Intuitive Surgical Inc (ISRG) — Q4 2020 Earnings Call Transcript

Good afternoon, and welcome to Intuitive's fourth quarter earnings conference call. With me today, we have Gary Guthart, our CEO; and Marshall Mohr, our Chief Financial Officer. 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 or 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 October 19, 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. Today's format will consist of providing you with highlights of our fourth 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, I will discuss procedure and clinical highlights. 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. Our fourth quarter capped the year in which the pandemic challenged our customers and our business. It highlighted some core strengths for the company, introduced some obstacles to overcome, and triggered some changes for us. To put the year and quarter in context, let me first review some of the numbers. Procedures grew 6% year-over-year for the fourth quarter and 1% for the full-year over 2019, resulting in approximately 1.25 million procedures in 2020. We placed 326 systems in the quarter, down from 336 systems in Q4 of 2019. For the full-year, we placed 936 systems in 2020, down from 1,119 systems in 2019. Finally, revenue fell 3% in 2020 as the result of delays in surgical procedures, as hospitals focused on treating COVID patients. Digging a little deeper, our core business remains healthy. After the first surge of COVID abated during this past summer, our customers returned to more routine use of our systems and solutions. We believe that the Intuitive ecosystem enabled increased access to and practice of high-quality minimally invasive surgery, which may have helped hospitals conserve valuable intensive care resources during the pandemic. Despite pressure on utilization of our systems due to COVID, our hospital customers continued to invest in building their Intuitive's robotics programs with additional systems, evidenced by a 7% increase in the clinical installed base in 2020. We saw committed customers strengthening their programs, likely due to their analysis of how well the Intuitive ecosystem satisfied their quadruple aim objectives: better outcomes, better care team experiences, better patient experiences, and lower total cost to treat per patient episode. Lastly, we believe our investments in our analytics programs have helped customers routinely analyze their performance, supporting their programmatic insights in the year. Our confidence in our core business and our long-term opportunity remains robust, in spite of near-term uncertainty, which is as follows. First, the pandemic is resurgent in many regions, powered now by more contagious variants. While hospitals have better protocols to manage patients today than they did earlier in 2020, our weekly surgical data in December 2020 and continuing today shows another clamp down on surgeries. Furthermore, we believe diagnostic procedures are slowing in hard-hit regions. With diagnostic procedures running significantly below pre-pandemic levels, patients and hospitals will acutely feel the impact through disease progression and the more complex therapies necessary when patients do return for care. This delay in diagnostic pipelines will likely take several quarters to resolve, even after the threat of COVID begins to abate. Second, we know that future of new capital installs are highly sensitive to utilization rates. Delayed surgeries will also impact the growth of surgical departments, pressuring new system installs until excess capacity is consumed. Third, in countries where the government pays the healthcare bill, budget strain and economic fallout from COVID may impact healthcare spending in new and variable ways in different countries. Lastly, the trend that started prior to the pandemic for increased data requirements and longer clearance time lines from regulators in the United States and Europe for our industry has continued this year. Taken together, these obstacles make predictions for the next several quarters difficult. As I mentioned earlier, 2020 has broadly eliminated some longer-term trends in healthcare that validate our thesis. The increased pressure on healthcare systems to conserve acute care resources for the sickest patients may have accelerated investments that enable patients to get the care they need with fast recovery, minimizing consumption of scarce hospital resources and reducing complications. The compounding value of analyzing real-time data and offline healthcare data to drive insights, to drive better care, has become obvious this year. Lastly, we saw an acceleration of remote technology used to enable proctoring, learning, and analysis. I've heard it said that in good times, we develop ourselves to become who we want to be while hard times reveal who we really are. In the year, we set our priorities based on our values. We implemented community relief and customer relief, launched our Extended Use Instruments program, mobilized local and remote training resources to support customers differently, and continued to listen carefully to our customers to best understand their needs. We've seen positive customer response to this approach, which is reflected in our Net Promoter Score. You can find more information on these scores in our JPMorgan Healthcare Conference presentation from this month, posted on our website. Over the past several years, we've been building our capabilities in different countries to better serve their healthcare systems. I'd like to take a moment to take you through how we performed outside the United States in the year. Turning first to Asia. Our business in Japan is moving beyond urology, given reimbursements for a broad slate of procedures obtained in Japan in 2018 and 2020. Government hospitals in Japan have been conserving resources for COVID care and the pandemic has introduced noticeable delays as the healthcare system reacts to outbreaks. In Korea, our business continues to be dynamic with an innovation-oriented customer group adopting new products like our da Vinci SP. In China, we saw accelerated customer acceptance of our partnership with Fosun Pharma and our products, with growth in procedures and the business overall outpacing our pre-pandemic plans. In 2020, China emerged as our number two procedure market. Turning to Europe. Our team in Germany has had success in engaging larger German hospital groups with increased system placements broadening our market access. Constraints on elective surgery have been implemented assertively in Germany in light of COVID. In Germany, France, UK, Italy, and the Nordics, our goals have been to broaden da Vinci use beyond urology. Progress therein has been hampered significantly by COVID. Lastly, we see relatively low public sector reimbursements in Europe for benign procedures. Innovations from Intuitive like da Vinci S and our Extended Use Instruments are providing an option for more price-sensitive customers in these markets. With regard to our innovation and product engines, we spent time walking through our progress at the JPMorgan Healthcare Conference this month and our presentation is available online at our website, intuitive.com. I'd recommend to the interested listener a review of those materials for greater insight into our progress. Summarizing briefly here, we're making good progress in advancing many elements of our ecosystem, including our advanced instruments, deepening our imaging and informatics programs, including our augmented reality program, Iris, and extending the launches of our new platforms. We grew the installed base in procedures for our single port platform, da Vinci SP. We're focused on advancing clinical indications for SP in several regions, as well as extending its instrument and accessory portfolio. For our flexible robotics platform, Ion, we saw strong clinical results and demand in the year, but met manufacturing and supply performance challenges in the fourth quarter as catheter demand outpaced our forecasting models and the need for important quality improvement implementations and COVID quarantines hampered our production. We are currently shipping Ion product and expect to meet the demand curve in the first half of 2021. Before Marshall takes you through our finances in detail, I’d like to touch on our financial strategy. Our operating model withstood the strains of 2020 well, starting with our decision several years ago to shift to greater flexibility in system placement models, the incorporation of sales, leasing, and risk-shared models allowed us to meet customers' needs during a disruptive time. Our investments in advanced instruments, including stapling and energy have been fruitful with growing revenues, improving margins, and growing customer appreciation for advanced instruments. We've been investing capital in our manufacturing methods to increase quality and lower our costs, which in turn has allowed us to extend savings to our customers to allow them greater flexibility and deploying our products in more cost-sensitive environments. This has triggered a virtuous cycle that allows us greater volume, which in turn gives us greater ability to invest in higher-volume processes. We'll continue to invest in this cycle going forward. We believe we are still in the early innings of a long opportunity to substantially improve the quadruple aim and acute medical interventions using robotics, computing, advanced imaging, and informatics. As a result, we continue to invest in our innovation engines to create and pursue these opportunities. In closing, our priorities for 2021 are as follows. First, we’ll support our customers' recovery of surgery during and post-pandemic. Second, we’ll focus on outstanding regional performance. Third, we’ll advance our priority programs and launches, SP, Ion, imaging and analytics, including new indications. And finally, continued expansion of clinical, economic, and analytical evidence base for key procedures and countries. I'll now turn the call over to Marshall, who will take you through financial matters in greater detail.

