased and the company ended the quarter with a higher cash and investment balance.

Myriam Curet discusses the clinical highlights of Intuitive's business and encourages stakeholders to review the extensive scientific studies published. She also mentions ongoing FDA-approved trials for complex colorectal and thoracic procedures using Intuitive's single-port technology. In addition, she highlights a notable study published in August on the cost-effectiveness and health utility of robotic lobectomy compared to video-assisted lobectomy.

The study compared the outcomes of robotic-assisted and VATS approaches to pulmonary lobectomy and found that patients who underwent the da Vinci lobectomy had a better quality of life and a higher cost-effectiveness ratio. The da Vinci group also had a higher number of lymph nodes examined. Overall, third quarter procedure growth was 19% year-over-year, with general surgery procedures such as cholecystectomy and colon resection showing strong growth. Outside of the U.S., procedure volume grew by 24%.

The growth of OUS procedures was driven by areas outside of urology, with general surgery and gynecology procedures contributing significantly. Europe saw strong growth in Germany, the U.K., and Spain, while Asia was led by Japan. China and India also experienced growth in various procedures. The company is raising its projected procedure growth for 2023 from 20-22% to 21-22%, with potential challenges including the uncertain return of patients to healthcare and potential macroeconomic challenges.

The company has adjusted its estimates for gross profit, operating expenses, noncash stock compensation expense, other income, capital expenditures, and income tax for the year 2023. The company expects its gross profit margin to be within 68% and 68.5%, and its operating expense growth to be between 12% and 14%. The estimate for noncash stock compensation expense has been lowered, while the estimate for other income has been increased due to rising interest rates. The company also narrowed its estimate for capital expenditures and refined its estimate for the pro forma tax rate. The call was then opened for questions, and the first question was about the increasing popularity of GLP-1 in the medical technology industry.

During a conference call, a question was raised about the impact of GLP-1s on bariatric surgery. The CEO deferred to a bariatric surgeon to answer, who stated that while there may be a short-term increase in interest in bariatric surgery due to the availability of GLP-1s, compliance issues, costs, and side effects may lead patients to ultimately choose surgery. The CEO then asked for a follow-up question, which was directed to the CFO about the decrease in gross margin for the fourth quarter. The CFO explained that the decrease was due to increased depreciation costs and new investments, and that the impact of these factors will be seen more in the next year.

In Q4, there was a slight decrease in gross margin due to FX rates, slower progress in line transfers and product cost reduction plans, and mix dynamics. The company expects variability in gross margin over the next few quarters due to depreciation expenses and efforts to improve product costs. They will provide guidance for 2024 gross margin in January as they work through plans to resolve accumulated inefficiencies in global manufacturing operations. The company is focusing on improving manufacturability and reducing costs for the Ion product and accessories in the SP line.

The company is in-sourcing a high-volume accessory on the multiport side and ramping up for their targets. There are various factors that could affect the growth of procedures in 2024, including China and bariatrics. The China market is facing some challenges due to government policies and a corruption probe, while the bariatric market is expected to find a new normal in the next few quarters. The company's usage-based leasing program has gained some traction.

The speaker is asked about the utilization rates on their systems, and they turn to someone else for more specific information. They mention that the utilization rates are similar between leasing and purchasing arrangements, and that the portfolio has exceeded targeted procedure levels. They also discuss the increasing trend of leasing in the U.S. and how it may continue to rise.

The speaker discusses the growth of general surgery in the U.S. and its potential in international markets. They mention that there is already growth in some OUS markets for cancer-related procedures, but there is more work to be done for benign indications. They also provide an update on their AI platform, Case Insights, which has had its first installs and cases with positive early feedback.

Case Insights is a new program that builds on previous research and uses a computational observer to provide insights to different parts of a hospital's analytic system. It is a long-term investment in the science of surgery and is not expected to be a significant revenue driver. The company remains excited about the program and plans to provide more information in the future. The questioner asks about the growth trajectory of the bariatric business and the effect of system leasing on pricing. The company responds that bariatric procedures represent a small percentage of their business and they expect it to continue growing at a similar rate. They also mention the trend of patients getting on and off the drug, which may affect the stabilization of the business. They also address the question about ASPs, but the response is not included in the summary.

The company's bariatric business represents 4-5% of global procedures, with growth declining in the US in Q2 and Q3. The company is still taking market share in bariatrics, even though there is an overall impact due to GLP-1s. The increase in US leasing does not affect the system ASP, which has seen a year-over-year decline.

Gary's views on the role of bariatric surgery in a GLP world have not changed significantly over the last quarter or two. The adoption of GLPs is increasing rapidly, but it is unclear how this will impact bariatric surgery. There may be potential effects of GLPs beyond the bariatric market, but this is still uncertain.

The company expects a modest impact from GLPs in other procedure categories beyond bariatric surgery. While obesity and diabetes may be risk factors for other diseases, they are not the dominant risk factor in most cases. The company believes there is still a large unpenetrated TAM and potential for growth in other areas. They are also pursuing new indications for SP, such as complex colorectal and thoracic cases, but it is unclear when these trials will be completed and when clearances in the U.S. will be obtained.

The company is hoping to submit everything for FDA approval in the foreseeable future, but there is a 90-day turnaround for clearances. They will then work on training and launching the product. The company expects submissions in the first half of 2024 and responses thereafter. They also discussed the opportunity to lower product costs as supply chain stresses ease, with a goal to get back above 70% gross margin in the midterm. There were also questions about China and pricing on instruments.

The speaker discusses the potential impact of anticorruption measures on the quota size for National Health Commission in China, stating that demand for their systems and procedures is high but may be limited by policy. They also mention a recent 5% price increase and their strategy for pricing, focusing on being a low-cost manufacturer and considering factors such as price elasticity and raw material pricing. They do not make any specific projections for future price increases.

The company has identified 6 million procedures globally for multi and single port surgeries, but they are only approaching 40% of that number. They plan to expand by gaining clearances in new markets, developing new indications, and improving reimbursement. This will allow them to access more of the global procedure pie.

The company is working on new products and technologies to provide competitive solutions in the marketplace. These projects have varying timelines, with some taking longer than others. The company has a multiyear plan in place to achieve its goals and improve surgery and acute interventions. They believe that value creation in this field is rooted in understanding and respecting patients and care teams. Their ultimate vision is for a future of less invasive and better care.

This summary was generated with AI and may contain some inaccuracies.