Intuitive Surgical Inc (ISRG) — Q1 2022 Earnings Call Transcript

Good afternoon and welcome to Intuitive's first quarter earnings conference call. With me today we have Gary Guthart, our CEO; and Jamie Samath, CFO. Before we begin, I would like to inform you that comments mentioned on today's call may be deemed to contain forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in our Securities and Exchange Commission filings, including our most recent Form 10-K filed on February 3rd, 2022. 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 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 first 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. Jamie will provide a review of our financial results, then I will discuss procedure and clinical highlights and provide our updated financial outlook for 2022. 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. In the first quarter, procedure demand for our products was healthy recovering where COVID receded. Drivers of procedure performance included general surgery in the US and non-urology procedures outside of the US, which are our areas of focus. Regardless of the health of procedure demand, we were challenged by environmental stresses including regional waves of COVID, staffing pressure at hospitals, component and raw material availability, and logistics delays. While it's difficult to forecast how long these headwinds will persist, our teams are working hard to meet the challenge. In the quarter, da Vinci procedures grew 19% compared to the first quarter of 2021. The use of da Vinci in general surgery in the United States grew nicely, led by bariatric procedures, cholecystectomy, hernia repair, and rectal surgery. Lobectomy growth was also healthy. Outside the United States, the UK, China, Japan, Germany, and Italy grew above our quarterly average growth rate, but I will note that some countries saw the beginnings of COVID slowdowns later in the quarter, in particular, China and Korea. International use of da Vinci is diversifying beyond urology in several countries with growth in oncologic procedures in thoracic surgery, gynecology, and general surgery. In Japan, MHLW increased reimbursement for robotically assisted gastrectomy and added another eight procedures to reimbursement coverage in April, bringing the total number of covered da Vinci procedure types to over 25 in Japan. In our flexible robotics program, Ion procedures grew approximately 350% in Q1 compared with Q1 2021, reflecting continued strength in adoption and utilization of the platform. Turning to capital, our team installed 311 da Vinci systems in the quarter compared with 298 systems in Q1 2021, bringing our total clinical installed base to 6,920 da Vinci systems. Placements varied by region with the UK standing out with a strong placement quarter. Capital placements have been historically lumpy, and after several quarters of capital strength, we're seeing some near-term softening of our capital placement pipeline in the US. Contributing factors may include a pull-forward of Q1 2022 demand into Q4 2021 due to customer budget utilization at year-end, a reduction in the number of third-generation da Vinci systems available for trade-ins, and an overall tightening of hospital finances. With the three-year CAGR and procedures of 15% from Q1 of 2019 to Q1 of 2022 and installed base growth of 11% over the same period, utilization of installed systems continues to climb through the pandemic and in the first quarter. This is increasing the value derived from the existing installed base for our customers and for us. Over the mid-term, capital demand in mature robotic-assisted surgery segments is a function of procedure demand moderated by utilization growth. Jamie will give regional capital trends, and Brian will give a more detailed procedure review later in the call. As we exit the first quarter, we continued to invest in global expansion, innovation initiatives, and our business infrastructure. Our spending in the quarter was roughly in line with our target. In instruments and accessories, we received Chinese NMPA clearance for our 45mm and 60mm SureForm staplers, our Vessel Sealer Extend, and our Endoscope Plus. These products support the utility of our Xi systems for several procedures, particularly general and thoracic surgeries. Turning to Ion, we submitted our EU medical device regulation application for the platform to allow the entry of Ion into Europe. Our teams are also building production capability and capacity, and making improvements to customer workflow planning software and reprocessing efficiency. In digital products, the My Intuitive app community tripled year-over-year and is now available in the US, Japan, Germany, France, United Kingdom, Ireland, and Switzerland with launches set for Italy, Spain, and India in Q2. Building on our Orpheus technology, our teams in Israel and the US have created Intuitive Hub, a unified hardware and software solution for the operating room. Intuitive Hub enables OR teams to capture, edit, and share video clips from clinical procedures and collaborate virtually using existing workflows and Intuitive systems. In the quarter, we launched an upgraded interface to da Vinci systems that allows for automated video capture with integrated procedure annotation for key events, creating convenient video storage and review for each case. Customer feedback for this integration has been encouraging. Across the installed base, the number of procedures in which Intuitive Hub was used grew approximately 60% year-over-year. To our goal of adding Iris anatomical models, we're in conversations with the FDA on how best to characterize some of its core AI technology, which will require a resubmission of our 510(k) for the next set of segmented organ models. Finally, the installed base of our virtual reality training simulator SimNow grew 33% in the quarter compared with a year ago. For our single-port program da Vinci SP, we began the launch of our next-generation SP endoscope which includes our Firefly Fluorescence Imaging technology and has 65% longer life. We also launched our next-generation core SP instruments that can apply higher forces during surgery and are more durable. Feedback on both has been encouraging. In Japan, we submitted our da Vinci SP for clearance to PMDA, seeking broad indications. We continue to pursue additional indications for SP in the US, which is important for broader adoption, with an ongoing IDE trial in colorectal surgery, and an approved IDE for thoracic surgery. COVID and some site-specific delays have slowed our progress in our colorectal trial. We're working hard to expand the number of participating sites to accelerate its completion. Stepping back, for 2022, our top priority is to support, supply, and train our customers as they navigate a challenging environment. We are also focused on helping general surgeons in the United States adopt our technologies and diversifying our business outside the United States beyond urology and executing on our new platforms and digital tools.

