Intuitive Surgical Inc (ISRG) — Q4 2024 Earnings Call Transcript

Good afternoon and welcome to Intuitive's fourth quarter earnings conference call. With me today, we have Gary Guthart, our CEO; Jamie Samath, our CFO; Daniel Oh, our Senior Medical Officer. Dave Rosa, our President and regular participant on this call, is away from the office this week on a prior business commitment and will not be joining today. Dr. Daniel Oh, Senior Medical Officer and practicing surgeon, will join us on this call to describe clinical highlights. We would also like to announce that Dan Connolly will be joining Intuitive as our VP and Head of Investor Relations. Dan has worked at a global investment manager for the last 18 years and has actively followed surgical robotics since 2008. We look forward to Dan joining Intuitive in early February. 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 for the fiscal year ended December 31, 2023 and subsequent filings. 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 full year and fourth quarter results as described in our press release announced earlier today, followed by a question-and-answer session. Gary will present business and operational highlights. Jamie will provide a review of our financial results and procedure highlights. Dan will present clinical highlights. Then, I will provide our financial outlook for 2025. And finally, we will host a question-and-answer session. With that, I'll turn it over to Gary.

Thank you for joining us today. I'll touch on our performance for the full year 2024 and share our perspective going into 2025. 2024 was a strong year for Intuitive with robust early adoption of our fifth generation multi-port platform, da Vinci 5 and healthy procedure growth in many of our supported indications and countries, resulting in strong financial performance for the year. Adoption of our Ion and da Vinci SP platforms continued with new global clearances and increased utilization. Our teams have been hard at work launching da Vinci 5 and learning from its early experience. We are improving our products across all three of our platforms and helping our customers achieve their programmatic objectives. We started 2024 focused on four main thrusts. First, we expanded indications and launches of our new platforms by region with a particular focus on our first phase of da Vinci 5 launch. Second, we pursued increased adoption for focused procedures by country through training, commercial activities and market access efforts. Third, we drove quality and gross margin improvements in our global operations. And finally, we focused on increasing our productivity, particularly in functions that benefit from industrial scale. Taken together, our team made excellent progress against these objectives. Moving to procedures, growth for the full year was 17%. Areas of strength included general surgery in the United States and regional performance in countries including the UK and Ireland, Japan and Germany. Distribution markets including Brazil, Spain and Italy were also strong in the year. This week, we announced the acquisition from ab medica of the da Vinci business in Italy, Spain, Portugal and related territories. We're pleased with their performance and we look forward to welcoming these new staff to our team. In the US, general surgery procedure growth was led by cholecystectomy with foregut and appendectomy procedures rising as well. Thoracic procedure growth was also healthy in the year. Bariatric procedures fell modestly for the full year 2024 given the rise in GLP-1 medications. Procedure growth outside the United States continued to diversify beyond urology, with nice growth in categories including general surgery and thoracic surgery. Globally, benign indications grew approximately 200 basis points faster in the year than cancer indications. In flexible robotics, ion procedures showed continued strength with 78% growth for the full year. SP procedure growth accelerated in the year with 72% growth over a full year, a result of healthy growth in Korea, Japan, and Europe, and solid growth in the US. On the capital front, we placed 1430 multi-port systems in the full year 2024 compared with 1313 multi-port systems in 2023. Ion placements for the full year were 271 versus 213 prior year and SP placements were 96 for the full year versus 57 systems in the prior year. Globally, placements were strong in the United States, helped by the launch of da Vinci 5. Overall, our systems portfolio of da Vinci 5, da Vinci Xi, da Vinci X, da Vinci SP and Ion combined with our flexible financing options allows our team to meet our customers' varying needs. Jamie will take you through placement dynamics in more detail later in the call. System utilization remains an important indicator of customer health because it is correlated to patient demand, care team satisfaction and hospital financial health. Multi-port utilization grew 3% in the year, SP utilization grew 12% in the year and Ion utilization grew 13%. Given our different platforms, their procedure mix and sites of care, teasing apart system utilization by customer segment becomes increasingly important going forward. For example, a mid-sized community hospital lung program's systems utilization can differ from a high-volume community hospital general surgery program. As robot-assisted surgery moves to the back half of adoption curves in some procedures, utilization growth rates may differ from prior year trends. Our performance supported revenue of $8.4 billion for the year, of which 84% was recurring and representing 17% growth over 2023. Our operating expenses were at the lower end of our spend guidance. Our spending reflects three initiatives. First, we continue to invest in R&D to support innovation and adoption of our platforms and digital tools globally. Second, we're expanding our manufacturing and commercial footprints. And lastly, we have sought to leverage our enabling functions given our increased scale. Our product margins also started to improve in the year, as increased shipment volume allowed for better factory utilization, as well as leverage in our component, shipment and other logistics costs. Taken together, our net income grew by 29% in 2024 over 2023. Touching briefly on da Vinci 5, our teams have done a nice job in executing a complex launch. We placed 362 da Vinci 5s in the year and over 2,500 surgeons have performed in total over 32,000 procedures on da Vinci 5 in 2024. da Vinci 5 has broad clinical indications and over 40 different procedure types have been performed using da Vinci 5 today. We design our systems to allow for routine sequential upgrades to their capability over time and da Vinci 5 customers will receive hardware and software upgrades going forward starting this year. This year's upgrades will focus on digital features supported by our 10,000-time increase in computing power. We'll share more details on these features as we bring them to market. As we enter 2025, our company priorities are as follows. First, we will focus on the full launch of da Vinci 5, its regional clearances and follow-on feature releases. Second, we'll pursue increased adoption for our focused procedures by country through training, commercial activities, and market access efforts. Third, we'll drive continued progress in building industrial scale, product quality, and manufacturing optimization. And finally, we'll focus on excellence and availability of our digital tools.

