Intuitive Surgical Inc (ISRG) — Q2 2020 Earnings Call Transcript

Thank you. Good afternoon, and welcome to Intuitive’s second quarter earnings conference call. With me today, we have Gary Guthart, our CEO; Marshall Mohr, our Chief Financial Officer; and Philip Kim, our Head of Investor Relations. As for me, while passing the lead over to Phil, I plan to continue on in a support role with our Investor Relations team. 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 our Securities and Exchange Commission filings, including our most recent Form 10-K filed on February 7, 2020, and Form 10-Q, filed on April 17, 2020. 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 Latest Events section under our Investor Relations page. Today’s press release and supplementary financial data tables have been posted to our website. In addition, this quarter, we have also posted charts illustrating 2020 weekly da Vinci procedure trends, which is intended to provide additional perspective and detail regarding the impact of COVID-19 on our business. 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 financial results, then Philip will discuss procedure details. 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. On this call, we'll describe our experience in the quarter, the actions we are taking and our priorities going forward. Our focus now and in the past is the safety and well-being of patients, care teams, our communities, and our employees. Turning first to global procedures. We ended Q2, 2020 down 19% compared with Q2, 2019. The underlying driver for this decline has been the growth of COVID-19 and the communities that our customers serve. While we saw procedure declines in all categories, urology and thoracic procedures were relatively resilient, while gynecology experienced the greatest decline. Rates of recovery from lows by procedure types were more uniform. We've seen hospitals with adequate supplies of staff, PPE, and physical resources return to above 90% of pre-COVID procedure run rates over a few months period. Recovery above this number is dependent upon the intensity of COVID in the region, patient's comfort to return to the hospital, availability of testing, and patient outreach. As we stand here in July, we see the continued growth of COVID in some regions, both domestically and internationally, making future predictions on hospital capacity for surgery difficult. Phillip will take you through some examples of regional differences in procedure trends later in the call. With regard to capital placements, we installed 178 new systems in Q2, 2020. This compares to 273 installs in Q2, 2019, and 237 installs in Q1, 2020. The new installs in Q2, 2020 represent a clinical installed base growth of 9% after accounting for trade-ins. While these numbers are lower than the prior year and prior quarter, frankly, they are greater than our expectation coming into the second quarter due to strong performance in Asia and some larger IDN placements in the U.S. That said, we know the correlation between system utilization in the form of procedure demand and capital availability at hospitals is a strong one. Hospitals will seek to absorb existing capacity before installing capital. So, on average globally, we expect a challenging near to mid-term environment for future capital placements as COVID-19 wears on and hospital expenditures remain constrained. Because COVID is impacting locales differently, we see significant variability in procedure growth and new system placement interest by region. Marshall will take you through capital placement trends and risks later in the call. Stepping back and evaluating hospital approaches to surgery during this period, we see some principles that are being applied broadly. During local rapid growth of COVID in a hospital catchment area, their initial response is to align and train their workforce, stabilize their PPE and testing capability, and if resources are scarce, the first surgeries that can be delayed are managed risking to the patient. As staff material in ICU resources free up either by diverting patients to alternative sites of care or within the four walls of the hospital, program directors triage patients in need of surgery and ramp back up as sites become less impacted. We have observed that outreach education and diagnostic visits and procedures come back. The surge of COVID in communities that represent our core markets, either from initial spread or secondary growth is occurring now. Add to the significant anecdotal evidence of delayed diagnostic visits for non-COVID illness, and we expect that the recovery tale of surgery will be a long one, likely to last many quarters. The ultimate timing and shape of a recovery remains uncertain. The drivers of a sustained recovery in surgery will likely vary regionally and may be predicated on the extent and duration of COVID outbreaks, the availability of human, material, and physical resources to concurrently treat both COVID and other diseases, patient comfort in returning to care centers for diagnostics or treatment, and finally, the relative health of the broader economy and hospital finances. At Intuitive, we are focused on those activities and priorities within our control. They are as follows: first, we're focused on the health and well-being of our customers, our employees, and our communities. As COVID has ramped in our communities, we instituted employee health and safety protocols and have been tracking our performance and refining our methods. We're also working with our foundation and others to produce and donate PPE for customers in the communities in which we work and live, having delivered to date to over 1 million pieces of PPE. Second, we focused on inventory and supply chain management. So far, product availability has been strong thanks to the relentless work of our supply chain teams and our partners. Third, we implemented our customer financial relief program in the quarter. The timeliness and the design of the program has been well received by our customers. Fourth, we continue to invest in our high-priority programs, recognizing that high-quality MIS is likely more important in the coming years post-COVID not less so. Fifth, we're evaluating those activities that should be accelerated in the current environment, and for which demand is likely to be durable post-COVID. Finally, we're constraining spend where we believe it is suboptimal in the current environment. Turning to instruments, beginning Q4 this year, we plan to introduce an updated set of select and Arista instruments for use with da Vinci X and XI, that will enable increased use beyond the current 10 years lifespan, part of our extended-use program. Extended use will vary from two to eight additional uses per instrument, and is the result of continuous and significant investment in the design and production of our instrument technologies that have resulted in improved quality and durability. In addition, we'll concurrently lower the price of some other instruments that are most commonly used in lower acuity procedures. We are dedicated to support our customers' pursuit of the quadruple aim, defined as better patient outcomes, better patient experiences, better care team experiences, and lower total cost to treat per patient episode. The long-term opportunity for our products and services is substantial. Both in high acuity complex procedures and in shorter duration lower acuity cases where customers are understandably more cost-sensitive. Some under-risk instruments are used in every procedure. So, our extended-use program helps all customers, and in particular those performing lower acuity cases, which are among the fastest growing procedures. As the program rolls out, I&A costs for customers performing lower acuity procedures will be highly competitive with non-robotic MIS approaches. I have described our commitment to a virtuous cycle of value adjustment for our customers driving volume increases, allowing us to invest in design and manufacturing at scale, and giving us the opportunity to share these savings with our customers to allow them to use our products more broadly. This program is another step in this journey. Our extended use program has been years in the making, and its timing is fortuitous relative to COVID. We're pleased to bring it to our customers now. The program will negatively impact our near-term revenue, but not substantially impact our gross margin for affected instruments. It is the right decision for our customers and therefore for Intuitive long-term. Marshall will take you through the financial implications of this program later in the call. Turning to advanced instruments. Our da Vinci Energy platform, which includes our next generation energy instrument and system, SynchroSeal and E-100, have made surprisingly good commercial progress in the second quarter, in spite of current environmental challenges. A testament to customer reception to its speed and precision. We also initiated our first commercial cases for E-100 and SynchroSeal in Japan in the quarter. And lastly, our 45 millimeter SureForm stapler launched in Europe in the second quarter. Turning to other programs of interest. Our Ion program continues to march forward in the face of COVID headwinds. Three systems were placed in the quarter and our clinical trial is progressing. Design and manufacturing teams continue to make progress on incorporating learnings to allow us to drive towards wider distribution in the future. While our progress in our precise trial for Ion has been slowed, we're seeing a return to cases as our clinical trial partners come free. For our SP program, our teams continue to support our early customers. Average monthly utilization for SP in Korea continues to exceed that of XI, a strong positive that speaks to early interest in the platform by surgeons and their patients. In addition to our learning from Korea, we are working with regulatory agencies regarding expansion of indications. The regulatory environment in the U.S. and EU has become more complex for new systems over time, made more challenging by the diversion of resources at hospitals and at regulators to fight COVID, which impacts clinical trials and regulatory reviews. We'll update progress on additional indications for SP, as we have greater clarity. In our intelligence and analytics programs, our teams are performing well. And we are leveraging our prior investments in cloud computing, training technologies, and analytics prowess. We have focused on our integration of cloud technologies with InTouch to accelerate access to remote proctoring in certain regions. We had already moved to a network subscription model for our simulation technology platform called SimNow, which is helping us decrease travel for surgeons for some elements of surgical training. Use of our hospital analytics programs is accelerating, even through the turbulence of 2020 helping hospitals and us in planning for system use and dynamic times like these. Before concluding my prepared remarks, let's step back. We cannot yet see the end of the COVID-19 pandemic. When the lessons from this event are absorbed, I believe high-quality minimally invasive care will be more important to the future, not less so. A balanced approach to improving the quadruple aim remains our North Star. Our priorities for the next few quarters are as follows: first, continued strong performance on customer employee and community safety while ensuring supply chain stability. Second, continued support of our customers adapted to their specific conditions; different customers are at different stages in this period, and we'll support them according to their needs. Third, advancing our priority programs, instruments, accessories, endoscopy systems, and intelligence programs. And finally, disciplined spend management during a period of change. I’ll now turn the call over to Marshall, who’ll take you through financial matters in greater detail.