Good afternoon. I will describe the highlights of our performance on a non-GAAP or pro forma basis. I will also summarize our GAAP performance later in my prepared remarks. A reconciliation between our pro forma and GAAP results is posted on our website. Overall, Q1 results reflected approximately 19% procedure growth as compared to the first quarter of 2021 and system placements of 311 systems, resulting in an expansion of the installed base of da Vinci systems of approximately 13%. As a result of our procedure and capital performance, Q1 revenue increased by 15% year-over-year. Key business metrics for the first quarter of 2022 were as follows. Within the 19% procedure growth, procedures in the US increased 16% and OUS procedures grew by 25%. Procedures in the US were impacted in January by the significant number of hospitalizations related to the Omicron variant. As rates of COVID-related hospitalizations declined in February and March, da Vinci procedures recovered quickly. On a three-year compound annual growth rate basis, first quarter procedures grew approximately 15%. First quarter system placements of 311 increased 4% from the 298 systems placed last year. The number of systems placed in conjunction with the trade-in of an older generation system declined by 18% from the first quarter of 2021. That decline was entirely driven by the US. Utilization of clinical systems in the field, measured by procedures per system, increased approximately 6% compared to last year. Using a three-year CAGR, first quarter utilization grew 4%. During the quarter, the supply chain environment continued to be challenging and remains dynamic. In Q1, we continued to experience constraints in our ability to meet customer demand, and as a result, on-time delivery performance to our customers was lower than we have experienced so far during the pandemic. In Europe, recently, we have experienced some geographically limited delays in fulfilling orders for some da Vinci instruments and accessories. These delays were due to a combination of the global supply chain and logistics issues, including our freight forwarder's unanticipated shutdown of its computer system. While these constraints did not have a material impact on our Q1 financial results, risks associated with potential disruption to our manufacturing operations and our ability to supply certain products to our customers remain significant. During the quarter, we also experienced higher logistics costs and manufacturing inefficiencies that impacted our gross margin. US procedure growth of 16% over Q1 of 2021 reflected continued relative strength in bariatrics, cholecystectomy, and hernia repair. In Europe, we experienced strong growth in the UK, reflecting in part the significant adverse impact of COVID in Q1 of 2021. Procedure growth in the UK also reflected strong early-stage growth in hysterectomy, colorectal, and thoracic procedures. Procedure growth in Germany and Italy was also strong while procedure growth in France was adversely impacted by COVID-mitigation measures in the first part of the quarter. Overall procedure growth in Asia was solid with growth across a broad set of procedure categories. Q1 procedures in China and Korea were slightly lower than our expectations given the impact of the Omicron variant later in the quarter. Procedure growth in Japan was strong reflecting some recovery in urologic procedures and strong growth in rectal hysterectomy and thoracic, key procedures that were granted da Vinci reimbursement in April of 2020. The impact of the Delta variant in Q3 of last year and the impact of the Omicron variant in this past quarter highlight the continued risk of future COVID waves and the associated significant risks to the number of da Vinci procedures that may be performed. Brian will provide additional procedure commentary later in this call. As Gary indicated, during the quarter we experienced a softening in our US capital pipeline, which we expect to impact system placements in the near term. In the US, we placed 186 systems in the first quarter, lower than 190 in Q1 of 2021, reflecting a decline of 28 systems associated with trade-in transactions, partially offset by increased placements to greenfield customers. The remaining installed base of SI systems in the US is approximately 268 systems. Outside the US, we placed 125 systems in the first quarter compared with 108 in the first quarter of 2021. Current core assistant placements included 78 into Europe, 19 into Japan, and nine into China compared with 59 into Europe, eight into Japan, and 23 into China in the first quarter of 2021. We placed 30 systems in the UK in Q1, driven in part by the timing of government budget cycles. We do not expect to place similar levels of systems in the remainder of 2022 in the UK. Capital performance in Japan was driven primarily by greenfield accounts and some existing customers adding capacity in anticipation of the eight additional procedure reimbursements taking effect on April 1. System placements in China were moderately impacted by longer logistics cycle times as a result of lockdowns in response to increased COVID cases. As of the end of Q1 2022, there were 55 systems remaining under the current quota in China, which may also be available to competitors that have received local regulatory clearance. Globally, trade-in transactions represented 35% of placements in the quarter compared to 38% for the full year of 2021 and 48% for the full year 2020. Given the lower number of older-generation systems in the field, we expect the volume of trade-ins to be significantly lower in 2022 as compared to 2021. Hospitals continue to experience financial and operational pressures as a result of staffing shortages, the supply chain environment, and resulting inflation. Since the start of the pandemic in 2020, the impact of COVID has placed a significant burden on hospitals. The financial pressures our customers have faced have been partially mitigated by government funding, such as the approximately $178 billion of CARES Act and other relief made available to hospitals in the US. The rising interest rate environment increases debt servicing costs and may make access to new debt more challenging. To the extent that hospitals continue to face financial pressures, reductions in government funding, and higher interest rates, hospital capital spending may be adversely impacted. In addition, as competition progresses in various markets, we will likely experience longer selling cycles and price pressure. Additional revenue statistics and trends are as follows. Total first quarter revenue was $1.49 billion, an increase of 15% from last year. Leasing represented 35% of Q1 placements, compared with 37% last quarter. The slightly lower first quarter lease mix primarily reflected the mix of customers who prefer to purchase systems. While leasing will fluctuate from quarter to quarter, we continue to expect that the proportion of placements under operating leases will increase over time. First quarter system average selling prices were $1.54 million, higher than the $1.45 million last quarter. The sequential increase was primarily driven by a lower mix of bulk buy transactions with large customers and a favorable product mix, in particular, a higher proportion of Xi dual system placements in the quarter. We recognized $16 million of lease buyout revenue in Q1, compared with $26 million last quarter, and $19 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 was approximately $1,870 per procedure, compared with $1,940 per procedure in the fourth quarter of 2021, and down 4% from the $1,950 realized in the first quarter of last year. The year-over-year decrease primarily reflects the benefit of stocking orders in Q1 of 2021 associated with the launch of our extended use instruments program in the US and Europe, and an unfavorable FX impact from the stronger US dollar. The sequential decline primarily reflects lower stocking orders associated with lower system placements, hospital ordering patterns, and a small unfavorable impact from FX. We placed 34 Ion systems in the quarter, as compared to 14 Ion placements in the first quarter of last year. The installed base of Ion systems is now 163 systems, of which 70 are under operating lease arrangements. First quarter Ion procedures of just over 3,900 are up over 4x compared to the first quarter of 2021. Seven of the systems placed in the first quarter were SP systems, including three systems placed at customers in Korea. Our installed base of SP systems is now 106. First quarter SP procedures grew approximately 36% year-over-year with approximately 50% growth in transoral procedures, a small but high-value segment. Growth of the SP platform will continue to be gated by additional clinical indications and clearances in the market beyond the US and Korea. Moving on to gross margin and operating expenses. Pro forma gross margin for the first quarter of 2022 was 69.8%, compared with 71.8% for the first quarter of 2021 and 70.1% last quarter. Pro forma gross margin was lower than last quarter, primarily as a result of higher logistics costs and increased fixed costs relative to revenue as we invest in our infrastructure and manufacturing capacity to serve our long-term needs. While net inventory grew approximately $66 million quarter-over-quarter, there are still a number of components and products that are below our targeted levels. Pro forma operating expenses increased 26% compared with the first quarter of 2021. The increase in first quarter operating expenses from a year ago reflected an increase in headcount, increased variable compensation, and higher customer-facing costs, customer training, travel costs, and marketing programs. As of the end of Q1, we had just over 10,500 employees, an increase of 26% from the first quarter of 2021, or an increase of 20% on a three-year CAGR basis. Of the approximately 2,100 employees we have added over the last year, approximately 900 are manufacturing employees. Capital expenditures in Q1 were $95 million, primarily comprised of infrastructure investments to expand our facilities' footprint, increase manufacturing capacity and automation of certain production lines. Our pro forma effective tax rate for the first quarter was 23.3%, slightly above our expectations primarily due to certain discrete tax items. Our pro forma tax rate was above the 22.2% for 2021, primarily due to a previous change in US tax law that became effective on January 1st, 2022. Our first quarter 2022 pro forma net income was $413 million or $1.13 per share, compared with $427 million or $1.17 per share for the first quarter of 2021. I will now summarize our GAAP results. GAAP net income was $366 million or $1 per share for the first quarter of 2022, compared with GAAP net income of $426 million or $1.17 per share for the first quarter of 2021. 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, amortization of intangibles and gains and losses on strategic investments. We ended the quarter with cash and investments of $8.4 billion, compared with $8.6 billion as of December 31st, 2021. The sequential reduction in cash and investments in the first quarter primarily reflected share repurchases, capital expenditures, and unrealized losses on interest-bearing investments classified as available for sale, partially offset by cash from operating activities and proceeds from employee stock plans. During the quarter, we repurchased 398,000 shares at an average price of $268 per share for a total expenditure of $107 million. And with that, I would like to turn it over to Brian, who will discuss clinical highlights and provide our updated outlook for 2022.