Good afternoon. I will describe the highlights of our performance on a non-GAAP or pro forma basis, and 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. Q4 and 2024 revenue procedures and system placements are in line with our preliminary press release of January 15. I will briefly review full year 2024 performance before describing our Q4 results in greater detail. 2024 financial performance was strong. Da Vinci procedures and total revenue each grew 17% over the prior year. Pro forma gross margin improved 100 basis points to 69.1% and pro forma SG&A expenses leveraged as compared to 2023. As a result, pro forma operating margin for 2024 improved 310 basis points to 37%, and pro forma EPS increased 28%, building off of the 22% increase in 2023. We placed 362 da Vinci 5 systems in our first year of the limited launch, of which 174 systems were placed in Q4, including our first replacements of da Vinci 5 in Korea. Turning to Q4. Our financial performance was ahead of our expectations, driven by revenue growth of 25% and strength across the rest of the P&L, resulting in pro forma operating margin of 38%. Q4 revenue reflected a couple of favorable dynamics. First, a higher purchase mix of systems as compared to recent periods, driven by mult-system deals with certain US IDNs that prefer to purchase and a higher mix of placements through distributors. Second, we saw a higher mix of dual console placements for da Vinci 5 as we increase supply and were able to support more academic customers. And finally, we saw a higher system ASP, resulting from a stronger mix of da Vinci 5 placements. Underlying core metrics were also strong with da Vinci procedure growth of 18%, growth in the installed base of da Vinci Systems of 15%, and average system utilization growth of 3%. In Q4, US procedures grew 15%, driven by growth in benign general surgery, including accretive growth in procedures performed after hours for emerging care. Bariatric procedures in the US declined in the low to mid-single-digit range, similar to last quarter. OUS procedures grew 25%, driven by relative strength in India, the UK, Italy and Japan. Procedure growth in Korea improved sequentially, in part driven by strong SP growth. However, our business there continues to be impacted by physician strikes. Consistent with the last couple of quarters, procedure growth in China was slightly below the corporate average, reflecting a continuation of the dynamics we have described on previous calls. Looking at OUS procedure performance in aggregate, we see strong growth in colorectal, benign general surgery and thoracic categories. Reviewing capital performance. We placed 493 systems in the fourth quarter, 19% higher than the 415 systems we placed in the fourth quarter of last year. In the US, we placed 284 systems in Q4, an increase of 75 systems as compared to last year, reflecting several large multi-system placements with a number of IDNs and an increase in the supply of da Vinci 5. Outside the US, we placed 209 systems in the fourth quarter compared with 206 in the same quarter last year. This quarter, we placed 89 systems in Europe, 43 in Japan, and 20 in China, compared with 71 in Europe, 70 in Japan and 11 in China in Q4 of last year. Placements in the UK and Germany continue to be impacted by ongoing government budget pressures affecting health care capital spending. The 89 system placements in Europe included 39 systems into markets served by our distributors as compared to 24 systems last year. In Japan, financial pressures caused some customers to delay capital investment decisions. Fourth quarter revenue was $2.41 billion, a 25% increase over last year. On a constant currency basis, revenue growth was 26%. Systems revenue grew 36% year-over-year, driven by a 19% increase in da Vinci system placements, a higher system ASP and the higher purchase mix previously referenced. Additional revenue statistics and trends are as follows. Leasing represented 45% of Q4 placements, compared with 58% last quarter, driven by the aforementioned mix of system placements from certain IDNs in the US who prefer to purchase and a higher mix of placements with our distributors. However, as we look forward, we continue to expect that leasing rates will increase over time. Q4 system average selling prices were $1.59 million, as compared to $1.42 million last year driven by higher mix of da Vinci 5 and a higher dual-console mix, partially offset by lower pricing in China. We recognized $28 million of lease buyout revenue in the fourth quarter, compared with $21 million last year. Da Vinci instrument and accessory revenue per procedure was approximately $1,860, compared with approximately $1,800 last year. The year-over-year increase in I&A per procedure reflects customer buying patterns and a higher mix of SP procedures, partially offset by procedure mix in the US given a lower mix of bariatric procedures and a higher mix of cholecystectomy. Turning to Ion. There were approximately 28,000 Ion procedures performed in the fourth quarter, an increase of 70% as compared to last year. In Q4, we placed 69 Ion systems compared to 44 in Q4 of 2023. As a reminder, supply constraints impacted Ion system placements in the fourth quarter of last year. Seven of the 69 systems were placed in OUS markets. The installed base of Ion systems increased 51% from last year to 805 systems and average system utilization increased 13% year-over-year. Fourth quarter SP procedure growth continued to accelerate, growing 81%, driven by Korea and early-stage growth in Europe and Japan, where we have clearance for a broad set of indications. We placed 30 SP systems in Q4 and 96 for the year, up from 57 placements in 2023. Fourth quarter placements included seven in Korea, six in Europe and four in Japan. Average system utilization for our SP platform grew 18% in Q4, reflecting in part growth of SP in markets where we have a broad set of indications. We have received recent clearances in the US for thoracic and colorectal indications. However, we expect broad commercial efforts for SP in those procedure categories to commence once we obtain FDA clearance for a SP stapler. Moving on to the rest of the P&L. Pro forma gross margin for the fourth quarter of 2024 was 69.5%, compared with 68% for the fourth quarter of 2023. The year-over-year improvement in gross margin reflects fixed overhead leverage given revenue growth, lower inventory reserves and improvements in freight and logistics costs. In 2024, we executed on our plans to significantly improve product margins for our Ion and SP platforms. While we have made substantial progress, Ion and SP product margins continue to be dilutive and our teams have ongoing programs to deliver further improvement. With respect to our manufacturing expansion and capital investment plans, in 2025, we anticipate opening new facilities for the da Vinci 5 and Ion system manufacturing in California and new endoscope manufacturing facilities in Germany and Bulgaria. As a result, and as we have previously indicated, we expect a significant increase in depreciation expense in 2025. We will also continue to transfer mature products to facilities in Peachtree Corners, Georgia, and Mexicali. Given these activities, we expect elevated inventory levels during 2025. As we complete this cycle of manufacturing expansion driven by our strategy to operate at industrial scale, we anticipate lower levels of capital expenditures in 2025 and 2026 as compared to recent periods. Fourth quarter pro forma operating expenses increased 9% compared with last year, driven by increased headcount, higher variable compensation and increased legal expenses. Fourth quarter 2024 operating expenses included a $45 million contribution to the Intuitive Foundation, as compared to a $40 million contribution in Q4 of last year. Looking at operating expenses for the year, we delivered on planned leverage in SG&A, which improved by 180 basis points as a percentage of revenue. While we will continue to look for opportunities within SG&A to leverage as we grow, we would highlight that in 2025, we expect increased depreciation expenses given recent capital expenditures and higher legal expenses given ongoing litigation. Innovation continues to be critical to helping our customers make progress in the quintuple aim and therefore you should expect us to prioritize investments in R&D. Pro forma other income was $87.6 million for Q4, lower than $94.6 million in the prior quarter, primarily driven by FX remeasurement of the balance sheet. Our pro forma effective tax rate for the fourth quarter was 20.5%, a little lower than our expectations, reflecting net discrete benefits of $11 million related to statute of limitation expirations and other adjustments to certain tax items. Fourth quarter 2024 pro forma net income was $805 million, or $2.21 per share, compared with $574 million or $1.60 per share for the fourth quarter of last year. I will now summarize our GAAP results. GAAP net income was $686 million, or $1.88 per share for the fourth quarter of 2024, compared with GAAP net income of $606 million, or $1.69 per share for the fourth quarter of 2023. As a reminder, fourth quarter 2023 GAAP tax expense reflected onetime benefits of $159 million related to an increase in deferred tax assets associated with the statutory rate increase in Switzerland and receipt of certain tax benefits related to our Swiss operations. The adjustments between pro forma and GAAP net income are outlined and quantified on our website. We ended the year with cash and investments of $8.8 billion, compared with $8.3 billion at the end of Q3. The sequential increase in cash and investments reflected cash generated from operating activities, partially offset by capital expenditures of $312 million. With respect to the plans we announced on Tuesday to go direct in Italy, Spain, Portugal and associated territories, the base purchase price is EUR290 million with an earn-out of up to an additional EUR31 million based on 2025 procedure volumes. While our primary motivation is to develop closer relationships with customers serving a combined population of approximately 118 million people, we do expect this transaction, which we estimate to close in the first half of 2026, to be slightly accretive to pro forma EPS. Before I turn it over to Dan to discuss clinical highlights, let me address the outlook for pro forma operating margins for 2025. Q4 performance of 38% was above our expectations. Looking ahead to 2025, we anticipate pro forma operating margins in 2025 to be lower than Q4 due to several dynamics. First, as previously stated, leasing rates are expected to be higher than Q4, which results in revenue and profits for related system placements to be recorded over multiple years versus in the quarter of placement. Second, we anticipate significantly higher depreciation expense given recent capital expenditures. And finally, we expect a higher mix of da Vinci 5, Ion and SP revenue, which carry product margins below the corporate average. In addition, from a modeling perspective, I would also highlight a couple of additional considerations. First, revenue denominated in non-USD currencies represents approximately 25% of our total revenue. On a revenue-weighted basis, using current exchange rates, the US dollar is approximately 4% stronger than rates realized in Q4. Second, as we move into the broad launch of da Vinci 5 in the middle of the year and customers have the opportunity to upgrade their fleets, we would expect trading credits for the da Vinci Xi to be significantly higher than recent periods adversely impacting system ASPs. Finally, given the increasing choice customers have, as competitors bring robotic systems to the market and seek geographical clearances, we may see capital selling cycles lengthen as customers evaluate alternatives. Brandon will provide our outlook for 2025 later in this call. And with that, I would like to turn it over to Dan.