Good afternoon. I’ll 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. Revenue and procedures are consistent with our preliminary press release of January 13th. Key business metrics for the fourth quarter were as follows. Fourth quarter 2020 procedures increased approximately 6% compared with the fourth quarter of 2019 and increased approximately 10% compared with last quarter. Fourth quarter system placements of 326 systems decreased 3% compared with 336 systems last year and increased 67% compared with 195 systems last quarter. We expanded our installed base of da Vinci systems over last year by 7% to approximately 5,989 systems. This growth rate compares with 8% in the last quarter and 12% last year. Utilization of clinical systems in the field, measured by procedures per system, declined approximately 2% compared with last year and increased 8% compared with last quarter. The impact of COVID on da Vinci procedures varied by region. Resurgence of COVID in parts of Europe had significant impacts on procedures, including in Italy, UK, Nordics, and France. While the impact of COVID on procedures in the Asia-Pacific region, including China, Japan, and Korea, was far less significant. In the U.S., fourth quarter procedure growth was impacted by COVID’s resurgence, resulting in 5% year-over-year growth compared to 7% growth in the third quarter. The resurgence in the U.S. and Europe was more acute and had a greater impact on procedures late in the quarter, a trend that continued into January. The impact of a resurgence can be significant. For example, in California, the fourth quarter COVID resurgence turned a year-over-year da Vinci procedure growth in October of 8% to a year-over-year decline of 6% in December. We also believe that reduced diagnosis reflecting patient concern over COVID exposure has impacted certain procedures globally. This has had its most pronounced effect on prostatectomies. Despite the fact that hospitals are better equipped to handle COVID patients today compared to the outset of the pandemic, COVID-19 resurgences like those currently being experienced in parts of Europe and the U.S. have challenged hospital care capabilities and have negatively impacted da Vinci procedures. In addition, delays in diagnosis and treatment of underlying conditions will also continue to negatively impact da Vinci procedures. Uncertainties in this COVID environment are not predictable, and the vaccine rollout and its impact on controlling COVID spread is also not predictable. Given these uncertainties, we are not providing procedure guidance at this time. Philip will provide additional procedure commentary later in this call. Fourth quarter capital placements exceeded our expectations, reflecting several factors. In certain cases, hospitals exhausted 2020 budgets and spend capacities. And in some cases, hospitals purchased systems in preparation for a post-pandemic environment. We also experienced a higher level of trade-ins of SI systems for fourth generation systems, reflecting hospital desire to standardize their fleet and to avail themselves of fourth generation technology and lower-cost Extended Use Instruments. Looking forward, we see the following capital revenue headwinds. Utilization declined 2% year-over-year, resulting in excess system capacity at hospitals. We expect customers to fill existing system capacity before purchasing additional capital. Some of the fourth quarter capital placements reflected hospitals exhausting 2020 budgets. As budgets reset for 2021, hospitals could reduce their capital spend, particularly as COVID strains hospital profitability. We expect leasing to continue to increase as a percentage of overall placements. Macroeconomic conditions created by COVID could also impact hospital capital spending. And as we face competition in various markets, we may experience longer selling cycles and price pressures. Additional revenue statistics and trends are as follows. Total fourth quarter revenue was $1,329 million, representing a 4% increase from last year and a 23% increase from last quarter. Fourth quarter revenue benefited from U.S. customer stocking of Extended Use Instruments and higher than expected system placements. Leasing represented 37% of current quarter placements compared with 35% last quarter. Fourth quarter placements included some larger IDN transactions where the IDN prefers purchase transactions. Excluding those transactions, leasing as a percentage of total placements would have been several percentage points higher. In an environment of COVID-19 as economic pressures increase, we anticipate more customers will seek leasing or alternative financing arrangements than reflected in historical run rates. Approximately half of the systems placed in the fourth quarter involved trade-ins, which is higher than the 40% last quarter and higher than the average over the last couple of years. Trade-in activity can fluctuate and be difficult to predict. Fourth quarter average selling prices declined to $1.43 million from $1.61 million last year and $1.55 million in the third quarter. The decrease relative to last year reflects a lower mix of systems placed in China and Japan and a higher proportion of trade transactions. The decrease relative to last quarter reflects a higher proportion of trade-in transactions and a higher mix of indirect market placements. We recognized $14 million of lease buyout revenue in the fourth quarter compared with $17 million last quarter and $34 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 increased to approximately $2,060 per procedure compared with $1,910 per procedure in the third quarter of 2020 and $1,980 realized in the fourth quarter of last year. The entirety of the increase compared to the third quarter reflects U.S. hospital stocking Extended Use Instruments. We launched Extended Use Instruments early in the quarter in the U.S. and mid-quarter in Europe. We will launch Extended Use Instruments in other markets in 2021 and 2022, depending on regulatory requirements. Going forward, we expect customers to adjust their instrument buying patterns and reduce their inventory levels to reflect the additional uses per instrument. In addition, Extended Use Instruments and lower instrument pricing will result in lower I&A revenue per procedure to Intuitive. The impact and timing of customer buying patterns and lower per-use revenue will likely begin to impact revenues in the first quarter but will depend on customer inventory practices and procedure volumes. While we expect price elasticity associated with Extended Use Instruments to enable greater penetration into available markets, that benefit will be delayed by COVID and otherwise will take time. 12 of the systems placed in the fourth quarter were SP systems, reflecting continued measured rollout of SP and the impact of COVID-19. Our installed base of SP systems is now 69, 8 in Korea and 61 in the U.S. 