Thank you, Jamie. Our overall first quarter 2022 procedure growth was 19% compared to 16% for the first quarter of 2021. The three-year compound annual growth rate was 15% between the first quarter of 2019 and first quarter of 2022. First quarter 2022 procedure growth benefited from 140 basis points from one additional workday in the quarter. In the US, first quarter 2022 procedure growth was 16% year-over-year, compared to 14% for the first quarter of 2021 and 16% last quarter. On a three-year compound annual growth basis US procedure growth was 13%. In the US, first quarter growth was again driven by growth in procedures within general surgery. Bariatrics, cholecystectomy, and hernia repair were the largest contributors to procedure growth while growth in foregut and rectal resection were also strong contributors. Outside of the US, first quarter procedure volume grew approximately 25% compared with 23% for the first quarter of 2021 and 28% last quarter. On a three-year compound annual growth basis, procedure growth was 20%. In Europe, we experienced strong growth in the UK, Italy, and Germany, partially reflecting the disruption caused by COVID in the first quarter of 2021. In the UK, procedure growth was strong in general surgery and gynecology categories supported by early-stage growth in hysterectomy, colorectal, and thoracic procedures. Procedure growth in Germany and Italy was also driven by procedures outside of urology with growth driven by colorectal, hysterectomy, and thoracic procedures. Capital placements were also strong in the UK with the placement of 30 systems, the highest number of systems placed in the UK in a single quarter, driven in part by government funding and the trade-ins of older-generation systems. In Japan, growth in general surgery, gynecology, and thoracic continued to be strong with robust growth specifically in benign hysterectomy, gastrectomy, and lobectomy. In addition, urologic procedures specifically prostatectomy and partial nephrectomy both experienced solid double-digit growth reflecting a recovery when compared to the prior year which was constrained by COVID. In China and Korea, first quarter procedure growth was solid but slightly below expectations as we saw a resurgence in March of COVID infections, regional lockdowns, and hospitalizations which negatively impacted procedure volumes. In China, growth in urology was solid in particular with growth in prostatectomy, nephrectomy, and partial nephrectomy. We continue to see broad-based growth in general surgery, thoracic, and gynecology as well. As we enter the second quarter this year, we are seeing the negative impact on procedure volume as a result of continued regional lockdowns. Now, turning to Ion, our robotic-assisted and alumina platform focused today on minimally invasive lung biopsy procedures. First quarter 2022 Ion procedures totaled just over 3,900 in Q1 2022, an approximately 350% increase over the prior year and 34% over the prior quarter. Ion system placements were also strong ending Q1 2022 with 163 installed systems, growing approximately 225% over the prior year. Now, turning to the clinical side of our business. Each quarter on these calls we highlight certain recently published 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. During the quarter, Dr. Peres Shaw along with colleagues from the Robert I. Grossman School of Medicine at New York University and in collaboration with Intuitive published a real-world body of evidence assessing open conversion rates during minimally invasive surgery using laparoscopic, thoracoscopic, or da Vinci robotic surgery across 10 common procedures for benign or malignant conditions. Utilizing the premier health care database, this study included over 275,000 adult patients who between January 2013 and September 2015 underwent a minimally invasive procedure including hysterectomy, sigmoidectomy, right colectomy, ventral or inguinal hernia repair, partial nephrectomy, lobectomy or low anterior resection. Overall, a 5% conversion to open rate for the MIS approach was observed across all procedures with a range of 1% to 24%. Converted-to-open patients were associated with a 1.8-day longer length of stay, 1.7 times greater risk of readmission within 30 days of the procedure, and a significantly higher in-hospital or perioperative 30-day total cost, adding approximately $2,900 to the in-hospital cost and $3,400 to the total 30-day cost. The researchers also compared differences in conversions between the laparoscopic, thoracoscopic, and da Vinci cohorts. After performing propensity score matching, conversion rates for da Vinci procedures were significantly lower than LAP or VATS across all procedures. The volume-weighted conversion rate for da Vinci was approximately 2.8%, corresponding to a total relative conversion reduction for all study procedures of 58.5%, compared to the laparoscopic or the thoracoscopic procedures. The researchers concluded in part, 'From the standpoint of population health or a hospital system, these high-level data indicated that a cumulative effect of conversions can be a significant burden. And that reduction of conversion has major benefits and leads to increased value for the patient, the hospital, and society at large. The use of robotic-assisted surgery is associated with a significant decrease in the conversion rate for all 10 operations studied and a multidisciplinary robotic program, encompassing several specialties, could result in significantly decrease conversion rates, with an improved ability to deliver successful minimally invasive surgery to its patients.' I will now turn to our financial outlook for 2022. Starting with procedures, on our last call, we forecast full-year 2022 procedure growth within a range of 11% to 15%. We are now increasing our forecast and expect full-year 2022 procedure growth of 12% to 16%. This range continues to reflect the uncertainty associated with the course of the pandemic. The low end of the range assumes ongoing COVID and staffing pressure at hospitals and assumes some continued choppiness with COVID throughout the year. At the high end of the range, we assume COVID-19-related hospitalizations around the world decline throughout the remainder of 2022 and there are no additional significant impacts from further resurgences. As noted last quarter, the range does not reflect significant supply chain disruptions. The steep increase in infections and subsequent recovery in the quarter from the Omicron variant in the US and the trend in procedure volumes, we have seen exiting the quarter in China, highlight the risk to the number of procedures that may be performed.