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. Key business metrics for the second quarter were as follows: second quarter, 2020 procedures decreased approximately 19% compared with the second quarter of 2019, and decreased approximately 22% compared with last quarter. Second quarter system placements of 178 systems decreased 35% compared with 273 systems last year, and decreased 25% compared with 237 systems last quarter. We expanded our installed base of da Vinci systems over last year by 9% to approximately 5,764 systems. This gross rate compares with 11% last quarter and 13% last year. Utilization of clinical systems in the field, measured by procedures per system, declined approximately 27% compared with last year, and declined 23% compared with last quarter. Let me walk through the impact of the COVID-19 pandemic on procedures and system placements and how it varied by market. The impact of COVID-19 varied significantly among geographies. To assist in your understanding of this dynamic, we have posted a graph showing U.S., China, Japan, and Germany procedures in the Investor Relations portion of our website. In that graph, we compare procedures to the average of the first two complete weeks of the first quarter, which we have characterized as pre-COVID-19 levels. In the U.S., procedure volume started the second quarter at around 30% of pre-COVID-19 levels, and grew by the middle of June to nearly the level measured in the first two weeks of the first quarter. However, with the resurgence of COVID-19 regionally in the U.S. and related deferrals of elective surgeries, procedures began to decline in the last weeks of the quarter. We expect to see da Vinci surgeries decline further in July, as the pandemic continues to spread and hospitals dedicate human and physical resources to the treatment of COVID-19 away from other procedures. Second quarter procedures in China, Japan, and Korea grew well year-over-year, as COVID had a lower impact on these markets. In Europe, the impact of COVID varied widely, with Germany experiencing year-over-year single-digit growth, while France, the UK, and Italy experienced large declines. Capital sales in the U.S. and Europe reflected lower procedures and delayed capital spending, while hospitals revisited their capital budgets, given the impacts of COVID-19. On the other hand, capital sales in several of our Asia direct markets, including China, Japan, and Korea, were better than anticipated. System placements will likely continue to be pressured by hospital spending, reflecting the impact of COVID-19 and the resultant economic pressures. Also, as system utilization declined by 27% year-over-year, hospitals have excess capacity that they will likely seek to fill before purchasing additional systems. The extent and duration of COVID-19 and subsequent resurgences in the U.S. and other parts of the world is uncertain. The time and extent to which da Vinci procedures may recover will vary by market. However, we believe surgery is durable, and the long-term worldwide opportunity for robotic-assisted interventions remains significant. Additional revenue statistics and trends are as follows: second quarter revenue was $852 million, representing a 22% decrease from last year and a 23% decrease from last quarter. Under the previously announced customer relief program, we're providing service credits to customers related to lower use of their systems during the second and third quarters as hospitals treat COVID patients. Revenue reflects $59 million of service credits granted to customers in the second quarter. As procedures in the U.S. and Europe recovered more quickly in the second quarter, the credits issued were less than expected. We are now anticipating the total cost of the customer relief program will be in the range of $80 million to $110 million. Second quarter placements included 21 into China, representing a greater proportion of total placements relative to the prior year and prior quarter. As leasing is prohibited in China and most systems are placed within Greenfield hospitals, the worldwide percent of leasing and trade-ins has declined. Leasing represented 29% of current quarter placements compared with 32% last quarter. Trade-ins represented 40% of current quarter placements compared with 57% last quarter. We would anticipate in an environment of COVID-19 as economic pressures increase, more customers will seek leasing or alternative financing arrangements than reflected in historical run rates. Trade-in activity can fluctuate and be difficult to predict. We recognized $9 million of lease buyout revenue in the second quarter compared with $12 million last quarter and $27 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 declined to approximately $1,900 per procedure, compared with just over $2,000 procedure in the first quarter of 2020, reflecting hospital usage of existing inventory as procedures decline. We expect instrument and accessory revenue per procedure to fluctuate as hospitals adjust inventories to reflect changes in procedure volumes. Earlier today, we announced our Extended Use Program, under which in October we will launch selected X and Xi instruments possessing 12 to 18 uses, compared with our existing 10-use instruments. These extended-use instruments represent our higher volume instruments excluding stapler, monopolar, and advanced energy instruments that are used in a broad set of procedures. The announcement is posted on our website. Our ability to introduce instruments with extended uses is the result of significant investments in quality and manufacturing processes over a long period of time. The extended-use instruments will generally be priced higher than our 10-life instruments, reflecting the investments we've made, but the cost per use will be lower for our customers. In addition, we will lower the price of certain instruments used commonly in lower acuity procedures and/or lower reimbursement procedures, like cholecystectomy, inguinal hernias, and benign hysterectomies in the U.S. Combined with the savings associated with extended-use instruments, the resultant instrument and accessory cost for these procedures will be competitive with non-robotic MIS