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Intuitive Surgical (NASDAQ: ISRG)
Q3 2024 Earnings Call
Oct 17, 2024, 4:30 p.m. ET

Intuitive Surgical Reports Positive Growth in Q3 2024

What This Earnings Call Covered

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for waiting, and welcome to Intuitive’s third quarter 2024 earnings release. All participants are currently in listen-only mode. We will have a question-and-answer session later on. I will now hand the call to your host, Brandon Lamm, who will guide us through today’s presentation.

Brandon Lamm — Senior Manager, Investor Relations

Good afternoon, and welcome to our third quarter earnings conference call. With me today are Gary Guthart, our CEO; Dave Rosa, our president; and Jamie Samath, our CFO. Before we begin, I’d like to mention that Brian King has left to pursue his next opportunity. We appreciate his contributions over the past nine years and wish him success moving forward.

We are currently searching for his replacement. Please be aware that some comments made on this call may include forward-looking statements, and actual results might differ due to various risks and uncertainties. More detailed information about these risks can be found in our filings with the Securities and Exchange Commission, particularly in our most recent Form 10-K.

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You can view our SEC filings on our website or directly at the SEC’s site. We advise investors to exercise caution when relying on forward-looking statements. This call will be available for audio replay on our website under the Investor Relations Events section. Additionally, today’s press release and supplementary financial data tables have been posted online.

Today’s format will showcase our third quarter results, followed by a question-and-answer segment. Gary will kick off the discussion with a business overview, Dave will present operational highlights, Jamie will review our financial results, and then I will provide an updated financial outlook for 2024. Finally, we will open the floor to questions. Now, I’ll turn it over to Gary.

Gary S. Guthart — Chief Executive Officer and Director

Thank you for joining us today. Q3 of 2024 was successful, showcasing healthy growth in procedures and robust capital placements, alongside solid operational execution in a difficult global market. I will start by discussing our platforms and their global performance. Our multiport system installation base is around 9,300 worldwide.

We have seen a five-year compound annual growth rate of 17% in multiport procedures, with approximately 16 million total patients treated using our da Vinci multiport systems, 10 million of which were treated in the last five years. Our manufacturing and logistics capabilities have improved, ensuring better availability for customers while managing margins effectively. Our multiport systems have shown excellent stability, setting high standards in dependability. We introduced our fifth-generation multiport system in March, with 188 installations and over 12,000 procedures completed in just six months.

The da Vinci 5 brings substantial enhancements for surgeons and care teams and introduces unique features expected to improve patient outcomes. We are progressing towards a widespread launch and are actively pursuing additional global regulatory approvals for da Vinci 5, which will be discussed later in the call. Regarding our endoluminal system, we launched Ion in Q3 of 2019. Today, we have an installed base of 736, primarily in the United States, where 722 units are located.

To date, over 150,000 lung biopsies have been performed using Ion, each benefiting from machine learning technology that adapts to patient-specific anatomy. The five-year compound annual growth rate for Ion procedures is a remarkable 205%, with over 100 peer-reviewed articles attesting to its efficacy. We have focused on excellence in product quality and customer experience, updating Ion with significant features and software improvements five times since its launch and enhancing several components.

In the coming two years, we aim to expand our efforts beyond the U.S. and continue innovating our systems and software while increasing utilization within existing accounts. The da Vinci SP, launched in Q3 of 2018, has an installation base of 243. Its procedures have grown at a five-year CAGR of 55%, tallying 67,000 total procedures performed. We are witnessing strong SP performances in Korea and early growth in Europe and Japan, along with an increased cadence of global regulatory activities.

The clinical evidence for SP is backed by over 500 peer-reviewed studies. Its uptake has been stronger outside the U.S., where clinical applications are broader. Our SP team is focused on enhancing our instrument lineup and expanding indications in the U.S., supporting proctoring networks internationally and developing next-generation SP systems.

In our digital initiatives, nearly 3,000 da Vinci virtual reality simulators are currently deployed…

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Intuitive Surgical Reports Strong Momentum in Robotic Surgery Innovations

Key Highlights in Training, Growth, and Digital Initiatives

Intuitive Surgical has made significant strides in enhancing surgical training and expanding its operational reach. Surgeons are undergoing around 15,000 hours of simulator training every quarter, while active users of the My Intuitive app now exceed 14,000. Intuitive Hub is now operational in approximately 2,000 operating rooms, showcasing a robust integration of technology in surgical environments. The company reported outperforming its analytics program with over 4,000 successful implementations and a quarterly run rate in the hundreds.

