Intuitive Surgical Inc (ISRG) — Q3 2021 Earnings Call Transcript

Good afternoon and welcome to Intuitive’s third quarter earnings conference call. With me today we have Gary Guthart, our CEO, Marshall Mohr, our CFO, and Brian King, our Treasurer. Before we begin, I would like to let you know that Philip Kim, our Head of Investor Relations for the last couple of years, has moved on to pursue his next opportunity. We appreciate his contributions and wish him well in his next endeavor. Joining us on the call today is Brian King, who has been our Treasurer for the last seven years. Brian will be expanding his responsibilities to include the role of Head of Investor Relations. Moving on, 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 10th, 2021, and Form 10-Q filed on July 21st, 2021. 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 in 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 third 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, I will discuss procedure and clinical highlights, and provide an update of our financial outlook, 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 team performed well in the third quarter in the face of pandemic-related headwinds. The rise of the Delta variant and stresses in some hospitals pressured the demand for surgery. Global supply chain disruption has yet to abate, necessitating redirection of internal resources to continue to meet our customers' demand. Despite these challenges, growth in the use of our products continued in the quarter and capital demand remained robust. Our new platforms advanced in their commercialization, their innovation, and in their clinical programs. Turning first to procedures, the increased COVID burden tempered the recovery we saw in the second quarter, particularly in the month of August. The impact of the Delta variant drove procedures in the United States below our expectations at the start of the quarter with run rate stabilizing in the last couple of weeks of September. Adoption continues in the United States, driven particularly by benign general surgery procedures including bariatric surgery, cholecystectomy, and hernia repair. A trend in malignant procedures remains solid, including prostatectomy, hysterectomy, lobectomy, and colon resection. Two trends that have emerged over the past few years are the increased use of da Vinci in benign procedures and rising use of our advanced instrumentation and targeted procedures. Both are the result of focusing on our customers’ needs and delivering product and economic solutions to match. Outside the United States, procedure performance varied as a function of regional pandemic impact. In China, growth in the quarter was strong and spanned multiple specialties reflecting continued adoption. In Japan and Korea, our procedure business remains healthy, with slight sequential procedure growth from Q2 to Q3, despite COVID-related surgery disruption. Germany, the UK, and France had reasonable year-over-year procedure growth and our customers are having success in diversifying procedure categories beyond urology. Regarding the capital environment, new system placements continued to be robust. The United States had an outstanding capital quarter with a balanced mix of hospitals new to da Vinci, as well as healthy incremental placements for existing customers and trade-ins of older technology. This performance has been driven by collaboration with U.S. integrated delivery networks, as they thoughtfully manage and expand the capacity of their da Vinci fleets. Elsewhere, China, Japan, and Europe had solid placements in the quarter, and our placements in Brazil showed strength. Turning to our newer platforms, our single-port system da Vinci SP had a solid quarter as we pursue additional indications. Placements of our flexible bronchoscopy platform Ion grew nicely sequentially in Q2 to Q3, powered by continued strong customer experiences in the field. Our finances were strong again this quarter though they followed an unusual path. System strength and favorable system sales mix drove strong system revenue. Procedures grew at the low end of our expectations as a result of the Delta variant. Instrument and accessory revenue per procedure moved down modestly as benign procedures continued to make up more of the procedure mix and our extended-use instrument program reaches equilibrium in the field. Our spending grew sequentially and year-over-year as we continue to invest in expanding our new platforms and digital programs, as well as build our go-to-market capabilities globally. Our expense growth was again modestly lower than planned, driven by some increase in time to fill open positions in a tight labor market, lower travel-related spending given the pandemic, and some under-spending in prototypes. We will continue to invest in programs that fulfill the mission and build the Company. Turning to our innovation efforts, we developed and deployed technology-enabled solutions to support our customers’ pursuit of better outcomes, better patient experiences, better care team experiences, and lower total cost to treat per patient episode. I would like to take a moment to overview the clinical status of our programs. For our da Vinci system, there are now over 9.7 million lifetime procedures performed with over 28,000 peer-reviewed clinical publications. Da Vinci X and XI now have over 70 representative clinical usages allowing broad use across multiple clinical specialties from urology to gynecology, thoracic surgery, general surgery, and transoral surgery. Tens of thousands of surgeons routinely use our multi-port systems. We continue to invest in our multi-port products, instruments, and services to further expand our capabilities and indications. Many surgeons continue to work with us to pursue new learning with several prospective studies ongoing. Our flexible bronchoscopy system, Ion, continues to build momentum clinically and commercially, with several presentations and manuscripts updating Ion clinical progress at the 2021 CHEST conference this weekend. As described in yesterday's press release, early clinical trial results point to outstanding capability allowing for definitive diagnosis of harder to reach body regions. Our teams are hard at work building our manufacturing and supply capabilities to meet rising demand. Our single-port system SP has a clinical database of 28 peer-reviewed clinical publications. There are currently several ongoing prospective studies for SP in Korea and the United States, including our IDE trial for colorectal indications. This quarter, we received FDA approval of our unit portal thoracic IDE. Broad SP adoption will be paced by additional regional and clinical clearances, which remain our focus for the SP program. Our digital solutions provide data-driven insights to surgeons, operative services and hospital administration. From virtual reality training to efficiency insights, to custom comparative outcomes analysis, these tools are now routinely employed by our customers and our teams to improve programs. Our analytics program supported thousands of customers in the quarter. Turning to machine learning, our teams are at the leading edge of data-based clinical science for surgery through our collaborations with leading academic centers, informing algorithmic and scientific discovery. Taken together, these programs allow our customers to quantify our collective impact on the quadrupling quality of care. Before turning the time over to Marshall, today we announced some changes in responsibilities of our senior executive team. These changes are the result of a structured process over the past few years, and they are driven by our need to support growth in our product lines, commercial reach, operational capabilities, and business infrastructure, as we scale to meet the global opportunity to advance minimally invasive care. Starting January 1st, 2022, our Executive Vice President and Chief Business Officer, Dave Rosa, will take on an important new role as Executive Vice President and Chief Strategy and Growth Officer, leading our efforts to identify and realize long-term business opportunities, continuing to build the value of our integrated product offerings, and ensuring our customers clearly understand the value of our ecosystem in creating successful, minimally invasive programs. Henry Charlton, currently General Manager of the U.S. and Europe, will succeed Dave as Chief Commercial Officer overseeing global commercial sales, regional marketing, and commercial enablement. Also, Marshall Mohr will take on an important new position as Executive Vice President of Global Business Services, leading Intuitive's continued growth in information technology and our enterprise process, data and systems, and global facilities. Jamie Samath, will succeed Marshall as Chief Financial Officer. They are each outstanding proven leaders and will report to me. We expect them to spearhead our efforts to achieve our mission and continue to position Intuitive as the first choice of our customers in a growing marketplace. I'll now turn the call over to Marshall, who will take you through our financial highlights in greater detail.