approaches. Overall, extended-use instruments and lower instrument pricing will result in lower I&A revenue per procedure to Intuitive. For example, had the extended-use instruments been available and the lower instrument pricing been in place for all of 2019, revenue for 2019 would have been $150 million to $170 million less than reported, and I&A I&A per procedure would have been 7% lower. The impact of these actions on future revenue will be dependent upon procedure volumes, instrument usage, mix, and whether cost elasticity will enable greater penetration into available markets. Five of the systems placed in the second quarter were SP systems, reflecting both our measured rollout of SP and the impact of COVID-19. Our rollout of the SP surgical system will continue to be measured, putting systems in the hands of experienced da Vinci users while we pursue additional indications and optimize training pathways in our supply chain. COVID-19 has delayed the ability to perform the clinical trial associated with an SP colorectal procedure. We placed three Ion systems in the quarter; Ion system placements procedures and related information is excluded from our overall systems and procedure accounts. Our rollout of Ion will continue to be measured, while we optimize training pathways in our supply chain. The completion of the PRECISE study is delayed due to COVID-19, and we cannot predict when the PRECISE clinical study will be completed. Outside the U.S., we placed 72 systems in the second quarter, compared with 80 in the second quarter of 2019 and 55 systems last quarter. The current quarter system placements included 18 into Europe, 18 into Japan, and 21 into China, compared with 30 into Europe, 24 into Japan, and 8 into China in the second quarter of 2019. Moving on to gross margin and operating expenses. Pro forma gross margin for the second quarter of 2020 was 62.4%, compared with 71.3% for the second quarter of 2019 and 69.7% last quarter. The decrease compared with the second quarter of 2019 and last quarter primarily reflects period costs associated with abnormally low production. The customer relief program and higher excess and obsolete inventory charges, partially offset by higher system ASPs reflecting a favorable geographic mix. Second quarter inventory charges were approximately $27 million, primarily reflecting last generation system, vision and instrument products, which as a result of decreased demand we are now able to fulfill customer needs with new or more capable products. As revenues have pressured by COVID-19, the production levels may operate at below normal levels, which may result in higher labor costs and under absorbed overhead in reduced product margins. Pro forma operating expenses increased 3% compared with the second quarter of 2019, and decreased 11% compared with last quarter. Spending in the second quarter reflected curtailment of costs associated with the impact of COVID-19, particularly training, marketing events, travel, and related expenses, partially offset by costs associated with employee relief programs and other direct costs of COVID-19. Spending during this period of the pandemic will be as follows: we will work to ensure our employees' safety and well-being, including investing in PP&E and employee programs. We will continue to support our customers. We will continue to invest in innovation focused on the quadruple aim. We will invest in manufacturing and our supply chain to ensure supply for our customers. We will ensure that we are prepared for periods when the spread of COVID-19 is contained. Certain costs will be lower as the underlying activities are restricted by COVID-19, including travel and related expenses, clinical trials, surgeon training, and marketing events. We will eliminate spending that is ineffective due to COVID-19, like surgeon and hospital events. We will reduce the hiring of volume-related roles like sales reps and manufacturing employees as appropriate. We continue to believe that we have a unique opportunity to expand the benefits of computer-aided surgery and acute interventions around the world, and we’ll continue to invest in the business for the long-term. Our pro forma effective tax rate for the second quarter was 36.9% compared with our expectations of 20% to 21%, reflecting a $37 million or $0.31 per diluted share charge associated with the conclusion of a tax case between an independent third-party and the IRS, related to charging foreign subsidiaries for share-based compensation. Our actual tax rate will fluctuate with changes in the geographic mix of income, changes in taxation made by local authorities and with the impact of one-time items. Our second quarter 2020 pro forma net income was $132 million or $1.11 per share, compared with $388 million or $3.25 per share for the second quarter of 2019, and $323 million or $2.69 per share last quarter. I’ll now summarize our GAAP results. GAAP net income was $68 million or $0.57 per share for the second quarter of 2020, compared with GAAP net income of $318 million or $2.67 per share for the second quarter of 2019, and GAAP net income of $314 million or $2.62 per share for the last quarter. 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 and IP charges, amortization of intangibles and acquisition-related items, and legal settlements. We ended the quarter with cash and investments of $6.1 billion compared with $5.9 billion at March 31, 2020. Cash generated from operations was partially offset by investment in working capital and our infrastructure. We did not repurchase any shares in the quarter. Our current thoughts on capital deployment are in the following order. We recognize the hardship that COVID places on our customers and we will work with customers to ease the burden of lower da Vinci utilization, including providing customers with more flexible financing. We will ensure secure supply chain and build appropriate levels of inventory to ensure customer supply, particularly as procedures resume. We will invest in securing our customers. We will continue our open market repurchase program consistent with our prior practice. And with that, I'd like to turn it over to Philip, who will go over our procedure performance.