The digital team is concentrating on three main areas: developing digital tools to enhance outcomes in the operating room (OR), fostering the formation of efficient care teams, and reducing total ownership costs, all while maintaining high standards in cybersecurity and data privacy. These initiatives are part of a broader strategy to strengthen local operations to provide improved service to patients around the globe. The company’s commitment to building regional teams has led to greater customer satisfaction and enhanced global capabilities.

In terms of growth, Intuitive Surgical has seen impressive results. The five-year compound annual growth rate (CAGR) for procedures has reached 21% in Europe, 25% in Asia, and 18% in regions outside the U.S. The company has successfully expanded reimbursement coverage for robot-assisted surgery to numerous procedures across many countries.

Despite these successes, there remains untapped potential for localizing capabilities to serve more patients. The focus on expanding robot-assisted surgeries and obtaining new clinical indications highlights Intuitive’s ongoing commitment to deliver advanced surgical solutions. These efforts also aim to improve patient outcomes and align with the quintuple aim sought by healthcare providers.

Clinical Insights from Dave Rosa

Dave Rosa, President of Intuitive Surgical, provided updates on clinical procedures and technological advancements. The da Vinci procedure growth rate was impressive at 18%, aided by an additional business day compared to Q3 2023. Key markets contributing to this growth include Japan, Germany, France, and the U.K., although mixed conditions in Asia persist.

A total of 379 da Vinci systems were deployed in the quarter, including 110 da Vinci 5 systems and 21 SP systems. The company also installed 58 Ion systems, reporting solid capital placements in the U.S., Japan, and India, while facing ongoing challenges in Europe and China. System utilization remained strong, with 4% year-over-year growth globally for multi-port platforms and higher rates for SP and Ion systems.

Financially, the company experienced a 17% increase in revenue this quarter, with spending aligned to expectations as it invests in R&D and production capabilities. Intuitive Surgical has begun a measured rollout of the da Vinci 5 platform, placing 110 systems in line with its strategic goals. Feedback from healthcare professionals at the recent Intuitive 360 user conference indicated a preference for the da Vinci 5, with over 12,000 cases already completed. Notably, Dr. Laila Rashidi’s early use of the da Vinci 5 demonstrated a 20% reduction in force during surgery, reinforcing the technology’s benefits.

In the realm of digital innovations, Intuitive is merging clinical and operational insights with electronic medical record data to enhance surgical outcomes. Their new analytical tool, Case Insights, aims to provide physicians with deeper insights into their postoperative reports, linking data from the da Vinci system to clinical practices. The company remains committed to advancing digital solutions to achieve better outcomes for surgical patients.

Looking ahead, recent regulatory milestones include receiving CE technical clearance for da Vinci 5 in Europe and authorization in Korea, while ongoing processes in Japan continue. The commercial journey in China has commenced with two Ion systems placed and initial cases performed. Intuitive is also expanding its advanced instrument portfolio with the new eight-millimeter SureForm 30 stapler designed for enhanced visualization in challenging surgical environments.

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Strong Performance Results Mark Q3 for Da Vinci Systems

Japan and Europe remain critical areas for growth, alongside advancements in the U.S. colorectal market where a 510(k) submission has been completed. The commercialization efforts in Europe are proceeding well, and early customer interest in the SP is encouraging. Additionally, I’d like to highlight some recently published peer-reviewed literature that is particularly noteworthy. Beyond the specific data discussed in this call, we recommend a thorough consideration of the extensive evidence presented in scientific studies over the years.

At the 2024 American Association for Oncology and Interventional Pulmonology Annual Conference in August, Dr. Bryan Husta from Memorial Sloan Kettering Cancer Center shared results from the CONFIRM study. This prospective study evaluated the effectiveness of the integrated Ion endoluminal system and mobile cone beam CT in biopsy procedures for pulmonary nodules smaller than two centimeters. A total of 155 patients from six centers across the U.S. participated.

Notably, the average nodule size was 14 millimeters, and the integrated platform achieved a nodule acquisition rate of 99.4%, yielding diagnostic results with no observed pneumothorax cases. The analysis showed consistent success across various centers, supporting high diagnostic yields irrespective of nodule size, location, or CT bronchus sign presence. The findings concluded that “integrated shape-sensing robotic-assisted bronchoscopy and global cone beam CT demonstrated a high diagnostic yield and excellent safety for small complex nodules, with reproducible results across physicians and institutions.” These results imply that this integrated platform could rival transthoracic biopsy methods for small nodules in clinical settings.