Thank you, Jamie. I'd like to share with you some recently published peer-reviewed literature that we found to be notable. In addition to the specific data highlighted on this call, we encourage you to consider the wide body of evidence detailing these topics in published scientific studies over the years. Today, we'll give an update on two recent publications. In the first study, Dr. Rocco Ricciardi and colleagues from the Massachusetts General Hospital in Boston collaborated with the research team at Intuitive for the COMPARE Study published in the Annals of Surgery. This landmark study compared perioperative outcomes of da Vinci robotic-assisted surgery to laparoscopic or thoracoscopic surgery, as well as to open procedures. This was a meta-analysis which analyzes results from previously published evidence over time to obtain an overview of cumulative data. In this study, the investigators pulled data from randomized controlled trials, prospective comparative cohort studies and large real-world evidence database studies from the past 12 years in order to evaluate whether da Vinci procedures were associated with an improvement in short-term patient outcomes across seven commonly performed oncologic procedures from different specialties. Notably, over 1 million patients were included in each of the da Vinci, laparoscopic thoracoscopic and open patient groups, and included data from 22 countries. The authors found that compared to standard minimally invasive surgery, patients undergoing da Vinci procedures had favorable perioperative outcomes. Specifically, da Vinci patients had a 56% lower chance of conversion to open, a 21% lower chance of receiving a blood transfusion, and a 10% less likelihood to experience a complication within 30 days of the procedure. In addition, length of stay was significantly shorter with lower 30-day readmission and mortality rates. Similar favorable outcomes were found for da Vinci patients when compared to the open approach with even greater magnitude differences between the two approaches. The authors concluded that this meta-analysis demonstrated multiple benefits for da Vinci procedures when compared to alternative minimally invasive or open approaches, noting that these results will be helpful to decision-makers considering the use of robotics in multi-specialty settings. In the second study, Dr. Michael Awad from Washington University School of Medicine and other colleagues published in Surgical Endoscopy the results of a preclinical study using Intuitive's novel force feedback technology incorporated in da Vinci 5. Across 28 surgeons with varying levels of experience, this study evaluated the forces applied to tissue when having force feedback technology on or off during core surgical tests, including retraction, dissection and suturing in a tissue model. Results from this study demonstrated a significant reduction in both the average and maximum forces exerted on tissue for all three surgical tests, irrespective of surgeon experience levels. Notably, when using the highest sensitivity setting, up to a 55% reduction of the maximum force exerted on tissue during suturing was observed. The authors concluded that this study demonstrated that force feedback technology may significantly decrease the forces applied at the tissue level when performing common surgical tests across novice, intermediate and experienced surgeons. To me, the notable finding in this study is that the benefit of force feedback was observed not just in novice surgeons, which one might expect, but also in experienced surgeons who had completed at least 200 da Vinci procedures. Now, I'll turn it over to Brandon.