Thank you, Marshall. Our overall second quarter procedure decrease was approximately 19%, compared to growth of 17% during the second quarter of 2019, and 10% last quarter. Our Q2 procedure decrease was driven by a 24% decrease in U.S. procedures and a 7% decrease in OUS markets. On a worldwide basis, procedures in the quarter troughed in April and continued to recover throughout the quarter. Although worldwide procedure run rates trended closer to pre-COVID levels in June, we caution investors from assuming this trend continues, given the dynamics discussed earlier in the call. In the U.S., procedure run rates were also trending closer to pre-COVID levels in June. However, the future of procedure performance may fluctuate as customers and states like Texas, Florida, and California encounter increased COVID cases. From a procedure standpoint during the end of Q2, we saw a broad recovery in most procedures, including procedures that had the biggest decline at the end of Q1, such as bariatrics, hernia, and benign gynecology. Within the U.S., there were geographic differences between states that were hit harder by COVID and those that were not. For example, during the quarter, Florida recovered to pre-COVID levels on a run-rate basis, while New York did not. State-specific containment strategies impacted procedure growth, and the timing of COVID outbreaks will play a role in driving geographic differences. Outside of the U.S., procedure growth in Asia was strong. As shown in the chart on our Investor Relations website, China's performance was strong, but we would caution investors not to use China as a proxy for our global recovery. Japan growth remained strong at over 30% in Q2, and South Korea also grew in the quarter. Western Europe saw broad declines with the exception of Germany, which continued to grow in Q2, albeit at a slower rate. We provide these data points to inform investors of the procedure dynamics in the second quarter. Given the uncertain scope and duration of the COVID pandemic and uncertain timing of global recovery and economic normalization, we continue to believe that Q2 procedure results aren't indicative of forward trends. That concludes our prepared remarks. We will now open the call to your questions.