Earlier this year, Dr. Maegawa from Emory University’s Department of Surgery published a study in the journal Surgery comparing robotic and laparoscopic cholecystectomy procedures for benign conditions, based on data from over 59,000 patients collected in 2022 through the American College of Surgeons’ National Surgical Quality Improvement Program. Among these, more than 53,000 underwent laparoscopic surgery while approximately 5,500 had robotic-assisted procedures.

The multivariable logistic regression analysis, which adjusted for various factors, revealed that patients undergoing robotic-assisted cholecystectomy faced an 18% lower chance of serious complications, a 56% lower chance of switching to open surgery, and a 24% lower risk of being hospitalized for more than 24 hours. Focusing solely on elective cholecystectomies, researchers noted a 46% lower likelihood of conversion to open surgery, a 59% reduction in reoperation risk, and a 30% decrease in the chances of extended hospitalization linked with robotic assistance.

In summary, the study demonstrated that robotic cholecystectomies correlate with a lower risk of serious complications and a reduced rate of conversion to open surgery compared to laparoscopic methods. This supports the notion that adopting new technologies has the potential to improve safety during minimally invasive surgeries.

As we conclude this discussion, we reaffirm our commitment to the priorities set for 2024. These include supporting the gradual launch of da Vinci 5 alongside our new platforms regionally, facilitating surgeons’ adoption of targeted procedures, enhancing product quality and profit margins, and bolstering productivity in areas that benefit from a global scale. I will now pass the spotlight to Jamie, who will elaborate on our financial performance and procedural highlights.

Jamie E. Samath — Chief Financial Officer

Good afternoon. I will outline the key performance highlights on a non-GAAP or pro forma basis, as well as summarize our GAAP results later. A reconciliation between our pro forma and GAAP figures is available on our website. In Q3, core metrics remained robust, with an 18% growth in da Vinci procedures, a 15% increase in the installed base of da Vinci systems, and a 3% rise in overall system utilization.

The growth in procedures during Q3 was positively impacted by a higher number of business days compared to the same period last year. Adjusted for the number of days, procedure growth was at 17%. In the U.S., procedures grew by 16%, primarily fueled by an increase in benign general surgeries.

On a day-adjusted basis, bariatric procedures in the U.S. saw a mid-single-digit decline, similar to last quarter. In markets outside the U.S., procedures grew by 24%, with significant increases in general surgery, gynecology, and thoracic procedures. Noteworthy growth regions included the U.K. and India while Japan, Germany, France, and Eli also exhibited strength. South Korea showed improved procedure growth from the previous quarter, though it still lags behind longer-term historical trends due to ongoing market challenges. In China, growth remained below corporate averages due to recent system placement dynamics and domestic robotic competition.

Regarding capital performance, we placed 379 systems in Q3, up from 312 systems in the same quarter last year. In the U.S., 219 systems were placed compared to 159 systems in Q3 the previous year. This quarter included 110 placements of the new da Vinci 5. Anticipating an increase in da Vinci 5 supply, we expect a shift towards trade-ins in U.S. placements as we prepare for a broader launch next year.

In international markets, we placed 160 systems in Q3, an increase from 153 last year. Excluding trading transactions, net new system placements outside the U.S. rose by 28% year-over-year. This quarter saw 65 placements in Europe, 39 in Japan, and 14 in China, compared to 60 in Europe, 32 in Japan, and 10 in China in Q3 of the previous year.

Despite ongoing government budget pressures affecting healthcare spending in Europe, we recognized third-quarter revenue of $2 billion, reflecting a 17% increase from last year—this growth is attributed to da Vinci procedure increases, expanded installed base, and growth in our Ion business. On a constant-currency basis, revenue growth remained steady at 17%. Additional insights into revenue trends include leasing accounting for 58% of Q3 placements, a rise from previous periods, revealing a preference for leasing among U.S. customers.

The average selling price for systems in Q3 was $1.51 million, compared to $1.4 million last year. This increase reflects a higher mix of da Vinci 5 sales along with a reduced number of trade-ins. We also recognized $24 million from lease buyouts during Q3, down from $28 million last quarter and $17 million from a year ago.

