The operator welcomes everyone to the Intuitive Fourth Quarter 2023 Earnings Call and informs participants that there will be a question-and-answer session later. Brian King, the Head of Investor Relations, introduces the CEO and CFO and cautions that comments made during the call may contain forward-looking statements. The format of the call will include highlights of the full year and fourth quarter results, followed by a question-and-answer session. Gary Guthart, the CEO, will discuss business and operational highlights, Jamie Samath, the CFO, will review financial results, and Brian King will discuss procedure and clinical highlights and provide the financial outlook for 2024.

Intuitive had a successful year in 2023, with growth in procedures, increased utilization of their platforms, and expansion in their global reach. General surgery and regional performance were particularly strong, and the company saw growth in categories such as gynecology and flexible robotics. In terms of capital, they placed a significant number of multi-port systems and saw growth in ion and SP placements. The United States and Japan were key markets for the company during this time.

In the third quarter, flexible financing arrangements were heavily used, particularly in the US. System utilization, defined as procedures per installed clinical system, grew globally, with SP growing by 15% and Ion growing by 6%. This indicates customer satisfaction and financial health. Revenue for the year was $7.1 billion, with higher expenses due to investments in R&D and manufacturing. Product margins were impacted by higher costs. Customers continue to believe in the value of the platforms for better outcomes, patient and care team experiences, and lower costs. The company has submitted a 510(k) application for their next generation multiport platform, da Vinci 5.

The company is focused on bringing minimally invasive care to more patients, improving the performance of their platforms and procedures, enhancing care team satisfaction, and reducing the cost of treatment. The upcoming da Vinci 5 system will have significantly more processing power and will be launched in phases after receiving clearance from the FDA. The company has completed a trial and submitted for a 510(k) in August of last year, and is currently responding to FDA's questions. They are also in communication with regulators in Japan and Korea for potential international launch.

In the paragraph, the speaker discusses the progress made by the company in 2023 and their priorities for 2024. They mention their focus on increasing adoption of priority procedures in different countries, pursuing expanded indications and launches for their platforms, and improving productivity and quality. They also provide a brief overview of their performance in 2023, including a 22% growth in procedures compared to the previous year. The speaker then hands over the discussion to another speaker who will provide more details on their financial performance.

In the year 2023, the company placed 1,370 systems with customers, an increase of 8% from the previous year. Excluding trading transactions, net new system placements grew by 23%. Recurring revenue accounted for 83% of total revenue and the advanced instrument portfolio exceeded $1 billion in revenue. The company also repurchased $416 million of its stock and has authorization to repurchase $1.1 billion more. Pro forma earnings per share grew by 22% compared to the previous year. In Q4, da Vinci procedures grew by 21%, the installed base of systems grew by 14%, and average system utilization increased by 9%. In the US, procedures grew by 17% and in OUS markets, procedures grew by 29%. The company placed 415 systems in the fourth quarter, a 12% increase from the previous year.

In the US, there were 209 systems placed in Q4, with growth driven by capacity expansion and higher greenfield placements. In Japan, 70 systems were placed, also driven by greenfield placements and remaining capital budgets. China saw delayed tenders and lower system placements due to anti-corruption efforts, and this is expected to continue through the first half of 2024. Globally, there were 51 trading transactions in the quarter. Revenue was $1.93 billion, a 17% increase from last year. Leasing represented 48% of Q4 placements, with increasing lease mix driven by usage-based arrangements in the US. Q4 system average selling prices were $1.42 million, impacted by regional mix and lower trade-ins. There was $21 million of lease buyout revenue recognized in Q4. da Vinci instrument and accessory revenue per procedure was approximately $1,800.

In the fourth quarter, there was a decline in I&A per procedure due to changes in procedure mix and customer ordering patterns, but this was partially offset by an I&A price increase. There was strong demand for Ion, with 16,500 procedures performed and 44 Ion systems placed. Supply challenges for Ion catheters and vision probes limited system placements, but backlog grew due to customer demand. The SP platform saw accelerated procedure growth and placements, with plans for expansion into new indications and markets. Pro forma gross margin for the quarter was 68%.