Good afternoon. Can you hear me okay?

We can, David. Yes.

Great. Thanks. A little choppy there. So a couple of questions for me, Gary, for you. Obviously, the focus of the call is going to be on the extended instruments program. So maybe one for you, Gary, which is look, in most technology industries where you democratize technology, sort of lower price to drive the TAM. I'm sure you've extensively studied your customer elasticity. And so Marshall talked about a 7% drop in I&A revenue. Can you just give us a sense of a framework around how to think about improvement in utilization based on these cost improvements? And then also for you, given your competitors who've seen J&J and Medtronic timelines slip, I think some investors are going to say, why take this kind of move now when the competitive landscape is getting easier. And then I had a quick follow-up for Marshall.

Yes. Thank you. I appreciate the question. On the first question of do we think that it changes the volume of procedures that might be accessed by our technology? The answer to that is yes. I think the real question will be timeline. A little bit hard to predict the timeline in the near-term just because I think a lot of it will have to do with COVID and recovery. So that will kind of blur the speed with which it happens. But if you look out over a couple of years, we clearly think that customers want to use our products and they want to use them broadly and in different procedure domains like general surgery but also broadly regionally. And to the extent that we can help them with economics, we think they have a preference to use our products, and we think that will help; that’s why we did it. On question two on timeline, we have been working at it for some time. These changes and manufacturing process improvements have taken years to get right. I think being a little too fancy in the timeline doesn't help the company or our customers, we think that it will be appreciated that we have done it, it will be appreciated that we have done it now. And overtime, I think we’ll look back on it and be happy what we thought it as expeditiously as we could.

Okay, very helpful. And then Marshall for you, I appreciate the commentary on 2019 on revenue, and I apologize if I missed it. The 7% or $170 million-ish type of revenue impact. Can you give us a sense of what the gross margin impact, gross or EBIT impact, maybe gross would be more helpful on 2019? Just trying to get a sense of the gross margin mix shift into '21 on this I&A study use program change. Thanks so much.

Sure. The margin on the products will be relatively consistent with current margins, so the impact is nominal in terms of 2019. It’s a slight down only because you have less instrument and accessory revenue. And from a mix perspective, you wind up with more systems revenue, and systems revenue have lower margins, but the individual margins on the instruments are not that different.

Thanks. Gary, I have a question on the capital side. If I go back to last quarter, you obviously talked about using the $6 million in the balance sheet to place more systems. Operating leases did go down. So can you maybe just talk a little bit about that dynamic, what you’re hearing from customers in particular and U.S. on operating leases? And to Dave's point before with their competitors delayed a little bit, does that change your appetite at all for pushing operating leases in this current environment?

Yes. So just standing back to the capital, it's really variable regionally, so where they are not strongly affected by COVID or they’re recovering strongly, then capital rotates forward again you saw that in China. And there we feel good about leasing systems or selling systems. In China they buy them, they don’t lease them, but in other markets, where they are interested in leasing, we’re happy to do that. In regions that are being disrupted by COVID where the flow of patients is changing because of either delays like surgery, or delays in diagnostic pipelines, there they have capacity on the existing installed base. They may want to move those systems, they may want to upgrade them, but in general we have seen and we have seen this in years past, act one as an operator of a hospital was to use your existing capacity before expanding it. And there, I don’t think leasing is the major issue. I think the real issue is them getting back to surgery and getting ready to the extent that they have demand, leasing helps us, so I think it's kind of secondary to recovery from COVID in the U.S. primarily.