For da Vinci instruments and accessories, the revenue per procedure was approximately $1,800, consistent with the prior quarter but lower than last year’s figure of $1,830. The decline in per procedure revenue year-over-year was mainly due to a reduced mix of bariatric procedures and an increased proportion of procedures in distributor-served markets.

Turning to our Ion platform, procedures grew by an impressive 73%, totaling about 25,000 in Q3. We placed 58 Ion systems in the quarter compared to 55 last year and 74 last quarter. Notably, early placements reflected backlog catch-up as supply for catheters and vision probes improved. This quarter’s Ion placements included three in Europe and our first two in China, resulting in a 50% year-over-year increase in the installed base to 736 systems, with 296 operating under lease agreements.

Additionally, Q3 saw a 70% increase in SP procedure growth, with a strong multi-specialty performance noted in Korea.

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Strong Growth in U.S. Market Drives Financial Performance Amid Global Challenges

In the third quarter of 2024, our company experienced robust growth in the United States, alongside early-stage development in Japan and Europe. Of the 21 systems placed during the quarter, 21 were SP systems, with 15 placements occurring in international markets. The SP installed base saw a remarkable 54% growth compared to the same quarter last year, totaling 243 systems. Let’s delve into the rest of our financial statements.

The pro forma gross margin for Q3 2024 stood at 69.1%, slightly up from 68.8% in Q3 2023 but down from 70% in the previous quarter. The year-over-year improvement in gross margin is largely due to better leverage on fixed overhead, reduced component costs, and lower logistics expenses, although this was partially countered by increased inventory reserves. Notably, we launched a new manufacturing facility at our East Coast hub in Peachtree Corners, Georgia, producing X and Xi systems. Additionally, we established a global capability center in Bangalore, India, consolidating our commercial and training teams along with IT and shared service resources.

As a reminder for future investors, due to ongoing capital investments, we anticipate a substantial rise in depreciation expenses in 2025 as we introduce additional facilities into operation. Our third-quarter pro forma operating expenses increased 13% from the previous year, primarily driven by a larger workforce, increased legal expenses, and more customer-facing activities. Similar to previous years, we maintained pro forma R&D expenses at about 11% of revenue, emphasizing our commitment to innovation that aligns with our growth objectives. Furthermore, SG&A expenses have been streamlined effectively as we scale our operations in line with growth.

During this quarter, we added approximately 670 employees, with over half of these roles in our high-volume manufacturing facility in Mexicali to support growth in procedures. For the year to date, through Q3 2024, our pro forma operating margin was 36% of revenue, reflecting an increase of 184 basis points from the same period in 2023. This rise was fueled by improved gross margins and more efficient SG&A leverage aligned with revenue growth. On a year-to-date basis, pro forma earnings per share (EPS) rose by 25% compared to last year. Pro forma other income amounted to $94.6 million for Q3, up from $79.4 million the previous quarter, largely due to increased interest income.

Considering the prevailing interest rate climate, we expect the average yield on our cash and investments to decline heading into 2025. Our pro forma effective tax rate for Q3 was 20.5%, attributed to one-time gains of approximately $12 million relating to the elimination of certain tax reserve limitations and adjustments to deferred tax assets. For Q3 2024, our pro forma net income came to $669 million, or $1.84 per share, an increase from $524 million or $1.46 per share in Q3 last year. I will now summarize our GAAP financial results.

The GAAP net income for the third quarter of 2024 was $565 million, equivalent to $1.56 per share, compared to $416 million or $1.16 per share in Q3 2023. The differences between pro forma and GAAP net income are detailed on our website, including excess tax benefits from employee equity plans, stock-based compensation, amortization of intangibles, litigation expenses, and gains or losses from strategic investments. By the end of Q3, our cash and investments totaled $8.3 billion, up from $7.7 billion last quarter. This sequential increase stemmed from cash generated through operating activities, which was somewhat offset by capital expenditures of $248 million.

Now, I will turn the discussion over to Brandon to detail our updated outlook.

Brandon Lamm — Senior Manager, Investor Relations

Thank you, Jamie. I will outline our financial outlook moving into 2024, starting with procedures. Previously, we forecasted full-year 2024 procedure growth between 15.5% and 17%. We are now raising the lower end to 16%, projecting full-year 2024 procedure growth within a range of 16% to 17%. This updated projection assumes continued softening in bariatric procedures and emerging challenges in Asia, including physician strikes in Korea and postponed robotic system tenders in China, which may impact capital placements and procedure growth. At the high end of this range, we anticipate stabilization in bariatric procedures at current quarter growth rates, provided that the challenges in Korea and China do not worsen. Importantly, we do not foresee significant impacts on elective procedures due to IV shortages or other hurricane-related disruptions.