Good afternoon. I want to 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. Reconciliation between our pro forma and GAAP results is posted on our website. The information in our earnings release and within our prepared remarks reflects the 3-for-1 stock split completed earlier in October. Overall, third quarter procedures grew 20% year-over-year and reflect the impact of the Delta variant resurgence. COVID also impacted third quarter 2020 procedures, making year-over-year comparisons complicated. In the U.S., procedures grew 16%, reflecting the impact that COVID resurgence had on hospital resources regionally. The impact of the resurgence was most pronounced in August and early September, and regionally in the south and southeast. Later in the quarter, as COVID cases began to slow, procedures began to recover. However, it is difficult to estimate the extent to which this resurgence or future resurgences will impact da Vinci procedures. Year-over-year, OUS procedures grew 30% with the impact of COVID varying regionally. In Europe, COVID had a greater impact in Italy and France, and less in the UK and Germany. While there continued to be COVID hotspots within some of our Asia-Pacific markets, overall procedures in the region performed well. China growth in the third quarter continued to be far higher than other regions, primarily reflecting system installation growth over the past year. Relative to the beginning of the pandemic, many hospitals are able to better manage increased COVID patient hospitalization. However, staffing shortages and hospital supply chain issues are challenging some hospital capacities and could impact deferrable procedures including da Vinci procedures going forward. Jamie will provide additional procedure commentary later in this call. Key business metrics for the third quarter were as follows. Third quarter 2021 procedures increased approximately 20% compared with third quarter 2020 and decreased approximately 3% compared to the last quarter. Compound annual growth between the second quarters of 2019 and 2021 was 13.5%. Third quarter system placements of 336 systems increased 72% compared with 195 systems for the third quarter of 2020 and increased 2% compared with 328 systems last quarter. We expanded our installed base of da Vinci systems over the last year by 11% to approximately 6,525 systems. This growth rate compares with 8% last year and 10% last quarter. Utilization of clinical systems in the field measured by procedures per system increased approximately 9% compared with last year and decreased 6% compared with last quarter. Compounded annual utilization growth rate between the third quarters of 2019 and 2021 was 3%. Moving on to capital placements, system placements in the quarter reflected a continued trend of IDN multi-system purchases and were driven by procedure growth and hospitals upgrading in order to access our standardized and fourth-generation capabilities. Looking forward, we see the following capital revenue dynamics. Procedure growth drives capital purchases in many of our markets; to the extent that COVID impacts procedures, it will also impact capital purchases. The trading cycle has been a tailwind to system placements. However, as the installed base of older generation products declines, the number of trade-ins will decline over time. Leasing and alternative financing arrangements enabled customer access to our systems. While the percentage of systems placed under operating leases fluctuates quarter-to-quarter, we believe leasing will increase as a percentage of sales over time, which will result in the deferral of otherwise current revenue into future periods. Macroeconomic conditions created by COVID could regionally impact hospital capital spending and as competition progresses in various markets, we will likely experience longer selling cycles and price pressure. Additional revenue statistics and trends are as follows. Third quarter revenue was 1.4 billion, representing a 30% increase from last year and a 4% decrease from last quarter. The compound annual revenue growth rate between the third quarters of 2019 and 2021 was 12%. The year-over-year revenue increase reflected growth in both procedures and system placements. The decrease relative to the second quarter of 2021 reflects lower instrument and accessory revenue associated with lower procedures and increased leasing as a percentage of placements. Leasing represents 41% of current quarter placements compared with 35% last year and 33% last quarter. Leasing as a percentage of total sales has and will continue to fluctuate with customer and geographic mix. However, we anticipate more customers will seek leasing or alternative financing arrangements than reflected in historical run rates. 