And then on the procedure recovery, just speaking about looking to the backlog of the patients, is there some more patients going into laparoscopic or open as there is backlog on robotics or even radiation therapy. I am just curious about how you think about alternatives to robotics, given backlog today?

Yes, we get to ask questions periodically. I don’t see a philosophical shift by heads of perioperative services to try to shift share in response to COVID. In a really hard-hit area, if they are doing everything they can and the only thing they have available is something other than MIS, they might go that way. I don’t think that’s their primary objective of the health system. And pretty quickly they want to return to what they believe is offering the patient the best outcome. Looking at the evidence, we don’t see any evidence of share shifts at this time. Let’s not say they aren’t there, it's just that nothing has really come up. And what we do see is as much positive for robotics as anything else.

Okay. I'll leave it with that. Thanks.

Great. Thank you. Can you hear me okay?

Yes.

Great. Hi, Gary. Thank you for taking the questions. First one for me, I am just trying to understand hospital systems' ability to kind of manage through this COVID increase in cases that we're seeing here of late. So I'm just curious has that increase in the United States in particular been disruptive to surgical volumes or have things held steady despite the uptick in cases?

We've observed that the situation varies by region. In areas significantly impacted, we are seeing the reintroduction of deferrals, while in other regions that previously experienced similar issues, it appears to be gradually returning. They are trying to manage it somewhat better now. Overall, the first few weeks of July have shown a lot of fluctuation, making it difficult to identify a clear trend; I certainly wouldn't describe July in the United States as a recovery.

Yes, it's okay. I was specifically asking about the U.S. But it sounds like your response was related to the U.S. too.

Yes, certainly true in the U.S.

Okay. The second question I have is about the capital environment. You mentioned it earlier, but from these results, there doesn't seem to be a significant negative impact from COVID on capital. However, you did mention a challenging environment ahead. I'm curious about how much of that relates to the need to absorb capacity versus the impact of COVID. Specifically regarding the U.S., how willing are companies to invest in capital in this environment? I would appreciate an update on that. Thank you.

Sure. As we approached the end of the quarter, we observed further delays in purchases. Hospitals communicated that they were re-evaluating their budgets, considering the financial implications of COVID treatment costs, as well as the long-term effects of COVID regarding potential recession and its impact on their finances. Consequently, the quarter was influenced by COVID. Moving forward, we anticipate challenges in restoring systems to full utilization, especially given the significant 27% decline. Hospitals will likely prioritize addressing this gap before investing in additional capital, particularly as they are already financially constrained. Therefore, while we might begin to see some recovery this quarter, we expect continued pressure on capital expenditure.

Great. Thank you very much.

Good afternoon. Thanks for taking the questions. One on capital, one on the regulatory environment. Gary, obviously system shifts greatly exceeded street expectations this quarter. Can you talk about any new programs you've introduced to support new placements? And we heard you talk this quarter about the loaner program. Are there any commitments associated with that? And are usage-based agreements increasing? As I said, I had one follow-up on the regulatory environment.

Sure. On that system shifts in the quarter, I'll start to answer and I'll ask Marshall to jump in and provide a little additional color. I think a lot of what we saw in Q2, in the U.S. was around momentum. Capital pipelines are multi-month engagements for our sales teams and for our customers. They have long-term commitments. They're fairly far down the pipeline. And in some cases, I think they know they want to do this long-term. They went ahead and closed. Outside to us, we had strength because you're starting to see procedure recoveries. And they're looking to build capacity for additional procedures. With regard to whether a particular sales program or the introduction of a loaner program and so on that really drove that number, I would not guide you that way. I don't really think that's true. But Marshall wanted to step in.

I think you characterized it right. I don't think there was any particular program that drove it. And I think that it really does reflect momentum. Gary alluded to a couple of larger IDN deals getting done. Those were months, if not a year in the making, and so it takes time to get them closed out. And when you're getting close, even though there's a COVID virus, they went ahead. And we do see strength outside the U.S., particularly in Asia where our COVID has started to recover.

Thanks, Marshall. And just for my follow-up, Gary. You talked about changes to the regulatory environment. Obviously, we all heard J&J saying that they're not going to be filing 510(k) for their robot in the U.S. I mean, what are you seeing Gary? At the FDA, do you think future surgical robots will de Novo 510(k)s PMAs? I obviously don’t expect you to speak for J&J but what can you talk about generally on surgical robots?

Over the last few years, we’ve seen an increase in clinical data requirements and evidence generation per new platform, as we come out and we’ve been talking to you about that over the last several years. With regard to introducing new platforms, us or anybody else, I think the pathway depends on the details of the claims, what’s being claimed, what procedures are being done, and the details of the predicates being used. And that would guide any of the conversations we would have with the FDA, or frankly, our competitors would have. So I really can’t call out what direction it will go for everybody. We do see the discussions being pretty rational, and they just have required additional data sets as time goes on, and nothing we’ve heard from the last couple of weeks of earnings calls has kind of changed our perspective on what we've seen.