Regarding gross profit margins, we continue to expect pro forma gross profit margins between 68.5% and 69% of net revenue. Actual gross profit margins may fluctuate quarterly based on product mix, regional performance, and new product introductions. When it comes to operating expenses, we adjust our previous forecast and now expect full-year 2024 pro forma operating expense growth within 10% to 12%. We anticipate noncash stock compensation expenses will range between $670 million and $690 million. Additionally, we have raised our estimate for other income, mainly from interest, and expect it to total between $325 million and $345 million in 2024.

As for capital expenditures, we maintain our estimate within the range of $1 billion to $1.2 billion, primarily for planned construction activities. We expect the pro forma income tax rate for 2024 will be between 22% and 23% of pre-tax income. This concludes our prepared comments. We are now open to your questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] We will now take our first question from the queue. Travis Steed from Bank of America, please proceed.

Travis Steed — Analyst

Sure. Could you share more insights regarding the dV5 ramp leading to the mid-2025 launch? Are further upgrades or software enhancements expected? I would also like to understand better how customer feedback has indicated certain contribution margin benefits from dV5.

Dave Rosa — President

Hi, Travis. I’m glad to answer your questions. We will continue making scheduled software updates leading up to the broad launch. You can expect these updates to be released regularly as we approach the launch period. For the dV5 supply chain, we anticipate a modest increase quarter over quarter as we progress into next year. As for contribution margins, Jamie, could you provide further details?

Jamie E. Samath — Chief Financial Officer

Certainly! We recently contributed to a publication highlighting the potential contribution margin gains from improved efficiency during procedures. Some of our early adopters, who are key opinion leaders, have reported noticeable improvements in console time, leading to greater efficiency in procedures. This feedback suggests a positive impact on overall profitability for the institutions utilizing dV5.

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International Developments and Strategic Insights: A Look at Key Procedures

During a recent operational update, company executives discussed early feedback from surgeons regarding efficiency gains and throughput on their platform. Ongoing discussions with administration emphasize the potential for improvements as aspects of the launch unfold.

Operator

Next, we have a question from Larry Biegelsen at Wells Fargo. Please proceed.

Larry Biegelsen — Analyst

Thank you for taking my questions. First, could you discuss the international landscape? Specifically, I noticed that Korean approval arrived sooner than anticipated. Are you prepared for an immediate launch there? Additionally, what is the current status of your timing in Japan? There was some back and forth in your earlier remarks.

Lastly, how long do you expect the CE Mark review process in Europe to take? I have a follow-up after that.

Dave Rosa — President

We do have the necessary supply to meet demand in Korea, which is encouraging. As for Japan, we have not established a specific timeline yet and are still in discussions. Regarding the CE mark in Europe, we continue to anticipate a timeline similar to last quarter, aiming for late 2025.

Larry Biegelsen — Analyst

That’s helpful, thank you. Now for Dave or Gary, I’ve noted discussions surrounding new procedures like appendectomy, foregut, hepatobiliary, and emergency procedures. Can you provide an update on your progress in these areas from clinical, regulatory, and commercial perspectives? How do you envision the size of these new markets?

Jamie E. Samath — Chief Financial Officer

In the U.S., we have been actively involved in foregut and hepatobiliary procedures for some time, and they have shown significant growth for us. These are both relatively niche categories, which may explain the limited focus in our discussions. In contrast, appendectomy is newer territory, and while it remains a smaller procedure, we are seeing growth as surgeons integrate Xi into their practice.

As Xi adoption increases, we expect to see appendectomy procedures utilized more in emergency and acute care settings. We’ve conducted clinical work on appendectomy and currently have FDA indications in the U.S., although this remains a smaller segment primarily concentrated in emergency situations.

Operator

Next, we have Robbie Marcus from JPMorgan. Please go ahead.

Robbie Marcus — Analyst

Congratulations on a strong quarter. I have two questions, potentially for Jamie. First, your margins have been impressive, both gross and operating margins. How much more room for growth do you foresee? Additionally, we are just beginning to see da Vinci 5 impact our margins, with some depreciation benefits likely tapering off soon. How should we think about margin progression moving forward?