In the second quarter of 2022, our year-over-year procedure growth rate will likely be lower than recent quarters as Q2 2021 results reflected a strong recovery in procedures as COVID began to subside. Turning to gross profit. On our last call, we forecast our 2022 full-year pro forma gross profit margin to be within 69.5% and 70.5%. We are now slightly expanding the range of our pro forma gross profit margin to be within 69% and 70.5% of net revenue. The lower end of the range was updated to reflect the impact on input costs related to supply chain inflation and some impact from a stronger US dollar. Our actual gross profit margin will vary quarter-to-quarter, depending largely on product, regional, and trade-in mix and the impact of new product introductions. With respect to operating expenses, on our last call, we forecast pro forma operating expense growth to be between 21% and 27%. We are refining our estimate and now expect our full-year pro forma operating expense growth to be between 23% and 27%. We continue to expect our non-cash stock compensation expense to range between $510 million and $550 million in 2022. We expect other income, which is comprised mostly of interest income, to total between $50 million and $60 million in 2022. On last quarter's call, we forecast 2022 capital expenditures within a range of $700 million to $1 billion. We are now refining estimated capital expenditures for 2022 to be in the range of $700 million to $900 million based primarily on the current timing of planned facility construction activities. With regard to income tax, we continue to estimate our 2022 pro forma tax rate to be between 22% and 24% of pre-tax income. That concludes our prepared comments. We will now open the call to your questions.