40% of systems placed in the third quarter involved trade-ins, which is consistent with the 40% last year and higher than the 38% last quarter. As customers continue to upgrade to fourth-generation capabilities, the population of installed SIs is decreasing, particularly in the U.S., where 97 trade-ins were completed in the third quarter, leaving an installed base of SIs of approximately 425 systems. As a result, we expect lower trade-out transactions over time. Trading activity can fluctuate and be difficult to predict. Third quarter average selling prices increased to 1.57 million from 1.55 million for both the third quarter of 2020 and the second quarter of 2021. Average selling prices will fluctuate with geographic and product mix. Consistent with historical patterns, we expect a higher mix of systems sold to distributors in the fourth quarter, which carry lower prices. We recognized 25 million of lease buyout revenue in the third quarter compared to 17 million last year and 26 million last quarter. Lease buyout revenue has varied significantly quarter-to-quarter, and will likely continue to do so. Instrument accessory revenue per procedure of $1,900 decreased slightly compared with $1,910 per procedure for the third quarter of last year, and decreased compared with $1,940 per procedure in the second quarter. The year-over-year change reflects increased usage of extended-use instruments, mostly offset by increased usage of our advanced instruments. The decrease from the previous quarter reflects customers continuing to adjust their instrument buying patterns to reflect the additional uses per instrument included in extended-use instruments. Ten of the systems placed in the third quarter were SP Systems. Our installed base of SP Systems is now 89, 10 in Korea, and 79 in the U.S. We continue our measured roll out of SP as we work on gathering clinical data to gain additional procedure clearances in the U.S. We placed 28 Ion systems in the quarter, bringing the installed base to 98 systems. There were approximately 2,000 Ion procedures completed in the third quarter. Ion system placements and procedures are excluded from our overall da Vinci system and procedure counts. Our rollout of Ion is progressing well. Outside the U.S., we placed 109 systems in the third quarter compared with 79 in the third quarter of 2020 and 115 systems last quarter. Current quarter system placements included 47 into Europe, 20 into Japan, and 17 into China, compared with 39 into Europe, 15 into Japan, and 12 into China in the third quarter of 2020. We also placed 9 systems in Brazil in the third quarter and now have placed 23 systems in Brazil over the past four quarters. Moving on to gross margin and operating expenses. Pro forma gross margin for the third quarter of 2021 was 71.3% compared with 70.2% for the third quarter of 2020 and 71.7% last quarter. The third quarter of 2020 included 23 million of service credits issued in conjunction with our customer relief program, higher period costs associated with lower production levels, and higher excess and obsolete inventory charges. The decline in gross margin relative to the second quarter primarily reflects product mix. Product and customer mix fluctuate quarter-to-quarter, which can cause fluctuations in gross margins. COVID has impacted global supply of semiconductors and other materials used in our products. While to date we've been able to secure supply necessary to ensure fulfillment of customer demand, our teams are expending significant time and effort to bridge future supply with demand. To date we've experienced immaterial component cost increases and freight expedition fees. However, global shortages could result in future supply disruptions as well as delayed development and regulatory activities. We also expect supply issues to result in higher production costs. Pro forma operating expenses increased 21% compared with the third quarter of 2020, and increased 2% compared with last quarter. The increase, compared to the prior year, reflects costs associated with higher headcount, increased variable compensation, and increased spending in areas impacted by COVID. Third quarter spending was below our expectations due to delays in headcount hiring and lower spending on activities restricted by COVID, including clinical development, marketing events, and travel costs. In addition, COVID delayed some R&D work resulting in under-spending on prototypes. We expect spending on activities restricted by COVID to increase as the impacts of the pandemic decline. We also expect spending to increase as a percentage of revenue as investments in headcount infrastructure and other support areas catch up to the growth of the business. Finally, we expect to continue to invest in expanding and accelerating our ecosystem of products and capabilities. Jamie will provide spend guidance later in this call. Our pro forma effective tax rate for the third quarter was approximately 24%. We recorded an expense of 11 million associated with periods prior to 2020 related to guidance recently provided by the IRS associated with stock-based compensation. We expect our pro forma tax rate for the fourth quarter to be approximately 21.5%. Our actual tax rate will fluctuate with changes in geographic mix of income, changes in taxation made by local authorities, and with the impact of one-time items. Our third quarter pro forma net income was 435 million, or $1.19 per share, compared with 334 million, or $0.92 per share, for the third quarter of 2020, and 477 million or $1.31 per share for the last quarter. Third quarter 2021 and 2020 included pre-tax gains of approximately 8 million and 62 million associated with investments in companies that resulted from development agreements entered into in prior years. I will now summarize our GAAP results. GAAP net income was 381 million or $1.04 per share for the third quarter of 2021 compared with GAAP net income of 314 million or $0.87 per share for the third quarter of 2020 and GAAP net income of 517 million or $1.42 per share for the last quarter. We ended the quarter with cash and investments of 8.2 billion compared with 7.7 billion last quarter. The increase in cash in the third quarter primarily reflected cash from operations and stock exercises. We did not repurchase any shares in the quarter. And with that, I'd like to turn it over to Jamie.