Thank you, Dan. I will now turn to our financial outlook for 2025. Starting with procedures. As described in our announcement earlier this month, total 2024 da Vinci procedures grew approximately 17% year-over-year to over 2,680,000 procedures performed worldwide. For 2025, we anticipate full year procedure growth within a range of 13% and 16%. The low end of the range assumes growth in China continues to be impacted by environmental and competitive dynamics. European governments continue to constrain hospital CapEx budgets limiting the expansion of capacity in the field and bariatric procedure declines continue at rates similar to 2024. At the high end, we assume China procedure growth recovers relative to 2024, the CapEx environment improves in Europe and bariatric procedure declines moderate. Q1 and full year 2025 will have approximately one fewer working day in 2024 due to the leap year. Turning to gross profit. In 2024, our pro forma gross profit margin was 69%. In 2025, we expect our pro forma gross profit margin to be within a range of 67% and 68% of net revenue. The lower estimate of pro forma gross profit margin in 2025 reflects significant incremental depreciation as we bring on new facilities, the impact of growth in newer products and the impact of the stronger US dollar. Our actual gross profit margin will vary quarter-to-quarter depending largely on product, regional and trade-in mix and pricing. The range does not include any potential impact of new tariffs on our business, which could be material. Turning to operating expenses. In 2024, our pro forma operating expenses grew 10%. In 2025, we expect our pro forma operating expense growth to be within a range of 10% and 15%. The growth in operating expenses reflects increased depreciation from new facilities, investments in innovation to drive our growth objectives, and an increase in legal expenses. We expect our noncash stock compensation expense to range between $760 million and $790 million in 2025. We expect other income, which is comprised mostly of interest income, to total between $370 million and $400 million in 2025. With regard to capital expenditures, we expect the range to total between $650 million and $800 million, primarily for planned facility construction activities. With regard to income tax, in 2024, our pro forma income tax rate was 21.4%. As we look forward, we estimate our 2025 pro forma income tax rate to be within a range of 22% and 23% of pretax income. That concludes our prepared comments. We will now open the call to your questions.