Thank you. Hey, good afternoon. Maybe, I'll ask my first question on your comments on the US systems side and the capital spending environment. Would just love to have more color on that. And, obviously, we were focused on the same numbers that you mentioned, which is just the greenfield unit placements. And if we kind of look back, just as context of what we have is, just over the past four or five years, those tend to increase by about 10% a year and it is pretty choppy year-to-year. Just using that as a proxy, how much help can you give us on whether that's a good kind of target for this year for the non-trade-ins in the US? And then just color on what you're seeing here in the near, kind of, just immediate term that you mentioned. It sounded like a lot of risk factors. And I'm wondering if it's risk factors that you're citing or it's something that you're actually seeing in your customers delaying planned purchases.

Yes. Let me take the second question first and then I'll ask Jamie to step in on a little bit more on the trade-in side. So what we're seeing now, where we're at is, a little bit less delay of planned purchases, a little bit less what we're signaling more around - Q4 demand looks strong. Q1 in terms of the early parts of the pipeline process and some of the contracting, some of the later parts, we're seeing in the US just a little bit lower volume. It may clear itself. It may entirely be that, this was just a pull-forward of a little bit of demand and some budget flushing, as hospitals got ready for the retirement of some of the government support for COVID. But it's not clear. We don't know yet. We know for sure that we're getting toward the end of the SI trade-in cycle in the United States. So that will soften some of the US capital. The final point I'll - and then there's forecasted additional pressures on hospitals and finances. The short answer to that is, we're going to have to see. We'll see if those come to fruition or not. So that's a little bit of where that lays out. With regard to kind of what does the trade-in ratio look like, let me turn it to Jamie.

Yes. If I just look back at last year 2021, there were about 500-ish trade-ins done globally. Of that, about 80% were transactions in the US, so you can just kind of get a sense of the degree to which the US has driven the trade-in cycle. As I said in my prepared remarks as of the end of Q1, there's about 268 SIs left in the US in the installed base. And so you can kind of use those two data points to estimate how that will play out over time. As you start to get towards kind of the end of the tail of remaining SIs, that they probably last longer than kind of the average when you're in the middle of the distribution. But that's what I'd say with respect to trade-ins. I think Amit, you had a question on greenfields. The way I would think about it in the US is, you have your procedure estimates that you can take from our range. You can apply the usual model with respect to utilization. That gives you some sense of how the installed base might expand. And so, you can kind of do that calculation. That obviously is a mix of greenfields and incrementals. And I would just reflect in that model then what is the potential risk from what we highlighted with respect to the softening US capital pipeline that we saw in Q1.