Thank you, Marshall. Our overall third quarter procedure growth was approximately 20% compared to growth of 7% during the third quarter of 2020. Q3 procedure growth reflected 16% growth in U.S. procedures, and 30% growth in all OUS markets. In the U.S., procedures in Q3 were adversely impacted by an increase in COVID-related hospitalizations due to the Delta variant. Procedures were particularly impacted in those states with relatively lower vaccination rates. As the number of COVID-related hospitalizations peaked and began to improve in September, we saw U.S. procedures start to recover. Q3 growth reflected relative strength in bariatric procedures, cholecystectomy, and hernia repair. In the more mature procedure categories, year-over-year growth in prostatectomy was strong relative to historical averages and benign hysterectomy grew in the low single-digits range. Third quarter OUS procedure volume grew approximately 30% compared with 9% growth for the third quarter of 2020. Third quarter of 2021 OUS procedures were driven by growth in prostatectomy and earlier stage growth in general surgery, gynecology, kidney cancer procedures, and thoracic surgery. China procedure growth remained strong and broad-based as a result of continued expansion of the installed base in the current quarter and the addition and training of surgeons new to the da Vinci platform. Growth in Japan was solid, but was impacted by localized lockdowns stemming from ongoing efforts to prevent resurgences of COVID. Growth in Korea was also solid, primarily driven by gynecology, urology, and head and neck procedures. A little more than half of the procedures in these three key Asian markets are outside of urology. In Europe, procedure growth varied by country based on the relative impact of the Delta variant and the impact of COVID-related mitigation measures. Growth in the UK and Germany was solid, with procedure growth in France and Italy impacted by reduced capacity for surgery as hospitals reserved resources for potential increases in COVID patients. During Q3, customers in the U.S. and Europe effectively consumed their remaining inventory of 10 life instruments following the launch of extended-use instruments in those regions in Q4 of last year. With this full adoption in the U.S., customers are benefiting from instrument accessories per procedure costs reducing by approximately 10% in lower acuity procedures such as cholecystectomy and hernia repair. In Europe, customers are benefiting from an even larger reduction in instrument accessory costs for target procedures. While recent procedure trends are confounded by the various waves of the pandemic, we believe based on customer feedback that the adoption of extended-use instruments is having a positive impact on targeted procedures. In our new platform, Ion procedures increased almost fourfold as compared to Q3 of 2020, driven by significant expansion of the number of systems with customers and an increase in usage in the existing installed base. Our single-port platform, which is gauged by additional regional and clinical clearances, showed solid performance with almost 50% year-over-year procedure growth. Now, turning to the clinical side of our business, each quarter on these calls, we highlight certain recently published studies that we deemed to be notable. However, to gain a more complete understanding of the body of evidence, we encourage all stakeholders to thoroughly review the extensive details of scientific studies that have been published over the years. During the quarter, Dr. Michael Kent from Beth Israel Deaconess Center, Harvard Medical School in Boston, Massachusetts, published results from a landmark multi-center Pulmonary Open, Robotic and Thoracoscopic Lobectomy or PORTaL study in the Annals of Surgery. This retrospective study sponsored by Intuitive compared lobectomy outcomes associated with open, VATS, and robotic-assisted da Vinci surgery with over 6,000 cases included in this analysis. After 1-to-1 propensity score matching, a comparison of open and da Vinci lobectomies with approximately 800 patients in each group, showed a two-day shorter length of stay, and a 9.5% lower rate of prolonged hospital stay associated with da Vinci lobectomies. The da Vinci cohort also had an approximately 8-minute shortened time for cases without a concomitant procedure. Post-operative complications were approximately 9% lower with the da Vinci robotic approach. Regarding the propensity score match comparison of minimally invasive approaches with over 1,700 patients in each