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. We expect to initiate first cases associated with a U.S. colorectal clinical trial this quarter. We placed four Ion systems in the quarter, bringing the installed base to 36 systems. Ion system placements and procedures are excluded from our overall system and procedure counts. Ion system placements were affected by supply chain issues described by Gary earlier in the call. We expect to remediate these supply issues in the first half of 2021. Our rollout of Ion will continue to be measured while we optimize training pathways in our supply chain. Procedures under the PRECISE study are expected to complete in the second quarter of 2021. Outside the U.S., we placed 130 systems in the fourth quarter compared with 140 in the fourth quarter of 2019 and 79 systems last quarter. Current quarter system placements included 54 into Europe, 22 into Japan, and 13 into China compared with 54 into Europe, 26 into Japan, and 39 into China in the fourth quarter of 2019. System placements into China in the fourth quarter of 2019 were higher as hospitals accelerated tenders in anticipation of the possibility of higher tariffs. Moving on to gross margin and operating expenses. Pro forma gross margin for the fourth quarter of 2020 was 69.7% compared with 72.2% for the fourth quarter of 2019 and 70.2% last quarter. The fourth quarter of 2020 included higher period costs associated with lower production and higher excess and obsolete inventory charges. The decrease relative to the fourth quarter of 2019 reflects higher period costs associated with lower production, higher excess and obsolete inventory charges, and lower system ASPs. As revenues are pressured by COVID-19, production levels may operate at below normal levels, which may result in higher labor costs and under-absorbed overhead and reduced product margins. In addition, product and customer mix fluctuate quarter-to-quarter and could cause fluctuations in gross margins. Pro forma operating expenses decreased 6% compared with the fourth quarter of 2019 and increased 11% compared with the third quarter of 2020. The fourth quarter of 2020 includes a $25 million contribution to the Intuitive Foundation compared with a $5 million contribution in the fourth quarter of 2019 and no contribution last quarter. Fourth quarter operating expenses continued to reflect reduced spending on activities directly impacted by COVID-19, including marketing events, travel and in-person training as well as lower variable compensation. These costs will naturally increase as the impact of COVID declines. We continue to believe we have a unique opportunity to extend 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. During this period of COVID, we continue to invest in product development activities, including informatics, advanced imaging, advanced instruments, and our Ion and SP platforms. Accordingly, you should expect the growth rate of R&D expenses in 2021 to significantly exceed the 2020 growth rate. We expect the growth rate of SG&A expenses to also increase significantly in 2021 compared to 2020. SG&A spending can be categorized as follows. Investments in OUS markets will increase over 2020 spend as we expand our capabilities and investment in clinical data. Variable compensation will increase over 2020 as we reset goals and targets. Core spending on resources and infrastructure will increase over 2020 to prepare for a post-COVID environment. Spend on activities impacted by COVID, like travel, marketing events, and in-person training will increase as the impact of COVID declines. Our pro forma effective tax rate for the fourth quarter was 20.7% compared with our expectations of 20% to 21%, primarily reflecting the geographic mix of income. 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 fourth quarter 2020 pro forma net income was $436 million or $3.58 per share compared with $426 million or $3.48 per share for the fourth quarter of 2019 and $341 million or $2.77 per share for last quarter. I will now summarize our GAAP results. GAAP net income was $364 million or $3.02 per share for the fourth quarter of 2020 compared with GAAP net income of $363 million or $2.99 per share for the fourth quarter of 2019 and GAAP net income of $317 million or $2.60 per share for 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. GAAP net income for the fourth quarter and third quarters of 2020 also included pretax gains of $4.7 million and $61.7 million on our investments in private entities, resulting from our purchases of certain technologies. The EPS impact of these gains net of tax was $0.03 per share in the fourth quarter and $0.39 per share in the third quarter. These gains are excluded from our pro forma results. We ended the quarter with cash and investments of $6.9 billion compared with $6.4 billion at September 30, 2020 and $5.8 billion at December 31, 2019. The increase in cash in the fourth quarter reflected cash from operations, a reduction in inventory and overall working capital and stock exercises. We repurchased $34 million of shares in the quarter at an average price of $661.10 per share.