Just a capping remark on that. Final thought is, the core driver in a mature multiport market segment in a country like the United States, the core driver is procedure demand. And we feel like procedure demand is healthy. It's healthy in our target areas. Our major focus is making sure that we can supply the customer with what they need in a way that's high quality and timely. So, it's really managing the supply chain. If that goes well and we are successful in closing those gaps, I think capital demand will work itself out. It will play through because it ultimately in those markets is driven by core procedure demand.

Thanks for that color. And the second question I always hate to ask this question but I feel like investors want me to, at this point in time just get you to reflect on it. So we always believe as you stated that you're working on at least one, if not two new platforms. We know you have that in the background. We see your R&D spend. That's obvious to everyone. I think the big question is always about timing. And for us, what we wanted to ask is, is this a situation at this point in time where technology just need more time to incubate whether maybe what we're seeing is more something that's related to FDA in the process that you go through and how that's evolved? How much color can you give us on just the process for getting new technology to market and where you are?

Yes. It's a good question. The - what I'd say here is a couple. One is, as the technologies have matured and the installed base has gotten bigger, we've made an intentional decision to invest a lot in upgrading the capabilities of Gen 4 platforms that are out there. So the first thing has been that the SI that somebody purchases today is more capable than the SI that they had when it was first launched and we keep doing that. In part, that's easier since those kinds of incremental adds to platform architecture that are pretty mature are easier for the customer base to absorb. And they also compound utilization. They allow them to get more utility out of the capital they have. They get higher throughput through it and they do more procedures with it. And in Gen 4, we're not done with that. We have continued to do it, and whether it's instruments and accessories or endoscopy or software. And we have some things up our sleeves for that too. So that was intentional. We were doing more kind of structural changes early on in that product and we have intentionally moved some things into more incremental changes on Gen 4. We do think that there are bigger structural changes that will make sense. We are working on them. They are interesting. I think they have long-term implications for the surgical market segments we participate in, and I'm excited about them. Some of those things are around technology development. Some of them are around manufacturing and supply chain development and some of them are around clinical pathways and regulatory pathways. So all of those things play out. I will reinforce what you said. We work on incremental changes. We work on structural changes and we work kind of multiple generations ahead, and that remains true. We continue to do that. Timing-wise, sometimes a little bit hard to predict perfectly based on both supply chain readiness and how FDA thinks about those things. For us, I want to make sure that every time we make a step that the customers value it, that it's done with them in mind rather than with us in mind. And we continue to have that philosophy and we'll pursue it.

Thanks for the color.

Hi. Good afternoon, everybody. Hi, Gary. Maybe, we could talk about - you could expand on your comments on Ion. Just a couple of things you said that I'd be curious to hear more about. Submitted for EU approval, maybe you could give us a little more color on the timing of the opportunity and I'm wondering whether it impacts 2022. But maybe you could also talk a little bit about what you've been kind enough to describe in the recent past as sort of an inflection point for Ion. Maybe broadly speaking, what's your early - what's the feedback you're getting from how the device is using? And maybe talk a little bit about what's next. I mean, it seems more like an execution kind of story at this point.

Thanks, Rick. On submission for Europe, we just submitted our dossier. Europe has changed over their - the framing of their medical device regulation. They call it, EU MDR. It's relatively new for the world. As a result, projecting exact timing to get those clearances is a little different relative to historical norms. We don't anticipate it completing in 2022. That's just - it's a little bit of what's the odds game, but we think it's several quarters to finish, mostly because it's new for the regulators and it's new for us. On the point of how is Ion ongoing, it's being driven right now on the single indication of biopsy and bronchoscopy. I think it's driving well because it meets a need. I think alternate technologies, manual and robotic are less capable. And we see a lot of peer-to-peer word of mouth that is driving interest and that's backed by data like the PRECIsE trial. So that's been helpful for us. A lot of our focus here has been developing our manufacturing capacity, continuously improving the product in terms of usability, quality, robustness, and efficacy. And the teams are doing a great job and working extremely hard to do all of those things make sure that we can maintain supply and improve. I'm just delighted with what they're up to. They are both increasing capacity and improving robustness and quality simultaneously. So that's been wonderful, and I think we have room. We're seeing the combination of Ion bronchoscopic evaluation combined with robotic surgery thereafter; sometimes people do it on the same day. And that has seen some real value for patients. It's not every part of the patient population, but there are some patients for whom that's a good solution. And we see a lot of excitement. So the tie-through of Ion diagnostics with follow-through treatment is creating patient value. It's shortening the time to definitive answers and then a surgery if a surgery is indicated. So that's been great. We think Ion as a platform has multiple future indications that it can provide clinical value that it can bring and we are pursuing them assertively in various places. We are not yet publicly describing what those things are in part because we have some technology to develop in part there's some regulatory pathways in and it's a competitive space. And so we're working down those elements. As we get a little closer and have a little bit better visibility into which ones when, then we'll be sure to share.