Jamie E. Samath — Chief Financial Officer

To start, we aim for margins that rank among the best in the med tech field. We do not have a targeted operating margin above 40%, as seen pre-COVID, because we balance our investment rate with our expected profitability. Currently, our margin stands at 37% this quarter and 36% year to date. For 2025, we anticipate a slight dip in gross margins due to increased depreciation as we ramp up new facilities. Although we aspire to reach approximately 70% gross margin mid-term, our current focus remains on prudent spending and maximizing profitability.

Robbie Marcus — Analyst

That’s helpful. As we transition into next year, with more trade-ins expected from da Vinci 5 as it fully launches, can you speak to the opportunity for refurbishing and reselling traded-in systems? Any immediate plans you can share?

Jamie E. Samath — Chief Financial Officer

As the trade-in cycle progresses over the coming years, we will refurbish the incoming Xi units, allowing for market segmentation to cater to both the U.S. and more cost-sensitive international markets. While specifics are still under consideration, we are preparing to make the most of this opportunity with refurbished Xi systems.

Operator

Moving to our next question, we have David Roman from Goldman Sachs. Please proceed.

David Roman — Analyst

Good afternoon, everyone. Let’s discuss Ion. There has been noticeable promotional activity in the U.S. and Europe as you expand into new markets. Can you help clarify where Ion stands in its launch and adoption phases across various regions, as well as your expectations for growth in this segment moving forward? I have one more question regarding P&L after that.

Gary S. Guthart — Chief Executive Officer and Director

Sure, David. Ion is making good strides in the U.S., especially regarding its initial indication for biopsy of suspicious lung nodules. We believe it has crossed an important threshold and should now be prevalent in over 10% of total biopsy use cases. Our focus is now on maximizing utilization and customer satisfaction while exploring additional indications within the lung sector using the Ion platform. Outside the U.S., we are still early in our journey, with initial activity in the U.K. showing promising momentum off a small base.

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Shifts in Financial Strategy: A Look into Surgical Robotics and Market Dynamics

Strategic Expansion in International Markets

The company is taking early steps into important international markets such as Germany and China. In the U.S., the focus has shifted towards maximizing usage and customer satisfaction, particularly within a concentrated client base. This dual approach underscores the firm’s evolving journey in global markets, harnessing the advantages of established relationships while exploring new opportunities abroad.

Growing Usage Agreements Impact Profitability

David Roman — Analyst

Your insights are invaluable. A follow-up regarding the Profit and Loss statement: This quarter, a noteworthy trend has emerged with an increase in systems under usage agreements, rising from approximately 12% earlier this year to about 15%. Could you elaborate on how this shift affects the placement model and overall P&L?

Jamie E. Samath — Chief Financial Officer

Absolutely. These usage agreements fall under a category of operating leases. Customers pay for the system based on usage, typically influenced by an annual procedural forecast embedded in the contract. Financially, this model mirrors standard offerings since it involves fixed payments. Operating leases usually offer slight gains compared to direct purchases due to implicit interest rates.

However, with usage agreements, we face variability in actual usage. Our engagement with clients informs how we manage this risk based on their operational plans, especially if usage falls short of expectations. This model has gained popularity, allowing customers to access additional systems without straining capital budgets while minimizing risks associated with new systems. Although we anticipate continued growth in the U.S. market, the potential for further expansion may slow since we are already well-penetrated there.

In contrast, international markets represent an early stage of adoption, making it premature to predict growth trajectories in those regions.

Insight on Dual Console Demand

Operator

Next, we have Rick Wise from Stifel. Please proceed.

Rick Wise — Analyst

Thank you, everyone. We hear from many surgeons interested in the da Vinci 5 system. It seems that larger academic hospitals are waiting for dual console availability, while smaller hospitals are making quicker decisions. Can you clarify if that trend is accurate and how it might impact procedure growth, particularly once dual consoles are fully launched in the middle of next year?

Gary S. Guthart — Chief Executive Officer and Director

Thanks, Rick. I will pass this on to Dave for details on dual console status, then we’ll address broader trends.

Dave Rosa — President

Sure, Rick. As we enhance our supply capabilities, we are prioritizing dual console production alongside single-system deals. Our team is actively communicating with diverse customers to assess their needs. I lack specific insights on how interest differs between small and large institutions.

Gary S. Guthart — Chief Executive Officer and Director

In my view, we shouldn’t expect a major change in our forecast model. As we conclude our launch phase and expand market access, we aim to fulfill demands across the spectrum. The impact of dual console availability on growth rates appears minimal across different sizes of institutions, making it difficult to pinpoint.