group, the da Vinci approach evidenced a 1.1-day shorter mean length of stay, and a 6.1% lower rate of conversion to thoracotomy when compared to VATS, with the differences in conversion rates reported for each tumor stage in the analysis. The authors concluded in part, 'In this retrospective multi-institutional data analysis, both robotic-assisted and VATS lobectomy were associated with improved peri-operative outcomes compared to open lobectomy.' Robotic-assisted lobectomy was associated with additional differences compared to VATS, such as a reduced length of stay and conversion rate. In August of this year, Professor Umberto Bracale from the University of Naples Federico II in Naples, Italy published a systematic review with meta-analysis of transversus abdominis release (TAR) for ventral hernia repair, assessing short-term outcomes of the open and robotic-assisted approaches. The macroanalysis combined six studies, containing over 800 patients, of whom just over 200 patients underwent robotic-assisted da Vinci surgery, and just under 600 patients who underwent the open approach. Results of this macroanalysis found that robotic-assisted approach was associated with a 0.4-day shorter length of stay, a 64% lower risk of post-operative complications, and a 79% lower risk of developing systemic complications. Readmission and reoperations were comparable between both groups. The authors concluded in part, 'Based on the data from the meta-analysis, the robotic approach for TAR seems safe and feasible, even in more difficult cases. Robotic-assisted TAR shows the common advantages of minimally invasive procedures that improve short-term outcomes with significant benefits in the early post-operative period.' Lastly, as noted in yesterday's press release, preliminary results from the precise study evaluating outcomes associated with the Ion endoluminal system will be presented at the Annual CHEST Conference. This preliminary analysis of 69 subjects showed a diagnostic yield of 83% with a sensitivity of malignancy of 84% to 88% from the biopsy of peripheral pulmonary nodules with a mean size of 17 millimeters. These initial outcomes regarding the performance of the Ion system are encouraging and we look forward to the full study being published in the second half of 2022. I will now turn to our financial outlook for 2021. During Q3, we experienced a more challenging supply chain environment with a deterioration in on-time delivery performance from our suppliers. We also saw increased supply chain costs. While this did not have a material impact on our operating results in Q3, the outlook we are providing does not reflect any potential significant disruption or additional costs related to supply constraints. Starting with procedures, last quarter we forecast 2021 procedure growth of 27% to 30%. Given Q3 results and the impact of the Delta variant, we are now narrowing our full forecast and expect full-year 2021 procedure growth of 27% to 29%. This procedure outlook does not reflect a significant impact from staffing shortages or a resurgence of COVID-19. The high end of the range assumes the COVID-19 related hospitalizations in the U.S. continued the recovery that began in September, and the COVID-related mitigation measures in OUS markets continued to ease. Turning to gross profit, on our last call, we forecasted our 2021 full year pro forma gross profit margin to be within 70.5% and 71.5% of revenue. We now expect 2021 pro forma gross profit margin to be within 71% and 71.5% of revenue. This range does not reflect any significant disruption associated with the current supply chain challenges. Our actual gross profit margin will vary quarter-to-quarter, depending largely on product, regional, and trade-in mix, the impact of product cost reductions in manufacturing efficiencies, and competitive pricing pressure. With respect to operating expenses, on our last call, we forecasted to grow full-year pro forma 2021 operating expenses between 17% and 21% above 2020 levels. We are refining our estimate and now expect a full-year pro forma operating expense growth to be between 17% and 19%. We expect our non-cash stock compensation expense to range between 450 and 460 million in 2021. With regard to pro forma other income, which is comprised mostly of interest income, we expect a range of between 50 and 55 million in 2021. Finally, with respect to income tax, we expect our Q4 2021 pro forma tax rate to be approximately 21.5% of pre-tax income. That concludes our prepared remarks. We will now open the call to your questions.