Got you. Procedure demand, as you clearly stated it was healthy this quarter. It seems like it's - it feels like it's likely to continue. So hopefully, as hopefully COVID headwinds settle back a little bit around the world. You - Intuitive always used to talk about the - let's see, if I can say this correctly Gary, the percentage of utilization for average utilization for da Vinci systems. And I'm sort of making this up from memory, but it used to be like when you got to 60% or 65% of procedure of da Vinci capacity, it would start to drive new discussions about new systems. Is it - forgetting the specifics of the question where do you feel like you are with the current installed base utilization? And is that a consideration that we should reflect on as we think about system placements going forward?

There's absolutely a relationship between procedure growth and demand, and increased utilization on capital, right? And it's inversely related. If you have lower utilization, you sell more capital to do the same number of procedures. We have believed and have pursued assertively that while higher utilization decreases the number of systems that we sell, it increases the utility, the economic value derived by our customers to get higher throughput. And so we put programs in both in terms of design and workflow, as well as consulting services to help them get higher utilization. We've been doing that for years. It's a number that, you can move in a sustained way but it's hard to move quickly. And I'll turn it over to Jamie shortly, who'll talk a little bit about what the trend line and utilization growth has been. But from an intent point of view, we are happy to see increased utilization, even if that pressures near-term capital because it creates better ROI conditions for our customers. And from a pure marginal economics point of view at Intuitive, the marginal economics work out well for us too. So it's a win-win even though at the top line in placements, it may look like pressure. So then you had asked the question kind of what is peak utilization, and how do you think about that. I'll also turn it over to Jamie. It has a lot to do with mix and operating conditions in the hospital. It's a little bit less a technology question, a little bit more how they use it. So Jamie, perhaps a little bit on utilization.

If I just go back to pre-COVID for a second Rick, if you look at 2019, average system utilization grew by 5% over 2018. If I look at recent times and use the CAGR approach to kind of normalize for COVID last year on a two-year CAGR basis in 2021, utilization grew by 4%. This past quarter on a three-year CAGR basis, again back to 2019 grew by 4%. So you can see some relative consistency there. With respect to looking forward, I think that there is some dependency on the institution, the procedure mix within the institution. General surgery in combination with Xi gives you the opportunity to drive utilization differently than a different procedure mix, particularly given the lower procedure times in some of the benign low-acuity procedures. But it also reflects the number of surgeons that are trained and the commitment of the possible to drive asset utilization. If you look at the distribution of utilization today, it's relatively wide. I think there are a number of CFOs and hospitals that on a medium-term basis see opportunities to continue to drive utilization up and we are supportive of that.

Thank you so much.

Thanks, Rick.

Good afternoon. Thanks for taking the questions. Just one on China for me and one on inflation and supply constraint. So on China, what have you guys seen so far from the lockdowns? And what are your expectations for the second quarter? Do you think you can still grow year-over-year in China? And related to that Gary, what's the process and timeline for the next quota? You're about to finish this quota. Is it possible the next quota could be larger or eliminated entirely? And I have one follow-up.

I'll turn those both to Jamie.

Yes. With respect to what we saw in procedures in Q1, as you saw the COVID cases rise in places like Shanghai. And as the authorities locked down and they locked down pretty strictly, we saw procedures impacted in March. That's continued so far into April although it's obviously early. I think that there's risk in procedures in Q2 relative to what you would expect without COVID and those lockdowns. China is our second-biggest marketplace, but it's still a relatively small proportion of overall procedures. The US is still about 70% of global procedures. But certainly the way things look right now, you have some impact in Q2. What that ends up being really depends on how long the lockdowns last and how long COVID persists in China. I think a separate risk is kind of the impact of logistics and supply chains as we deliver products to China and from a more macro perspective, just the port closures and the broader impact that we could see in China given the degree of exports they have just generally across the economy. With respect to the China quota, difficult to predict. The last couple of times the quota has been issued in the third year of the quota period, which would be next year. We don't have great visibility into when that might be. And we don't have honestly great visibility into what the number would be. I don't think we are expecting or planning on a situation where we are exempt from a quota. But again we don't have great insights into how that will play out.

In general, if the quota is responsive to demand, we think demand is high and the question is how responsive to that demand is the central government quota when they do it.

No. I'm sorry to interrupt you. Thank you. Jamie, on inflation and supply constraints, are you able to quantify the impact on the gross margin that you're expecting from inflation? And on supply constraints, how are you addressing this? A lot of companies are buying forward inventory. And what are your expectations for when it gets better? I know you've talked about hand-to-hand combat. You've used that phrase almost on the last few calls. So thanks for taking the questions.