In summary, the decline in pro-forma gross margin is due to increased inventory reserves and a higher mix of new platform revenue with lower margins, partially offset by a price increase. The company has made investments in manufacturing capabilities, including production in China and transfers to different locations in the US. Operating expenses increased by 15% compared to last year, and there was a $40 million contribution to the Intuitive Foundation. Pro forma other income increased due to higher interest income. The pro forma effective tax rate was lower due to the release of certain tax reserves. GAAP net income for the fourth quarter was $574 million or $1.60 per share.

In the fourth quarter of 2023, GAAP net income for the company was $606 million, compared to $325 million in the same quarter of 2022. This increase can be attributed to one-time tax benefits and adjustments between pro forma and GAAP net income. The company ended the year with $7.3 billion in cash investments, a decrease from the previous quarter due to capital expenditures. The company expects lower trading volumes and system placements in 2024 due to the phased rollout of their new multiple system, da Vinci 5. They will offer a future trading right for customers who wish to purchase a Gen 4 system, resulting in a deferral of a portion of the purchase price.

The company expects lower gross margins in the initial launch of their new platform but anticipates an increase over time. Operating margins were slightly lower in 2023 but are expected to improve in the medium term due to various factors, including the launch of da Vinci 5 and improvements in gross margin. Procedure growth for 2023 was 22%, with 19% growth in the US and 27% growth outside the US.

In the fourth quarter of 2023, the US saw a 17% year-over-year growth in procedures, with general surgery procedures being the strongest. Bariatric procedures also saw growth, but at a slower rate. Outside of the US, investments in international markets have led to a 20% compound annual growth rate in procedures over the past decade. These procedures now account for about a third of global procedures and are growing beyond urology, with general surgery, gynecology, and thoracic procedures leading the way. In the fourth quarter, OUS procedures grew by 29%, with colon resection, hysterectomy, and lung resection being the top categories. Europe saw similar growth, with Germany, the UK, and France leading the way in general surgery, gynecology, and colorectal and lung resection procedures.

In the fourth quarter, there was growth in Asia, led by China due to lower procedure volumes caused by COVID. Japan saw healthy growth in procedures, particularly in prostatectomy and colorectal procedures. India also showed strength in general surgery and gynecology procedures. In terms of clinical studies, a systematic review and meta-analysis was published on robotic surgery for inguinal and ventral hernias, showing that the robotic approach had lower risks of hernia recurrence and opioid use compared to laparoscopy and open surgery. The company encourages stakeholders to review the extensive body of evidence on robotic surgery.

A systematic review and meta-analysis found that robotic surgery for ventral hernia repair had better outcomes compared to laparoscopy and open surgery, including a lower risk of conversion to open, intraoperative bowel injuries, shorter length of stay, lower risk of readmissions, and lower risk of complications. This supports the use of robotic surgery as a safe and effective alternative. For 2024, the company expects a procedure growth rate between 13% and 16%, assuming no impact from patient backlog and potential challenges in China.

The company expects a decline in patient backlog and a return to normalized procedure seasonality throughout 2024. Their pro forma gross profit margin is estimated to be between 67% and 68% of net revenue, with the lower estimate reflecting the impact of newer products and capital investments. Operating expenses are expected to grow between 11% and 15%, primarily due to increased depreciation and stock compensation expenses. Other income is projected to be between $290 million and $320 million, and capital expenditures are expected to be between $1 billion and $1.2 billion for facility construction. The pro forma income tax rate for 2024 is estimated to be between 22% and 24% of pretax income. The call was then opened for questions from analysts.

During a conference call, Larry Biegelsen asks Jamie Samath about the financial implications of the new da Vinci 5 system, which is set to launch in 2024. Samath explains that the dynamics are different from when they launched the da Vinci Xi system in 2014 and that they will provide more information on the features once they have clearance. He also mentions that leasing has changed significantly and that there are various factors that will influence customers to upgrade. Biegelsen asks for more details on the lease and the new system, but Samath declines to provide any further information until clearance is obtained.

During a recent conference call, Intuitive Surgical CEO Gary Guthart discussed the company's new da Vinci 5 surgical system and its potential impact on the market. He mentioned that the company submitted for broad indications and is awaiting feedback on the trial. The da Vinci 5 has hundreds of design changes aimed at improving outcomes in existing procedures and expanding the addressable procedures. Guthart compared the potential impact of da Vinci 5 to that of the previous system, da Vinci Xi, which allowed for greater penetration depth and potential for additional indications over time. He also stated that the company's design methodology for da Vinci 5 focused on the quad aim, and a potential release date for the system could be in 2024 or 2025.