Hello. Thanks and good afternoon. I want to come back to the supply chain comment first. Just ask you how visibility looks for componentry now versus maybe a little bit earlier this year, what lead times look like now, it sounds tighter, just a little more color around that and to what extent have you already been able to either double order, for lack of a better term, I guess, or stockpile this year, and how viable of an option does that remain for you?

Yes, Amit, it's Marshall. The supply chain environment has worsened and become more challenging over time. We have invested significant resources to address these shortages, and so far, it hasn't impacted our ability to meet customer demand. However, there is a risk, and it's important to acknowledge that. Regarding costs, we mentioned some material cost increases last quarter, which were not substantial. We also incurred some fees for expedited freight, but those were not material either. Looking ahead, we anticipate rising costs that could affect our margins in the fourth quarter or the first quarter. It's difficult to predict exactly how much at this time. Overall, it's a challenging environment right now.

I believe our supply chain and manufacturing teams are performing well. They are operating in a challenging macro-environment, which will improve when the time is right.

Good afternoon. Thanks for taking the questions. Just two for me: one on Ion, Gary, and then one on procedures. So the precise data look good. Yesterday, I guess the question is do you think the early data suggests your shape sensing technology can lead to better yields and lower pneumothorax rates versus your main competitor, which uses a different technology? And how much of a catalyst do you think the data from yesterday will be for Ion? And I just have one follow-up.

I believe that the overall architecture, the shape sensor, and the decision to create a soft catheter capable of going deep into the target area have proven to be very effective for us. The data is compelling, especially when compared to Monarch, and we feel confident about our position. These results are having a positive impact in the market. Our customers are providing excellent feedback, and we continue to invest in both the operational and innovation aspects of that program. Overall, we are very optimistic about it.

Thanks for that, Gary. And then on procedures, I guess it sounds like most or if not all major markets are moving in the right direction. I'd love to hear a little bit more color, particularly on the U.S. and it sounds like Jamie, and by the way congratulations on the new role, it sounds like we should expect normal seasonality in Q4. When we look at 2018 and 2019, the sequential procedure growth was very similar worldwide U.S. and OUS, is it possible that it could be a little stronger given that we're seeing a recovery? Thanks for taking the question.

Thank you, Larry, by the way. I would say this, what is reflected in the high-end of our procedure guidance are really two things. Those COVID-19 related hospitalizations in the U.S. continued the recovery that began in September, and that was in the middle part of September that that recovery commenced. So there's a progression there that continues through Q4. It also assumes that the mitigation measures in OUS markets, which are typically a little more conservative than we see in the U.S., continued to ease, and those also started to ease in September. At the low end, what we see is a slower recovery in the U.S. from what we saw in Q3 and choppiness OUS in terms of the on-off of mitigation measures in various markets. And so that range of 27% to 29% that we provided, really it's just a function of the rate at which we recover from what occurred in Q3 with the Delta variant. That was a little color on that.

Just jumping in. I think there are two things that are going on. One is, what will pace us is hospital availability for surgery. It's not infection rate, it's going to be resourced consumption at the hospital and their ability to pivot their resources, both human capital and facilities, back towards surgery. As you double-click on that, some of it is regional variance, but some of it is actually just hospital system variance. There are differences in how each hospital has managed it. So it's hard to generalize, I think, beware of averages.

Got it. Thanks for taking the questions.

Thank you and good afternoon. Just to follow up on that last question. So for Jamie or Marshall, I guess, therefore, do the procedure volumes that you are forecasting for Q4, is that assuming improving year-over-year growth in Q4 versus the year-over-year growth in Q3, or about the same?

Yes, I believe the guidance we provided suggests that at the lower end, year-over-year growth for Q4 will be 15%, and at the upper end, it will be 22%. When you compare this to what we reported in Q3 of 2020, it shows a range that is both above and below our Q3 results. This reflects the year-over-year comparison based on the Q4 2020 base, as well as various scenarios regarding the actual procedures in Q4.

Okay. Thank you for that. And then just one quick one for Gary, I was struck by your comments in your opening remarks about how your multi-port systems now have 70 clinical uses. And I was curious, could you elaborate on that a little bit? Is that 70 different surgical procedures or how are you characterizing clinical usage? I found that an interesting number.

Yeah, that's right. It's the number of different procedures that is described in our labeling as to where this might be used in the body or in sub-specialties. So if you look in urology, there's a handful of different procedures that it can be used for and likewise gynecology general surgery. And as you just walk through, that's a set of procedures for which we've engaged the agency and put in our labeling. So they are quite broadly applied.

Okay, my model only has 10, so I guess I have some work to do. Thank you.

You got 10. And we're not done. I think surgeons and we and regulatory agencies around the world continue to explore where else technologies like ours can go.

Good afternoon. Could you elaborate a bit more on the comments regarding the staffing shortage? I know this may not be fully reflected in guidance, but what level of risk do you think this poses? How widespread is the issue? Clearly, the labor market is very tight, but is this something you're witnessing across most of your customers, or how would you describe it?