Thanks so much.

Thanks, good afternoon. Gary, I'm just curious about how you’re able to manage your internal R&D development projects throughout COVID? And I guess really the question is, are you able to keep things going or did you see setbacks as well? I mean I know you talked about the PRECISE trial again, but I'm really thinking sort of your internal development projects.

I believe the efforts of our teams have been remarkable. We are fortunate to have a medical office within the company along with surgeons and medical professionals on staff. This has enabled us to implement protocols that keep us at the forefront of safety measures for infectious diseases while striving to maintain progress in our work. Our engineering teams have shown great creativity and thoughtfulness in getting tasks accomplished. We have experienced some delays, which is unfortunate but part of the reality we face. Nonetheless, I think our teams have worked diligently to continue advancing our programs and not simply accept delays because of COVID. The challenges we encounter, particularly regarding clinical trials, are often beyond our control, as these involve interactions with hospitals and frontline institutions that are prioritizing their resources to manage COVID. We fully understand this situation, which sometimes leaves us in a supportive role. In areas where we have control, such as our environment, we can rearrange our spaces and labs to make further progress. While we have seen some setbacks, we also recognize significant efforts being made to address these challenges.

Okay, terrific. And then the other question is, certainly there is a sense out there that COVID will sort of accelerate trend that we’ve already been seeing and a move to some sort of ambulatory surgical setting. Just curious, in the last quarter’s call you sort of mentioned that the Intuitive organization was ready to be helpful in any way and certainly sounded like, what was implied if robots need to be moved to either ASCs or other care areas that you’d be prepared to do it. Did you actually see any of that occur? And do you think that there is going to be an accelerated trend to move things that you can into non-acute care settings?

I'm going to ask Marshall to answer the first part of that question around have we seen acceleration in the data set and then I’ll answer the second part of the question around what do we think might happen going forward. So, Marshall if you would jump in on what we've seen so far?

In terms of ASCs, the number of da Vinci type procedures performed there is not particularly significant. If we focus on HOPDs or ASCs that are owned by hospital IDNs, we have a substantial presence and are addressing the procedures that occur in those settings. I haven't observed any large transfers of patients to ASCs during this time. Hospitals are currently facing challenges in meeting all needs relating to COVID. I don’t have any additional information to offer on this topic.

I believe surgery in those environments is well understood, and robotics can play a significant role. The main factors that determine whether procedures take place in an ambulatory setting, hospital-owned outpatient department, or inside a hospital for same-day surgery are largely influenced by reimbursement and reimbursement policy. As long as the reimbursement policy remains unchanged, I don't anticipate a significant shift of procedures performed by Intuitive into ASCs. However, if reimbursement policies were to evolve, we would adapt accordingly. Much of the same-day or outpatient surgery conducted on da Vinci devices is influenced by reimbursement aspects, so our focus is on where it makes logistical and reimbursement sense to perform these surgeries, along with ensuring the right tools, technologies, and training are available. We can adjust to these factors over time.

Okay, great. Thank you.

Thanks. Hey, good afternoon. Just a couple quick ones. On the da Vinci SP, if I heard your comments right about Korea utilization being higher than XI. That was a little bit surprising. So I'm just curious if you can give some color behind that. And whether that suggests for you that the types of procedures being done on SP are kind of more on the lower acuity side of the spectrum? And whether that kind of pays for you how you might be marketing the product here as it evolves.

Yes. In Korea, the nice thing is that the regulatory clearance allows broad clinical application. As a result, they can do procedures in urology and thoracic and gynecology and head and neck. And they're also looking at procedures in the breast. There I think it's less about low acuity. And I think they're really exploring where does the single incision or natural orifice approach really drive clinical values up. The surgeons are I think thoughtful and innovative here. And that's exciting to us. In the U.S., we need to run trials and get additional data as we've said before for colorectal applications and for some of the other things that we have in the pipeline. So that will take us some time. So we look to Korea to say, okay, what does demand look like when not constrained by the regulatory setting? The nice utilization or high throughput sort of tells us two things. One is, there's a real interest in exploring the hypothesis that this creates better outcomes. We can also look at the data there and start to see where it does indeed. That's exciting. The second thing is it puts the product through the tests of high throughput high turnaround is a well-designed in that setting. And can they use it as much? And that's been powerful for learning but also encouraging for us as to the maturity of the product even at this early stage. So that's how we're looking at Korea and it will help inform our regulatory strategy in other parts of the world.