The speaker is excited about the upcoming launch of da Vinci 5 and believes it will bring significant improvements. They are currently in the process of getting clearance from the FDA and hope for a 2024 launch. There is potential for an increase in average selling price, but the specifics are still being worked out. Manufacturing capacity will be limited initially, but there are plans for a phased launch.

The speaker discusses the progress of the company and the potential for future software improvements in their da Vinci 5 system. They mention the increase in computational capability and the ability to add future software updates, comparing it to their previous launch of the Xi system. They emphasize the platform's potential for growth and improvement over time.

Robbie Marcus asks Jamie about the projected expenses for OpEx and CapEx in light of the new product launch. Jamie explains that the majority of CapEx will go towards expanding manufacturing capacity in Mexicali, which will affect both gross margin and SG&A. R&D and SG&A growth will be similar in 2024, with potential for leveraging and scaling in certain functions. Jamie also mentions the potential for operating margin expansion over the next three to five years, but acknowledges that execution and interrelationships between actions may impact the timeline.

Rick Wise, from Stifel, asks for updates and details on the Ion and SP systems. Gary Guthart, CEO, mentions that SP had a strong quarter and they are focused on expanding its use in Japan and Europe. They also have trials for thoracic and colorectal procedures in the US. He is confident in the team's efforts. Jamie, from the Ion team, talks about strong demand but supply constraints. Rick asks about the resolution of the limitations and Jamie mentions they are working on it.

The company is currently working on a breast oncology trial that will not have a significant impact until 2024. They are also facing supply chain challenges with their catheter and vision probe products, which are being transferred to Mexicali while the business is doubling. It is not yet clear when these challenges will be resolved. In the meantime, customers may prefer to lease with an upgrade clause until the new Gen 5 product is launched. This could potentially accelerate the leasing approach for the Xi product and benefit sales.

The speaker, Jamie Samath, discusses the impact of the launch of da Vinci 5 on the company's revenue in 2024. They expect to see an increase in the proportion of operating lease placements due to customers wanting the protection offered by the clauses. The upgrade process will depend on when da Vinci 5 launches and how long it takes to fully roll out. The CEO, Gary Guthart, does not anticipate a significant revenue benefit in 2024, and the company has implemented measures to mitigate customer wait times. The next question is about the impact of China's quota and anticorruption campaign on system placements, with the speaker predicting a negative impact through the first half of 2024 and potential improvement in the second half. Additional information on the anticorruption campaign is requested.

Jamie Samath, a representative from a company, discusses the impact of an anticorruption effort on their business. They expect delayed tenders through the first half of 2024 due to this effort, but if it is resolved, there could be opportunities for recovery. Samath also provides guidance for procedure growth, stating that the first half of the year will be a tougher comp compared to last year. The factors in this guidance include bariatric growth rates in the US, China's impact on the international market, and backlog in the system.

The speaker discusses the growth rates for bariatric procedures, stating that the low end of the range assumes a moderation in growth due to factors such as anticorruption measures in China. They also mention that general surgery and urology are expected to be the primary growth drivers for the business in the future. In regards to da Vinci 5, they mention the current penetration levels in various surgical areas, including colorectal, bariatrics, cholecystectomy, and hernia.

The company has seen growth in the US general surgery market and expects this to continue due to the early adoption of their products in international markets. They are also developing a new product, dV 5, which they believe will improve outcomes in various procedures. This will be added to their portfolio of choices for hospitals, providing more options for customers. The call ended with a question about how dV 5 may improve access to hospitals, to which the CEO responded that it will be a part of their portfolio and give customers more choice.

Intuitive believes there is a significant opportunity to improve surgery and acute interventions by working closely with hospitals, physicians, and caregivers. They aim to achieve the "quadruple aim" of better patient outcomes, experiences, and lower costs. They believe that value creation in this field is centered around respecting and understanding patients and their care teams. Intuitive envisions a future of less invasive and improved care for patients. The call concludes with a thank you to everyone for joining and an invitation to the next call in three months.

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