On the customer side?

Correct.

Yeah. We've had anecdotal inputs from some customers that they're facing staffing shortages. Other customers have said to us that they're able to overcome those risks. And so given the mix dynamics and the lack of clear evidence in terms of its impact on procedures, what we've said is the remainder of the year guidance does not reflect any significant disruption from the last staffing shortages, meaning that there's no deterioration in the phenomena for hospitals.

Another aspect you mentioned was the selling cycle. It's still early regarding competition, but given the CE Mark for Medtronic, I’m interested in what your sales representatives are saying about initial interest and potential demonstrations.

Yeah. I think with several of the other systems that are on the market, and as you say, the most recent one, we see early engagement. Those first engagements tend to be a placement of clinical trial sites and training centers and so on. So they are not surprising. They're their early access programs to get into the market up. So far there are far more claims about what these new systems will do, and I think the reality is time will tell the genuine systems. I think evidence has to be generated to backup those claims. And so far, we don't see anything yet that looks like evidence. Just the said claims, so we'll keep serving our customers, doing what we can to make sure that they can achieve the quadrupling outcomes. And we'll see how other companies do.

Maybe last one, we have we always get the question about new system for you guys. It feels like that you picked up a little bit lately. You're putting up good system numbers. I'm curious in your view, is that something the market needs right now? What do you wanted to say, if anything at all, about the appetite for another system from you guys or anything you may be working on?

We believe there is significant potential for innovation across all our platforms. Whether it's with multi-port or Gen 4, we are continually innovating. We've made considerable progress with Gen 4, and our latest models, X and XI, reflect that evolution. We're also investing in both small incremental advancements and larger opportunities with multi-port technology. As we prepare to introduce these innovations, we will keep you informed. We've launched SP and are continuing to develop it, securing global approvals for new products. Likewise, Ion is performing well in its initial application, and we see opportunities for it in additional areas within the body, which we will explore and share over time. You can expect ongoing innovation from us. While we don't feel an urgent need for change, we are innovating at a pace that aims to significantly enhance the quality of care. Our focus is not on a retail strategy but on creating solutions that improve the quality of care and enhance the customer experience.

Good afternoon, everybody. One focused question and then a larger picture when Gary, in your opening comments, you mentioned that extended life instruments, if I understood, have reached, I think, the operational equilibrium. I just want to make sure I understood what you were implying that suggest that the initial phase of adoption has happened and we're going to see better growth excluding the sort of initial stocking ASP impact. And is there a second round of instruments? This has been so successful. How should we think about all that?

Well, with regard to what I meant by equilibrium, it was really that the initial stocking orders and the transition from older instruments to newer is largely taking place, but I'll let Jamie answer that more carefully than I just did.

Actually, I think that's right, Gary. There's a period of time when as we launched extended-use instruments, customers in the U.S. and Europe in particular were ordering those instruments at a rate higher than their usage as they consume the 10 life instruments that took some time to gain parity. And so you saw in the end of positive benefit to instrument accessories per procedure in Q1 and Q2. Q3 for those regions that largely came to parity. We did launch extended-use instruments later in Asia and some of the rest of the world countries. And so they are still working their way to parity. So there will be small downward pressure on instrument accessories per procedure holding everything else equal as they get to parity looking forward.

The second half of your question, just to finish it, you talked about are we done, is that it for these kinds of ideas and extended-use instruments and da Vinci, these were design and process investments that we made to pursue what we think of is the virtuous cycle. The idea that if we can improve quality and lower costs for our customers, that they can use our products in more and different procedures. And we're not done doing that. It may not look exactly like what we've done in the past, there are other things that we think we can do with it. Allow them high-value systems at different price points, or value instruments at different price points, so that line of reasoning has not exhausted.

And Gary, I have one final overarching question. You've established two new senior leadership positions for Marshall and Dave Rosa. Could you elaborate on your reasoning behind this? Is it simply that Intuitive has become so large and complex that to thrive in the future, more senior leadership is necessary? What are your expectations for Marshall and Dave in the coming years? Thank you.

Thank you for that question. Over the last few years, we've had an expansion of business and expansions of opportunity, both are happening. On the business side, we want to make sure that we serve our customers at a very high-quality quickly in local regions where we can, and that we take advantage of a lot of the systems’ enterprise data that we have to help drive the business and help our customers. And that's something that Marshall has been doing and I've asked them to double down on that to make sure that we can really take advantage of our global scale and serve our customers in our business really well at that scale. And it's an opportunity and it's real work. The flip side is I have never been more positive about the long-term opportunity for companies like ours that can master the kinds of things that we have to do to help minimum invasive care and interventions. And so there's real opportunity there. And I'd like us to get there quickly to have the agility and focus to be able to open new ideas and new architectures and new markets. And I can think of nobody more qualified to lead that effort than Dave Rosa, who has visited just about all parts of the Company. He started off as an engineer and scientist and has done many things for us. So we're really trying to get the advantages of scale to help our global customer and also be agile in capitalizing on growth opportunities as we see them.