And then my follow-up would be on just new doctor training. That was obviously still quite strong for you pre-COVID here in the U.S. and obviously been a key element for you procedure growth looking forward. So just qualitatively, are you able to just give us a sense of the impact on training that you saw in the quarter? And how you're thinking about the rest of the year? Just levels of normal, even like you did for procedure would be super helpful to just get a sense of where you are with being able to train new doctors?

Yes, I'll start and Marshall will help you. I'll ask you to jump in and add some color. It's clearly challenged, and one of the things that we're working on. First, right up front is particularly in the United States, doctors are focused on other things and travel which some training requires is strained. So for us, two things have been going on. One of them is to see if we can forward deploy our training assets to make travel easier or extremely convenient, travel by car for example rather than by plane or use of digital tools and cloud technologies to be able to get access to some of the materials that they might use. We're actually encouraged on that front, I think we have some investments we have made over the years that we can leverage to help and we’re seeing the beginnings of that. So I think that side looks good. That said, training requires demand generation, requires interactions with our sales teams in addition to training once they get going. So it's substantially below prior levels, we’re starting to see the beginnings of it coming back, but I’ll let Marshal give you a little bit of color there.

Yes, it has been below our historical levels, and its importance varies by geography. In Japan, where new procedures are being adopted, training is a more critical element. In the United States, training can occur within institutions, and established procedures often have more available proctoring. Consequently, the contribution of new surgeons in the United States is much lower compared to places like Japan. We observed a significant decline in training early on in the United States due to reluctance to travel and other COVID-related factors. As Gary mentioned, we are exploring alternative methods for training, which may have some impact on us. However, it's not as significant a contributor in the United States as our existing surgeons.

Thank you.

Good afternoon, Gary and Marshall. I was reflecting again about the delayed J&J program and about, I think you said it or Marshall said it Intuitive's unique opportunity to invest. Help us think about this. I have to imagine that in some way, perhaps many ways, Intuitive has been actively aggressively thinking about the challenge preparing for near term and long term for the possibility of more competition. That challenge would seem to be meaningfully delayed for the moment. Does this offer you in anyway any opportunity to accelerate the pipeline or accelerate spending in some kind of way? Does this window present an opportunity? It does present you some kind of unique opportunity to investment? You're going to do something different now than you would have if it has been more imminent?

Thanks, Rick. For us, we have really focused on being tightly focused on really making measurable improvements to the quad aim, really looking forward looking through the windshield rather than in the side mirrors as to what, we think is important. I guess what I’d say is the greatest limitation for us so far has not been opportunity, I think to do interesting things. There's an enormous amount of opportunity out there to make improvements, and there's an enormous technology opportunity. I think the biggest challenge in the great limiting step for us has really been to continue to deploy our programs with excellence. And so that’s been rate limiting step on growth. I think that other companies out there are investing in things that make sense that are interesting. I think the vision about where the world might be in 10 or 15 years is not a complicated one; I think it’s reasonably shared. And I think what will differentiate Intuitive and other companies is really the ability to deliver these complex technologies at a very high-quality level, and then ways that customers can really use to access their resources. So, I look around at what's going on outside, and I think they are engaging some of the both opportunities that are out there in the world and some of the challenges of doing this well and delivering it. So for us, I guess I didn’t wake up this week and think that the world has changed because of somebody else's conference call.

On Monday, we shared a survey of over 100 robotic surgeons. Among those who expressed an intention to buy in the future, 40% indicated that they had decided to postpone their purchase. This isn't surprising, and you are confirming that. How should we consider this postponed volume? Are you worried that these orders might be permanently lost? Is there a possibility that we could see a significant rebound in capital as normal demand resumes, with new accounts and procedures opening up? Is viewing it this way correct? Thank you, Gary.

I believe there are two main factors influencing the demand for additional capital. The first is the increased need for capacity due to the growing demand for da Vinci procedures from both surgeons and patients. If that demand is held back by COVID concerns or delays in diagnostic processes, it will impact the capital pipeline, and this varies by region. In areas where COVID is under control, we typically see normal sales activities resuming, whereas in regions heavily affected by COVID, the focus shifts elsewhere. The second factor driving capital demand is the desire for new features and products, particularly from those using older technology. If customers are willing to pursue upgrades and have the financial means, we can continue to make progress. However, in my view, the primary issue in the coming months will be accommodating existing demand in the field. The duration of this need largely depends on COVID, and it’s uncertain how long that will last. We are prepared to respond accordingly, positioning ourselves well from an organizational standpoint to sustain the business in the long term. We'll do our best during this time and observe how things develop. That was our last question. Thank you. In closing, we continue to believe there's a substantial 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 have 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 to treat of care. We believe value creation, surgery, and acute care is foundationally human. It flows from respect for and understanding of patients and care teams, their needs, and their environment. Thank you for your support on this extraordinary journey. We look forward to talking with you again in three months.