Thank you, Marshall. Our overall fourth quarter procedure growth was 6% compared to 19% growth during the fourth quarter of 2019 and 7% growth last quarter. Our Q4 procedure growth was driven by 5% growth in the U.S. and 11% growth OUS. Resurgences of COVID in the U.S. and Europe impacted our growth rates in the quarter, and we saw procedure growth rates decline as the quarter progressed, particularly late in the quarter. With respect to key contributors to growth, overall procedures in China and bariatrics in the U.S. were the largest drivers of procedure growth in Q4. In the U.S., within general surgery, bariatric, cole, and hernia were the largest contributors to procedure growth within the quarter. Bariatrics may be benefiting from certain patients prioritizing weight loss as obesity is a significant COVID risk factor. In addition, we continue to receive positive reviews of our SureForm 60 stapler, which provides surgeons with an optimized robotic tool set and feedback for bariatric procedures. In China, procedure growth accelerated as new systems installed under the quota began to provide additional capacity for incremental growth. Q4 China procedures had broad-based growth in urology, thoracic, general surgery, and gynecology. With respect to our more mature procedure categories in the U.S., Q4 gynecology procedure growth was up, reflecting growth in cancer procedures, partially offset by declines in benign procedures. On a worldwide basis, dVP procedures in the fourth quarter declined year-over-year and had similar trends as we described last quarter. COVID is impacting the diagnostic and patient pipeline related to dVP. Now, turning to the clinical side of our business. Each quarter on these calls, we highlight certain republished 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. Doctors Clark A. Wilson and Jihad Kaouk from the Cleveland Clinic and colleagues in a paper published in Urology described their experience evaluating robotic-assisted radical prostatectomy with da Vinci SP through an extraperitoneal approach and enhanced recovery protocol for same-day surgery. 60 subjects with organ confined disease underwent an SP procedure with no patients requiring conversion to another approach. Median length of stay for all patients was 4.2 hours. 75% of all patients enrolled were discharged on the day of surgery and 96% of patients discharged within 24 hours when excluding those either with surgery after 6:00 p.m. or with preplanned admissions due to patient preference or significant comorbidities. The authors concluded a robotic-assisted radical prostatectomy with the da Vinci SP system and extraperitoneal approach can be performed safely and reproducibly as the same-day surgery. This publication adds to the number of early studies around the emerging SP technology, demonstrating encouraging results within robotic-assisted radical prostatectomy as a same-day surgery and acceptable perioperative, functional, and short-term oncological outcomes in the hands of experienced surgeons for the appropriate patients. We look forward to the growth of the body of evidence around da Vinci SP. Lastly, we'd like to highlight that our second annual sustainability report will be available after the call on our Investor Relations website. That concludes our prepared comments. We will now open the call to your questions.