A Deeper Dive into Hub Installations

Rick Wise — Analyst

Quickly, regarding the Hub, which is now present in over 2,000 operating rooms, can you share early feedback and its implications for both the da Vinci 5 system and procedural growth?

Gary S. Guthart — Chief Executive Officer and Director

The Hub is currently functioning well, supporting both our Generation 4 and Gen 5 systems. It acts as an effective data recorder and media management tool. Many early setups remain on-premises, and users appreciate the ability to track data and evaluate post-operative performance. As we transition to cloud functionalities, I believe it will enhance customer capability significantly. Our foundational work is promising, and while there are areas for improvement, progress is evident and exciting.

Operator

Next in line, we have Adam Maeder from Piper Sandler. Please, go ahead.

Adam Maeder — Analyst

Good afternoon, and congratulations on the quarter. I’d like clarification on the capital environment moving into the end of 2023 and 2025, especially concerning hospital budgets and investment appetite. Regarding Europe and China, are the financial pressures consistent with the first half of the year, or have they worsened? What’s the outlook moving forward?

Gary S. Guthart — Chief Executive Officer and Director

Jamie, would you provide general insights, followed by my comments on China?

Jamie E. Samath — Chief Financial Officer

In the U.S., conditions appear stable, with noteworthy interest in the da Vinci 5 system contributing positively. The overall capital backdrop remains steady. In Europe, particularly in countries like the U.K. and Germany, there’s been notable pressure on healthcare capital spending, which is impacting our activities there.

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Intuitive Surgical Discusses Market Challenges and Future Growth Prospects

Current Struggles in Europe and China

Recently, leaders at Intuitive Surgical highlighted ongoing pressures in the European market due to government budget constraints. These pressures, they noted, have remained consistent for the past quarter. In Europe, upcoming government events may influence market dynamics, but it is still too early to make predictions.

Healthcare Market Stress in China

According to Gary S. Guthart, Chief Executive Officer, the healthcare market in China is facing significant challenges. The introduction of value-based pricing and price caps has put pressure on their operations, which are likely to persist for several quarters. Additionally, there are new domestic competitors in the market that benefit from local provincial preferences when they launch their products. This trend is not expected to change quickly, indicating a period of adjustment before stability is achieved.

Insights on da Vinci 5 System Usage

Brandon Vazquez from William Blair raised important questions about the da Vinci 5 systems. He sought insights into how this system is utilized compared to other models in the Xi base. Jamie E. Samath, Chief Financial Officer, responded that the da Vinci 5 is being used across various procedures effectively, but it is too early to draw reliable comparisons between it and the Xi model due to the small installed base.

On the topic of software innovations, Samath explained that they have two categories of software. One category consists of non-medical device software, which can be updated more rapidly, while the other involves regulatory-compliant products, which follow a longer development cycle. The transition to a higher frequency of software updates reflects the company’s focus on technological advancement.

Balancing Growth Opportunities in the U.S. Market

During the discussion, Matt Miksic from Barclays inquired about future growth strategies in the U.S. market. Guthart indicated that the company’s growth would come from deepening their reach into existing procedures while exploring new market segments. Successfully addressing the needs of existing customers will remain a priority alongside seeking opportunities for innovation, particularly with new technology and treatment indications.

Looking Ahead

In summary, Intuitive Surgical remains optimistic about its potential to enhance surgical procedures and patient care. Their commitment to addressing the requirements of hospitals, patients, and healthcare teams speaks to their belief in the fundamental human aspects of healthcare systems. The company envisions a future where treatment is less invasive and more effective, ensuring patients can return to their lives swiftly. Leaders expressed gratitude for the support as they continue on this journey, promising further updates in future communications.

Call Participants:

Brandon Lamm — Senior Manager, Investor Relations

Gary S. Guthart — Chief Executive Officer and Director

Dave Rosa — President

Jamie E. Samath — Chief Financial Officer

Travis Steed — Analyst

Jamie Samath — Chief Financial Officer

Larry Biegelsen — Analyst

Robbie Marcus — Analyst

David Roman — Analyst

Gary Guthart — Chief Executive Officer and Director

Rick Wise — Analyst

Adam Maeder — Piper Sandler — Analyst

Brandon Vazquez — Analyst

Matt Miksic — Analyst

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