Good afternoon. Thanks for taking the question and congrats on a really strong finish to the year. One for Gary, one for Jamie. So, Gary, historically, you said procedures drive placements. In the second half of '24, US system placements grew over 35%. Utilization was about 2%. Is this a leading indicator of more procedures? Or will we have a digestion period to restore normal utilization? And I have one follow-up.

I believe several factors are at play here. As I mentioned in the prepared remarks, as we progress through some curves, the expectations for those programs may shift regarding utilization. Not every account is expected to be high-volume, and that's acceptable. The economics can still be viable, and we can meet their needs. Additionally, new capital opportunities and features might encourage some customers to delay their purchases slightly before acquiring systems, which could impact utilization. We will need to see if this effect materializes. Both of these factors are likely influencing the situation. Analyzing these interactions can be quite complex. Over time, I anticipate that utilization growth rates in multiport will stabilize somewhat in the US. I don’t think they’ll continue to soar at the current pace, but I believe there is still potential for growth in SP and Ion utilization.

Thanks, Gary. And Jamie, on the Q3 call, you said the gross margin will be a little lower in 2025 versus 2024. I think the 67% to 68% guidance was probably a little bit lower than expected. Can you quantify the drivers from the 69.1% this year in 2024 to the 67% to 68%? And how to think about the path back to your goal of 70%? Thank you.

Yeah. There's really three drivers, Larry, the largest of which is the impact of depreciation expense and associated fixed costs. So there's deleverage in the '24 to '25 comparison, roughly-ish, depending on the revenue model for ’25. That's about a point of the 160-point delta, if you go from ‘24 actual to a midpoint of ‘25. The other two dynamics roughly equalish in terms of impact are product mix with DV5, Ion and SP being a greater proportion of the revenue, they all carry currently margins below the corporate average, so have a dilutive effect from a mix perspective. And then I think what's new from the last call is the impact of FX. So those three things are the drivers. There are some offsetting cost reductions. The teams are delivering within that kind of gross margin range. I think what we've said with respect to gross margin is over the midterm, we think we can get back beyond 70%. That is going to require us, once we get past this kind of incremental depreciation to leverage over a multiyear period as we grow. We also have, as we've said, the work on product margins in Ion and SP. There's still some work to be done there. And then on a more routine basis, our teams have to deliver cost downs.

Thanks, Jamie.

Okay, thank you. And I'll echo congratulations on a fantastic fourth quarter. Two for me. First, maybe for Gary, you gave a lot of detail on the call about a midyear full launch and trade-in cycle. Would love to just get your qualitative comments around how you're thinking about the mix of da Vinci 5 versus Xi going forward? The necessity or the speed of which an upgrade cycle can start? And how you're thinking about Xi versus da Vinci 5 placements in terms of mix going forward outside the US on approval start rolling in? It all has implications for the model, so I'd love to get your thoughts on that.