Thanks very much. Hey, good afternoon, everyone. I thought maybe I'd first go to your comments in general on hospital capital spending and maybe try to reconcile some of them. I think, if you go back to last week, you cited hospitals with seven-plus systems were up strongly. And here, you're still citing lower utilization as the key headwind. And so, I'm just wondering, are you otherwise seeing a skewing towards newer customers, and just trying to get my hands around. I have to imagine it's complicated and hospital systems are different, but how much more color you can provide around kind of some of these different data points that you've provided?

Yes. Please continue.

Why don't I jump in, Marshall, and then I'll kick it back to you? Amit, thanks for the question. We were talking about earlier in the month here. We think there's some budget flushing that happened at the end of 2020. How strong that will be into 2021? Did they pull forward spending that would otherwise normally have been in 2021? Hard to say. Having said that, if you look at where we were winning relative to other priorities, even if there is some budget pull forward, large customers were that already had robotics programs were expressing confidence with us, which we think is a positive. The caution we're sending you now in this call is just that over time, there'll be an equilibration, which is there is some excess capacity in the field because COVID is suppressing procedures. And at some point, COVID will lift, and that capacity will be absorbed. Some folks will invest ahead, getting ready and being able to work on backlog and others will be conservative and wait till they consume that capacity. Forecasting that is hard. And so, that's how we're trying to help you navigate through this. But Marshall, please clean up anything that you need to do in that answer.

No, you hit it perfectly.

Okay. And as my follow-up and separate on data and digital engagements to date. Again, kind of going off of a comment you made last week at hospital analytics and you talked about the 350 hospitals, 690 engagements. I'm just wondering how much more color you can give on that in terms of how much of that is that programmatic variety that you talked about that won't necessarily be monetized versus something that could either improve outcomes or reduce costs and potentially be monetized? Just any color around those early engagements would be helpful? Thank you.

Yes. Thanks for the question. When we’re talking about what we shared with you in the talk at JPMorgan, most of that is programmatic analysis. And it's not so much something that we think is going to be revenue-generating directly. We think that it illuminates the value of our ecosystem and strong da Vinci programs. And that is a benefit to us. It increases the stick rate, allows people to see in a verifiable way within their own data sets, the value they're bringing. It gives them action plans to find opportunity for standardization and other kinds of efficiency improvements. So, it's of high value to the customer and high value to us. Some of the other things that we've shared with you, for example, Iris, those things are something that we'll collect revenue for. They probably won't become huge revenue arms in and of themselves, but they bring value on a per-case basis. And it's something that we can talk to the customer about in terms of value creation there. They also strengthen the ecosystem. So, I think for shareholders who are asking the question, 'Hey, when does informatics and machine learning create a revenue arm of its own?' I'm not sure that's the right question. I think that analytics and informatics power the ecosystem as a whole. We're pretty agnostic as to how we get paid for that. If we get paid for that through increased utilization, wonderful. That works great. We look at cost to develop those programs and kind of overall their contribution to our financial health. But we don't have to charge for them individually if that's not how a customer wants to pay for it. Let me turn it to you, Marshall, and any color you want to add.