Hey. Thanks for taking the question. I was hoping maybe, Marshall, you could talk a little bit more about the supply chain issues from the standpoint of just helping us get visibility or understand how close you are to the edge there. And meaning, you keep calling out this risk that exists but it sounds like you've been doing a really good job with managing things so far. Is there any benchmark numbers you can give us to help us understand what the lead times are in some of the key things that could get disrupted or the likelihood that it will happen? Is it getting better or is there a real risk of you not being able to ship some product, is I guess the core of the question?

I wouldn't say the situation is improving. In fact, I believe it remains challenging and will likely persist for some time. The semiconductor issue, which has been widely discussed, is affecting not only the auto industry but also computers. If you've tried to order any home goods that use chips, you're likely aware of the issue. Resolving this will take a significant amount of time, as building fabrication facilities and producing products is a lengthy process. Therefore, I anticipate that these challenges will extend well into next year based on what we've been hearing. Our team has done a commendable job thus far in managing the situation. While there are ongoing issues, our team has managed to address them. I can't provide specific statistics on the frequency or implications, but anecdotally, some lead times have exceeded six months. This doesn't apply to all our products, nor is it a universal average, but in certain cases, it is quite extended. It's important to highlight this as a risk for your awareness.

Thank you for that. I thought maybe just to follow up on the supply question was just a little bit more on just inflationary headwinds generally. And Marshall, just how you're seeing labor costs growth today versus early in the year or more normal times and raw material cost growth versus normal times. It's just hard for us to start thinking about these things along with what you commented on the supply chain for next year is just qualitatively as we start to think about where operating margins might go.

We've seen some cost increases. Again, they haven't been that significant. And frankly, our teams have done a marvelous job of sorting with efficiency and effectiveness to offset those increased costs. But we're hearing from suppliers that they're going to raise their prices. And so we're saying that, hey, we expect that costs will go up more. Not sure. I want to say that the inflation where it is has hit us and am here to stay, but we are seeing some suppliers raise costs.

Thank you for taking my question. Gary, I have two quick ones for you. Regarding the precise study showing 80% diagnostic resolution, is that sufficient? When we compare it to other studies, it looks like a solid number, but I'm wondering when the market will respond to these new figures, and if we might see an increase in the adoption of Ion. Also, just a quick question about Q3. I know you've mentioned the Delta variant, but did any labor shortages affect Q3? Historically, we haven't seen pandemic impacts, and Intuitive has outperformed its peers, so I'm curious if there was something else occurring that could explain possible excesses in Q3. Thank you.

Okay. On the first one, in terms of diagnostic yield, you had said 82%, and I guess what I'd advise everybody is there are a couple of numbers that are important and they stay linked together. And that is what the size of the lesion is? And then what's the positive diagnostic rate, the ability to definitively diagnose? That's what the interventional pulmonologists are looking at. So the bigger the lesion, if it's a 3-centimeter lesion, your diagnostic yield rate is going to go up, your definitive because it's easier to hit. So you got to look at both numbers. It's not a single metric. So 82 for smaller lesions is leading, as far as I can tell for endobronchial approaches for that approach. Some folks can get to higher yield rates, but they are hitting bigger targets. So you need to look at both, and that's what I encourage you to do. The second thing that I advise you is that there are other ways to examine or get a biopsy. There can be outside the body, CT-guided needle biopsies, and those outside the body CT-guided needle biopsies have high success rates at gathering the tissue, but they have a lower safety profile than the endobronchial approach. So there's a third dimension, which is did you get the tissue you needed to get a definitive diagnosis? How big was the lesion you were trying to target? Then what was the complication rate? And we think that Ion is really good at managing all three of those relative to competitive approaches, and we're seeing a nice uptick as a result. And is that a tipping point? We'll see. So far, so good. That's what we had expected. This kind of performance, that's what we were targeting. We're pleased to see it being borne out over multiple sites and multiple customers, and we think that's going to be helpful. With regard to your second question, you were talking a little bit about are we seeing an unusual or more aggressive slowdown because of Delta, then perhaps others. What I'd encourage you to think about there is where in the world everybody is exposed and where they are seeing their growth. So in our case, we have a certain regional profile where our procedures are being done. Other companies may have much bigger exposure to say markets or countries that have a lower impact having to do with Delta. Frankly, I think it's as simple as that, but time will tell on that as well. So let's go ahead and conclude. That was our last question. 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 a 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 falls 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 speaking with you again in three months.