I was going to mention some environmental aspects of the situation, and then I'll let Jamie discuss any modeling implications. Two factors are influencing what we refer to as a broad launch. One factor is getting our supply chains ready to meet the expected scale and volume of demand when we start engaging in trade-ins and obtaining clearances globally. That’s exciting. The second factor is software updates, which incorporate feedback from the field and the integration of technologies in our digital space, including imaging capabilities that will be released in the initial launches. These digital tools will be valued by our customers and surgeons, providing them access to data that will help them assess their own performance and the effectiveness of their programs. The compelling nature of these tools will determine how quickly customers choose to upgrade. The upgrade cycle revolves around the question of differential value. The Xi and Xi models are exceptional machines that perform reliably. We are pleased to support them and our customers who recognize the increasing value of the features we offer in the da Vinci 5, such as analytics, force reflection, ergonomics, and improved imaging, which drive the trade-in cycle. I understand your inquiry about how quickly these developments will progress and what that might look like can be challenging to predict. Jamie, I’ll pass it over to you for your insights.

Yeah. While we don't have a specific percentage, the impact of moving to broad launch, the impact of getting additional geographical clearances, obviously then says, directionally, over time, the proportion of placements that are da Vinci 5 generally should increase. Although I would recognize that Xi is a capable system. And at some point, we have the opportunity for a refurbished Xi. With respect to trade-ins, you don't really see trading start to pick up until you get to broad launch, which is the middle of the year, and it's going to be a function of the dynamics that Gary indicated. Of course, we can look back at what happened on the Xi launch and how those upgrades went and we have some indication from customers in our pipelines. I think the best that we could say at this point, given it's so early is that any trading cycle would be progressive.

My final point is regarding the opportunity for depreciated assets like Xi, which we know how to service and support. There is potential to open or create new opportunities in other markets that may be more sensitive to capital pricing, and the answer to that is yes.

Great. Maybe just one quick follow-up. Gary, you always give us a general state of the union on the health of the capital equipment environment around the world. US, OUS, and I'm particularly thinking of China where you had a really strong placement quarter and fourth quarter. So any thoughts there would be great as we head into 2025. Thanks.

Yeah. I think Jamie usually does that. Jamie, why don't you take care of that?

I want to clarify that I wouldn’t describe the 20 systems we placed in China in Q4 as strong, though it may look better when compared year-over-year. The situation in China remains dynamic and challenging, affected by domestic competition and government actions. I would describe the overall environment as relatively consistent yet demanding. Regarding capital, it has been strong in the US, partly due to interest in the new da Vinci 5 product. There seems to be less sensitivity to capital budgets in the US, particularly regarding placements. We have noted the challenges in the UK and Germany, and for the first time in Q4, Japan experienced some delays due to profitability issues with certain clients. Overall, we’ve seen relatively strong performance in the US, but some varying dynamics in international markets. We don't have enough information to predict how things will unfold in 2025.

Thank you very much.

Hey, I’ll echo my congrats as well. Gary, I wanted to ask a bigger picture question. You're kind of crossing over $1 billion a year in R&D now and even after launching DV5. So maybe help us understand the R&D investment opportunity over the medium term and potentially moving into kind of new green spaces. Is that going to be more through the endoluminal platform or are there still chunky categories like cardio that could be minimal to robotics? Or is it more about geographic expansion side of care? Just thinking to understand kind of the true opportunity left out there to capture.

I believe it involves a combination of all three factors you mentioned. There are innovations and technologies, some of which extend existing platforms that you are familiar with, while others are future platforms that are still years away but will present new opportunities for us as time goes on. We are committed to exploring these opportunities even though they require time, investment, and effort. There are current platforms that could benefit from additional indications, whether they be geographic, which would involve regulatory and clinical work to secure those indications, or through enhancements like new instruments, accessories, and imaging capabilities that could broaden the market. We've also invested in supporting new entrants to robotics, as their requirements for learning and economic support can differ. This effort is worthwhile to us. Some of the features you see in da Vinci 5 are examples of these initiatives. In summary, we recognize potential across all these areas and manage our approach to balance these opportunities to avoid being overly focused on any single aspect. We operate with a long-term view that spans multiple specialties and geographic regions.

Helpful. Thanks. And then, Jamie, maybe just a shorter-term OpEx question on the 10% to 15% growth, kind of the high and low end, how much of that's R&D versus SG&A? And any color there on how that can shape up and kind of what drives the high and low end? And potentially, since you did mention tariffs, just kind of curious how to size that or a potential way to mitigate that, if you can? Just wanted to kind of follow up on Larry's margin question. Thank you.