Yes. I would just maybe ground the impact of inflation a couple of ways. If you look back at history, our gross margin has been in, let's say, the 71%-ish range versus what we just guided 69% to 70.5%. And there's really two drivers in the gap between our history and that range. One are the investments we're making in fixed costs in infrastructure and manufacturing capacity, that's being invested effectively for long-term need. So some of that is ahead of when we will need it. But the lead times require that we put that in place ahead of time. The second impact is this impact from the supply chain and inflation in the form of logistics costs, higher component prices, et cetera. I can't give you perfect kind of delineation between the two. I would say roughly slightly more of that gap is on the fixed cost side. The remainder is in inflation supply chain impacts. With respect to how we're managing through the supply chain, there are significant efforts by our operations team just to respond to the whack-a-mole that you described. It's a constant battle of issue resolution. And our number one goal, as Gary described, is to ensure continuity of supply to customers. So that's where our efforts and focus is. As the supply chain environment rebalances in whatever point that is in the future, certainly, we will kind of refocus our operations teams to focus on cost reductions, getting our manufacturing efficiencies back to our targets. But that's going to really be a question of when will that be. On the inventory side, you saw us actually increase inventories. I referenced in my prepared remarks almost $70 million sequentially. The mix of that though is clearly not perfect. We're replenishing inventory where we can if and as supply lasts. But we have an imbalance currently. Certainly, if you look at the medium to long-term, we're going to look carefully at what levels of inventory we want to hold as one risk mitigation. I think the other thing we'll look at is how we make ourselves less dependent on sole suppliers.

Thanks, Jamie.

The current situation is a bit challenging to predict because there are many variables involved, making it difficult to forecast exactly how things will progress. While the number of stressed components has decreased, the intensity of the stress on some parts has increased. This means that while fewer issues exist, the remaining ones are more persistent. We will utilize various strategies, such as purchasing in advance, maintaining safety stock, and ensuring redundancy in our supply chain, to help minimize risk.

Hi, Gary and Jamie. Thanks for taking the question. Gary, just for you. I mean, I think Intuitive has like 2,200 US hospital customers. That's more my guess than I think what you've ever laid out. But can you maybe talk about what it takes to get the remaining 4,000 hospitals really off the sidelines and using robotics? Just maybe how are you thinking about that in the US? I mean, do you necessarily have to go everywhere, or are there really, kind of, still opportunities to get into the high-volume surgery centers hospitals given some of the commentary about the trade-in cycle dynamics and your push for some higher utilization of the systems?

I won't go into the quantitative approach, but I can provide a qualitative view. Many hospitals that are newly established may not currently have our programs, but they are part of an integrated delivery network where our products and expertise are present. We work collaboratively with the leadership of these networks. As they recognize the value of our programs, they begin to incorporate our products into important areas of their system. We've noticed a positive trend in our collaborative expansion with customers in these environments. Additionally, we're increasingly discussing the expansion into various care settings, particularly as less complex general surgeries and other simple procedures are increasingly performed in smaller outpatient facilities. We believe this trend will continue to grow. We aim to follow our customers' needs and preferences. Capital investments in robotics tend to consolidate procedures regionally within Centers of Excellence, which benefits our customers through improved utilization and better surgical outcomes due to increased practice. Thus, while we don't believe we need to reach every single patient today, we acknowledge that consolidation is beneficial and the market will expand from its current state. Jamie, feel free to add anything if you’d like.

The only thing I would say is the remaining greenfields tend to be - this is not always the case, but tend to be more in the rural setting, smaller number of beds. So what I think we've seen over the last three, four quarters as Gary described is actually increases in the number of placements of greenfield accounts. These are hospitals as Gary said that are within existing IDNs. And that's largely a function of the success and experience those IDNs have had with benign procedures particularly in general surgery, which tend to be a higher mix in these rural hospitals. And so they see the opportunity for effective robotics programs in that setting, whereas, before maybe there was more skepticism or the financial picture was more challenging. We'll do that carefully and in conjunction with our IDN partners, and it has to be one that makes economic sense for us and for the customer. On the ASC side, we have a relatively small but growing installed base. Our procedure growth at ASCs in the US is accretive, but that's probably because the number of systems that we have at hospitals or ASCs is relatively low. Those ASCs generally are ASCs affiliated in some way with our IDNs. That gives us greater confidence in those accounts.

Drew, I wanted to follow up on our discussion about Japan where you mentioned the addition of eight more procedures for which you're receiving reimbursement. Could you provide some context on how you anticipate that ramping up will compare to the previous wave of reimbursed procedures in Japan?

A little color on that. I think over the mid-term, we're really excited about it. Over the near term, it takes more. Thank you, Drew. That was our last question. In closing, we continue to believe there's a substantial and durable opportunity to fundamentally improve surgery and acute interventions. Our teams continue to work closely with hospitals, physicians, and care teams in pursuit of what our customers have termed the Quadruple Aim: better more predictable patient outcomes; better experiences for patients; better experiences for their care teams; and ultimately a lower total cost to treat. 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. At Intuitive, we envision a future of care that is less invasive and profoundly better where diseases are identified earlier and treated quickly, so patients can get back to what matters most. Thank you for your support on this extraordinary journey. We look forward to talking with you again in three months. This concludes the call.