No, I think that's right. I think that we look at it as the opportunity to increase the ecosystem and to expand our base and/or accelerate adoption.

Thank you.

Thanks, Amit.

Thank you for taking my question. Marshall, I appreciate that we don't have guidance and your comments on spending levels for 2021. However, without revenue figures, it’s challenging to contextualize those numbers. Could you provide a bit more clarity? Is the expectation that OpEx growth in 2021 will outpace sales growth? Alternatively, I could ask whether SG&A growth has aligned with revenue in the past few years, while R&D has grown at around double the revenue growth rate. Can you offer any insights on those parameters? That would be very helpful. I also have a few follow-up questions.

That's a great question. I understand that we're not providing revenue guidance, which makes it challenging to contextualize the numbers. Ultimately, the effects of COVID are quite unpredictable. If COVID subsides quickly, the spending we’re discussing might align better with revenue growth. However, I want to emphasize that we've experienced a prolonged period where COVID affected us, and some of the variable expenses I mentioned were much lower than historical levels, but those will rise as COVID fades. Additionally, there are other expenses we will continue to incur. Increases will happen regardless of COVID's situation because we aim to invest in the R&D areas I highlighted. We see significant opportunities to enhance our market presence and deepen our penetration over the long term, so we will be raising those costs. I realize I haven't provided the specifics you’re after, but it's quite challenging to predict revenue and operations in this environment right now.

Okay. And then just maybe two quick follow-ups, one easier to answer than the other. Just in terms of volumes, obviously, fourth quarter was more similar to third quarter. And generally speaking, the message from most corporates last week was that first quarter is going to be at fourth quarter, if not frankly a little worse. I just wonder if you could sort of comment on sort of what you're seeing from the procedure environment here in the first quarter? And then, just secondarily, on the Extended Use Program, obviously, we saw kind of a bolus on revenue per procedure this particular quarter as hospitals didn't change inventory patterns. Are you seeing any evidence? I know it's hard in COVID that it's driving higher demand, the Extended Use Program driving higher demand. And when would you expect those revenue per procedure numbers to begin to reverse? Is that as early as the first quarter, or probably more likely middle part of the year? Sorry for both questions. Thanks so much.

Yes. So the first part of your question was...

Q1 volume update.

Yes, in the first quarter, I observed that as the quarter progressed, the resurgence became more pronounced and significantly affected procedures. For instance, in California, we experienced growth in October followed by a decline in December, which indicates the extent of the impact this can have. I also noted that the trends we saw at the end of the quarter continued into January. While some companies speculate that Q1 might be worse, we are not attempting to predict the exact outcome due to the existing uncertainties. However, it's evident that entering the quarter was at the lower end of what we experienced in Q4. Regarding Extended Use Instruments, we launched them in the U.S. at the beginning of the quarter and in Europe in the middle of the quarter. Approximately three-quarters of our customers are now acquiring these instruments, and they are starting to be utilized in procedures. It’s challenging for us to forecast when we will begin to see the benefits of these instruments in terms of elasticity and pricing, especially with COVID complicating matters. It will take time, and I anticipate it will be a while before we notice those benefits. Sometimes it requires us to highlight the advantages to hospitals and promote it a bit, so we'll approach this with patience.

Gary, I wanted to get you up in two geographies, if okay. First, on the U.S. Just curious, do you think that perhaps by the second half of this year, there's a chance based on everything you're seeing that we could be close to a normal level of surgical procedure volumes in the U.S., or given what you're seeing on the diagnostic side and the slow vaccine rollout that that's more likely to be a 2022 event? And then, I'd also love to get your opinion on China and the durability of the phenomenal growth you appear to be having here of late.

Hey Bob. Regarding the U.S., I won’t make any predictions, but let's discuss the factors involved. Clearly, hospitals are eager to return to treating non-COVID patients, and there’s a strong demand for that. Achieving this requires a few conditions, primarily that resources, such as ICU capacity and staff, need to be freed up from COVID care. The availability of these resources fluctuates with COVID surges. Your monitoring and analysis regarding vaccine distribution and COVID case numbers are likely as good as ours, so that's a major aspect. As for diagnostic pipelines, the situation is similar. Everyone wants to bring patients back for diagnoses. We expect a buildup of surgical patients needing attention due to the previous surge and the significant number of missed routine checkups, like colonoscopies and PSA screenings. Disease continues to progress during these delays, often leading to more advanced cases at diagnosis. We’ve encountered this scenario before, especially with changes in PSA testing guidelines, which again creates a backlog and prolongs processing times. While I don’t think this will cause significant shifts in market share among treatment methods, it will definitely be challenging for patients, creating headwinds for us in 2021, with potential tailwinds as patients get diagnosed and re-enter the system. Now shifting to China, we’re very optimistic long-term. Clearly, Chinese patients are seeking high-quality care, and there’s significant interest from surgeons in robotics and the da Vinci system. Our partnership with Fosun and our joint venture are progressing well. In the short term, the outlook is strong. However, the medical marketplace in China is complex. Currently, systems are subject to centrally managed quotas. We anticipate regulatory changes in China as the FDA updates its policies, and we see local companies eager to compete. We remain committed to our long-term strategy in China, expecting a strong demand market that may be somewhat volatile due to policy shifts and central controls. We will keep you informed as we gain more insights.