Regarding the growth of R&D and SG&A, I would describe it as being somewhat similar, targeting a range of 10% to 15%. R&D remains a priority for us, while in SG&A, we plan to add representatives and commercial personnel to support procedural growth. Additionally, we anticipate increased legal expenses in SG&A due to ongoing litigation, along with a portion of CapEx results and depreciation impacting our SG&A expenses. Overall, we expect both to grow at roughly the same rate within that 10% to 15% range, primarily driven by procedural activities. We will manage our expenses based on how our business performs, and there may be opportunities to make incremental investments in R&D as we progress and reach important milestones. We are keeping a close watch on the news regarding tariffs and assessing the potential impact of any that may arise, especially since a significant portion of our instruments is manufactured in Mexico. This could significantly affect us if major tariffs are imposed. We are considering how to address potential pricing adjustments in response, but no decisions have been made yet. We are trying to balance our customers' needs with our own business objectives, so we will keep you updated.

Great. Thank you.

Thanks. Good afternoon. Gary, during your insightful comments at the JPMorgan conference, you mentioned new digital features, including hardware and software updates that are forthcoming. While I understand you may not be ready to share specific details yet, could you help us grasp how these developments might enhance the da Vinci 5? Will they introduce new procedures, boost productivity, or allow its use in different settings? In what ways do they expand the vision or possibilities for da Vinci 5 in the near term? I'd like to have a follow-up question after that, if possible.

In our early thinking, I see this in three categories. By making it easier for care teams to achieve great outcomes with real-time tools in the operating room, we believe it creates opportunities for them. It builds confidence, which allows care teams to develop more quickly. While this may not always introduce new procedure categories, it makes it easier for surgeons and care teams to reach more patients since they are more confident in their abilities. This is one way it can help us. The second category is that quickly building confidence in care teams benefits everyone involved. It's advantageous for hospitals as it yields faster returns and higher confidence, and it's beneficial for care teams as they build their confidence more rapidly. Many of our tools can facilitate this training, enhancing learning for both surgeons and others in the team. Lastly, these tools enable customers to perform value analysis using their own data, which also builds their confidence and reveals opportunities that benefit both them and us. This is how to think about our work with da Vinci 5 and the current landscape we’re navigating. One insightful point that Lonnie used to make is that every time you develop a new capability and master it, it opens up new possibilities. A surgeon, such as Dr. Oh, will take that capability and begin to explore its potential. This exploration can lead to new avenues and opportunities, particularly with the imaging and augmented reality innovations we're working on for da Vinci 5, which will inspire the next generation of surgeons.

Great. If I could follow up briefly with Jamie, Ion and SP both had fantastic years last year. What will drive the next phase of growth for them? Specifically, what level of sales is needed or what has to happen? Is this something that will occur in a year or will it take five years? When will these two excellent products no longer be a margin burden? Thank you.

Yeah. In terms of the overall business, what's driving procedures and revenue. If I look at Ion with 28,000 procedures in Q4, you can see that's a run rate of over 100,000 procedures almost entirely in the US. So you're starting to get up the adoption curve in the US for Ion and a significant remaining portion is in transthoracic needle aspiration in terms of the approach versus bronchoscopic approaches in terms of where we've adopted in the early period. So what you see based on where you are in the adoption curve in the US for biopsy for Ion is customers will tend to more focus on improvements in utilization. And as you get to that point in the adoption curve, again, biopsy in the US, you just naturally on the next curve start to see procedure growth rates come down. And you've seen that if you look at the last three or four quarters. And so for our Ion business, kind of next set of focus, obviously, we've got to finish the US is the markets in which we're launching internationally with the clearance in Europe, Korea and China. And on a longer-term basis, there is the opportunity for Ion as a platform to get into new indications that would be in the lung first, and there's potential for other places in the body down the road. From a product cost perspective, it is a set of programs that take quite some time. It's the everyday battle in the manufacturing team and there is some engineering work that needs to happen to kind of get to the product cost. And I'd say that's also in the midterm, consistent with our overall gross margin objectives. With respect to SP adoption, again, we've also got international launches there. Europe and Japan both have broad indications. You see Korea, which we've had in the marketplace for some time, really strong utilization. And so for SP, it's really as we look to the US, is the additional indications. We've got thoracic and colorectal. You have the opportunity to extend that over some period. You see the growth rate accelerating nicely in SP. Margin work in SP is, let's say, not the same level of effort as Ion because we're more leveraged. The social and vision console are common with Xi, but never less work to do. That is also, I characterize as something that happens over the midterm.

Thank you, Gary.

Thank you and good afternoon, everybody. I wanted just to start with a comment you made in the prepared remarks regarding competition and selling cycles. Is this something that you're observing today as you talk to customers outside the US or even in the US? Or are you just calling out a theoretical impact of what might happen as new entrants come to market? And then I have one follow-up.