I have a question regarding Ion. What can we expect for next year? You mentioned that the PRECISE data will complete enrollment in the second quarter. Should we anticipate seeing that data in 2022? Is there any update on Ion in China? Additionally, your competitors have discussed expanding indications beyond lung bronchoscopy. Can you provide any insights on that? Lastly, what are your plans for adding therapeutic capabilities to Ion? Essentially, what should we expect moving forward with Ion? Thank you for addressing my questions.

All right. Thanks, Larry. Philip, I'm going to turn to you on PRECISE trial timing. And then, I'll take it from there.

Yes. With respect to when you might hear some data, it is a fair assumption to expect to hear something in 2022. We haven't been more specific beyond that, Larry.

Currently, our commercial and manufacturing teams are focused on the diagnostic bronchoscopy market, which is our first indication. Ion is a platform technology, and we are excited about its potential. However, it's important to recognize that we are still in the early stages of development in bronchoscopy. Our clinical results are impressive and lead the market compared to competitors. Our goal is to meet customer expectations in terms of quality, demand, and shipments. We also see potential long-term applications beyond bronchoscopy and diagnostics, and we are actively working on those, including ablation technologies and other areas. We are not ready to publicly discuss our next steps for two main reasons: we are still at the early stage of making bronchoscopy a reality, and, for competitive reasons, we are not prepared to share our future plans yet.

And China, Gary?

On the China front, we of course have the joint venture with Fosun. We are working through pathways for Ion in China. We think there is a market there. I would advise folks that the Chinese regulatory system and CFDA handles gen 1 products pretty differently than FDA does in the U.S. And as a result, you want to see a little greater maturity in your product line before you go broadly there. So, we're working through that with our JV and also with the Chinese regulators. When we have some time lines for you, we will describe them. But we remain active and interested.

Hey, thanks. Gary, you mentioned no kind of shift in treatment modalities. So, I assume the deceleration doesn't imply any kind of share loss to laparoscopic. But as we think about coming out of the pandemic, the other side of it is you highlight a remote technology, for monitoring, proctoring, and analysis. Are there structural changes here you think coming out of the pandemic that could drive faster adoption of robotics?

I believe so. Time will tell, but there are some encouraging signs. People are starting to realize that a lot can be accomplished without traveling, which is true for surgeons as well. Our teams have successfully digitized and regionalized training this year, which has been great. The forward deployment of training and increased use of digital tools will continue, and I think acceptance of this is on the rise. Remote proctoring has also accelerated, which has been beneficial for us, especially since we invested in it before the pandemic. Moreover, we are observing changes in resource utilization, with reduced hospital stays, ICU time, and overall patient comfort during the pandemic. I believe this trend will persist. Even as COVID rates decline, I think people will recognize that staying in a hospital may not be ideal, and using ICU resources unnecessarily is not advisable. There’s a growing appreciation for high-quality minimally invasive surgery, and having the analytics to support that could serve as a catalyst for change. Overall, I am cautiously optimistic that the trends we are witnessing regarding recovery could lead to positive outcomes for Intuitive.

Another thing you highlighted at the conference was the regulatory requirements and time lines for the industry keep increasing. I know that's something you've been talking about for a while. But as we think about the roadmap here for SP, the IDE trial for colorectal, have the time lines gotten pushed out further in your view, given the regulatory burden, or is just kind of in line with what you've been talking about for a while?

Yes. I think we're starting to see the contours of the regulation side in the U.S. stabilize. So, it's stabilizing at a requirement level that's greater than it was in years past, but I don't think it's continuously moving. That's been good. I think the thing that's challenged some time lines for us and others is COVID. If your clinical trial sites are having to manage COVID as well as whatever your clinical trial is, that can put pressure on you. That's kind of a near-term thing. I think, longer-term, the question of what does this do if clinical trial requirements and general data requirements in the U.S. and Europe for computer-aided systems and robotics have become greater, what does that imply? And it probably implies a couple of things. One is that systems in the market are likely to stay in the market a little longer because it's just extended timelines for innovation. I think the other thing is that it probably resequences when you see different products where in the world because some health care systems, Korea being notable, are allowing innovative products into their systems a little more quickly and other ones are becoming a little less. So, for a company like us, you'll see increased investment in headcount and in resources for clinical and regulatory staff, and you'll see a reordering of where we go with new innovations over time. You'll probably see for the industry platforms sit a little longer that probably benefits incumbents a little more than it does in surgeons.

Great. And then one last one on the extended use rollout. You did Europe recently, U.S. last quarter. Is there a next step to the process? Are you going to do it in Asia? And any reason the elasticity would be different in any of the geographies in your view?

Marshall, why don't you take that first?

The expansion into other regions will be influenced by regulatory timelines. For example, in China, the process is expected to take a significant amount of time, while in other markets it may be quicker. I don’t have a detailed plan for every country, but we are focused on the Asia Pacific area and aim to reach our direct markets there as quickly as possible. Regarding the impact on elasticity, we made two adjustments in the United States. We launched Extended Use Instruments, which reduce hospital care costs, and at the same time, we lowered the prices of certain instruments typically used in less complex procedures like cholecystectomy, benign hysterectomies, and inguinal hernias. Overall, the cost associated with an instrument set used for cholecystectomies is now competitive with other minimally invasive methods. Each country has different pricing strategies, focusing on procedures impacted by reimbursement challenges. Thus, the effect of elasticity observed in the United States may not directly apply to other countries. However, we are concentrating on specific procedures in those countries where reimbursement is a concern and believe we can add value. We anticipate some increase in elasticity in each country, although the extent will vary.

If I could just start off on the competitive landscape, Gary, any comments you could offer on internationally, any competitors that are on the market, and what you're seeing out there relative to kind of what you would have expected? And then, in the U.S., just in light of some updates from mainly competitor. J&J recently, this fall provided an update on the feature set? And any thoughts you would care to offer where they're going to be trying to compete, particularly on kind of extra robotic arms, et cetera?

Certainly. Regarding the international landscape, I want to emphasize that this isn't just a matter of robots competing against each other for customers. Instead, it's about comparing different robotically-enabled ecosystems that deliver various outcomes. We assess each new development by considering the capabilities of the robots, including their instruments, accessories, imaging systems, advanced tools, and software or analytical capabilities. There's a notable difference in skill sets and abilities across these ecosystems, and this also applies to larger domestic competitors. This is the perspective we hold, and I believe customers largely share this view. There will always be some who want to try new technologies and see their potential, which is to be expected. I haven't encountered anything architecturally surprising in the latest announcements; we've already tested many of these concepts within the company. Time will reveal the impact of our decisions, which we've made thoughtfully based on our evaluations and scientific methods, and customers will consider these factors over time. Additionally, some larger players are looking to bundle products, potentially reducing capital costs and adding extra features to attract customers. However, bundling only makes sense when the underlying products are commodities, which is not the case here. Robotic systems, along with their instrumentation and imaging systems, are not commoditized, leading to significant variations in usage and outcomes. This is the message we will share with our customers and sales team as new advancements emerge.

Got it. I have one more follow-up regarding the capital environment and the discussions you're having. As you talk to institutions about their 2021 budgets, I'm curious if they are considering a two-year budgeting process or if it's different from their past approaches due to COVID. Additionally, what signs are they looking for to regain confidence and proceed with purchases given the ongoing uncertainty? Thanks.

Yes. Regarding the first part of your question about their budgeting, I don't have enough insight to provide a comprehensive answer. We believe they will undergo a reset for 2021, but I’m unsure if their spending levels will match those of 2020. There seems to be financial pressure on several hospitals due to COVID, which may lead to 2021 budgets being smaller than those in 2020. However, I lack detailed information on this.

Yes. I think the thing I would point to that I think is kind of a economics question for everybody is just going to be something to look at is they will make their estimates as to how fast folks will return and whether they want to accelerate, so that they have capacity available for dealing with the backlog. I think that will differ by hospital groups. So, some folks will have the capital capacity to lean in and see this as an opportunity to deepen their exposure or their presence in market. Others will feel conservative and will want to wait and see. So, I do not think it's going to be one size fits all in terms of how they do their financial planning. That was our last question. So, I'll conclude from here. In closing, we continue to believe there is 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 of care. 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 and their environment. Thank you for your support on this extraordinary journey. We look forward to talking to you again in three months.