We have seen it clearly in China with the increasing number of domestic competitors there. I'd say that in terms of impact of competition on selling cycles in other international markets has been relatively stable. But what you're seeing is an increasing number of competitors get clearances in various markets, including in the US, there are a number of competitors in the US and obviously, there's one larger company that's looking to make a submission in the near term. So we're just acknowledging that as competition increases, there is the possibility outside of China, the selling cycles could lengthen.

That's helpful. As you consider the opportunity in instruments and accessories, whether on a per procedure basis or a total addressable market basis, could you share insights on which segments of the surgical ecosystem you currently have a foothold in? Additionally, can you provide an outlook on potential growth in this area over time? We recognize the significance of the fourth sensing feature of the DV5 launch and its potential impact on upgraded instruments and corresponding average selling price within the instruments and accessories line. Furthermore, as you evaluate other components of the surgical ecosystem for potential capture to strengthen your position, could you elaborate on what those might be and provide some estimates on their market size? How do you integrate these considerations into your marketing and strategic planning?

Yeah. Maybe I'll start with kind of the principles we use to think about how we can bring additional value to procedures we already participate in. And underneath, I think you have a modeling question, and I'll let Jamie take that. On the principal side, we look around and say, if there's something going on in the operating room that our customers are currently spending on, they're buying from somebody else. And we think that either we have design capabilities or integration capabilities that would make for that experience to be better for them and value creating. It's either clinically value creating or it's economically value creating, then we'll seek to do that. Sometimes in partnership, or sometimes it's something that we'll try to do ourselves take in-house and the way we've done some things like the cannula seals and stapling. So we look across it. If we see a real place that it's true value creation, not just something where it changes the revenue line by doing exactly what somebody else does, we're not very interested in that. But if we think the integration or the design creates a better outcome for the customer, either economically or clinically, hopefully both, then we'll step forward and we'll do that. We don't think we're done. If you look at da Vinci 5, you saw some things come into da Vinci 5 that were benefited by integration, and we think it's working great. So we look for those things. They take a while. They're not immediate. So our strategy and our product planners are looking for value creation opportunities there, but it doesn't start with how fast can the revenue growth be. It starts with what's the value creation and what could that be. Force-sensing instruments, force-reflecting instruments are such an example. They're more complex. They have a higher ASP. We think they bring value. We have to demonstrate that value and off we go. Jamie, I think the modeling question is super hard, but I'm going to give you a shot.

So, I would just say that the two examples I'd reference in terms of where you could, let's say, get greater share of wallet, if you can bring value, our force feedback instruments and insufflation both on da Vinci 5. Force feedback, we don't expect to be kind of at a broad supply until the end of '25. So the kind of impact that has on I&A per procedure is gated by when we get to broad supply with respect to inflation. So far, the proportion of cases that use that has been pretty high and that can have an impact as da Vinci 5 procedure volumes grow. I would just say if I zoom out in terms of I&A per procedure in total, the larger driver is going to be procedure mix. A greater proportion of kind of where we see growth coming from is in benign procedures. Gary kind of described that in more recent results. But when you think about cholecystectomy and other benign procedures, you'll have a procedure mix dynamic that means that we think, at least over the next couple of years, I&A per procedure drifts down slowly over time.

We have time for just one last question.

Thank you very much. I have a bit of an unusual question. I'm curious about the efficiencies gained from your growing install base. As you install more systems in various areas and regions, does this increase in the install base lead to margin implications through improved efficiencies in selling to and servicing customers? Can you identify differences in density across regions or markets where you have greater scale versus those with less? I'm trying to understand the long-term effects of these factors. Thank you.

Well, generally, the I&A revenue are at higher margins than capital. And so as you drive utilization growth, then a greater proportion of the revenue over some period comes from the higher profit streams. And so, well, let me ask Patrick. Is that the essence of your question?

I'll answer quickly just in light of time. We do get some advantages of scale with geographic density in terms of cost to support an account. So service, service depots, sales support, training support, as that becomes more dense, it does give us some cost advantages to serve them. Is that where you're headed?

That's the way. Thanks so much.

Thanks so much. That was our last question. In closing, we believe there's a substantial and durable opportunity to fundamentally improve surgery and acute intervention. Our teams continue to work closely with hospitals, physicians and care teams in pursuit of what our customers have termed the quintuple aim: better, more predictable patient outcomes, better experiences for patients, better experiences for their care teams, better access to great care and ultimately, a lower total cost of care. We believe value creation in surgery and acute care is foundationally human. It flows from respect for and understanding of patients and care teams, their needs and their environment. 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. And we look forward to talking with you again in three months.