Intuitive Surgical Q1 2024 Earnings Call Transcript

Presentation

[Operator]

Thank you, everyone, for standing by, and welcome to the Intuitive Q1 2024 Earnings Release Call. [Operator Instructions]

I will now turn the call over to our host, Head of Investor Relations for Intuitive Surgical, Brian King. Please go ahead.

[Brian King, Vice President, Treasurer and Head of Investor Relations at Intuitive Surgical]

Good afternoon, and welcome to Intuitive's first quarter earnings conference call. With me today, we have Gary Guthart, our CEO; and Jamie Samath, our 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 annual report on 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 under 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 2024. And finally, we will host a question-and-answer session.

And with that, I will turn it over to Gary.

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

Thank you for joining us today. The first quarter of 2024 was a solid one for Intuitive, where core measures of our business remained healthy, including solid procedure growth and capital placements. Furthermore, our teams delivered important milestones across several parts of our Intuitive ecosystem, including launching our next-generation multi-port platform, da Vinci 5; launching our da Vinci SP platform in Europe; and improving our supply constraints for Ion catheters. Some regional challenges existed in the quarter, which we'll describe today.

Taken together, we remain enthusiastic about our opportunity, and we'll work through near-term pressures by focusing on what we can control.

Starting first with procedures. We experienced solid growth in the quarter of 16%, compared with a strong Q1 of '23, that was a result of elevated patient volume from the return of patients post-pandemic. Q1 of 2024 procedure performance was led by broad growth in general surgery in the United States and by procedures beyond urology outside the United States. Globally, cholecystectomy, colon resection and foregut procedures led the way.

Regional performance included strength in China, Germany and the United Kingdom. In Japan, we saw a moderation of growth in urology, as we reached higher levels of penetration. In Q1 2023, we benefited from the return of patients in backlog. In Korea, growth was lower than our expectation, primarily due to a physician strike in the country, which began in February and has continued.

Turning to capital. We placed 313 da Vinci systems in the quarter, of which 289 were multi-port systems, compared with 302 multi-port systems in Q1 of '23. SP placements were 24 in the quarter versus 10 systems a year ago, and Ion placements for the quarter were 70 versus 55 a year ago. Capital placements were solid in the United States, our global distribution markets, and in Germany. Placements in China appear to be impacted by delayed tenders and an apparent increase in provincial preference for domestic robotic competition. We saw some placement weakness in the U.K., as financial pressures in the NHS constrained access to capital.

System utilization, defined as procedures per installed system per quarter, grew 1% globally year-over-year for our multi-port platform, lower than last quarter and our historical trend, a result of a strong placement year in 2023, in which, the multi-port clinical installed base grew 14%, while customers addressed a COVID related backlog. For our newer platforms, utilization grew 10% for SP and 14% for Ion in the quarter. Utilization is an important indicator of customer health and is a reflection of customers driving value from their systems.

Turning to our finances. Revenue growth of 11% in the quarter reflects solid procedure performance and capital placements. Average system selling prices declined modestly due to regional and product mix. Product margins were within our expectations, reflecting a higher mix of newer platforms. Operating expenses came in slightly below planned, resulting in pro forma operating profit growth of 18%. Jamie will take you through our finances in greater detail later in the call.

In the quarter, we made good progress with our new platforms. In March, we received FDA clearance for our next-generation multi-port platform, da Vinci 5. Within the quarter, we placed eight da Vinci 5 systems and surgeon completed their first cases. As we engaged with customers during their activation of da Vinci 5, our customers are noting and appreciating improved precision, improved imaging, improved efficiency for surgeon and staff, improved ergonomics and they are exploring the potential of force feedback, where early surgeons are excited to test hypothesis about its procedural, clinical and learning value. Digital analytical capabilities of da Vinci 5 are also drawing positive reviews. In parallel with customer support, we're working hard to optimize our supply chains and manufacturing capabilities for da Vinci 5 components. We will remain in our measured roll-out, as we stabilize supply and respond to customer input.

Turning to Ion. Our teams have made meaningful progress on resolving supply challenges for our catheter and Ion's vision probe, although work still remains to be done. Earlier this month, FDA reviewed our set of design and production changes and cleared an increase in an Ion catheter lives from five lives to eight lives, alleviating some supply constraints while improving the economics for us and our customers. Also in March, we received NMPA clearance for Ion in China through a special review process for innovative medical devices. While NMPA clearance is only the first step toward commercialization in China, we believe Ion can play an important role in helping to address the significant burden of lung cancer in the country.

Turning to SP. We received CE mark in Europe, with a broad set of indications in the quarter, and we placed eight systems. First cases in Europe were performed this April and were encouraged by early customer interest for SP.

In closing, for 2024, our priorities are as follows. First, we'll support the measured launch of da Vinci 5 and our other new platforms by region. Second, we're focused on supporting surgeons' adoption of focused procedures. Third, we're focused on improving our product margins and quality. And finally, we're focused on improving productivity in those functions that benefit from global scale.

I'll now turn the time over to Jamie, who will take you through our finances in greater detail.

[Jamie Samath, Chief Financial Officer at Intuitive Surgical]

Good afternoon. I will describe the highlights of our performance on a non-GAAP or pro forma basis and 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.

In Q1, da Vinci procedures grew 16%. The installed base of systems grew 14% to 8,887 systems. And average system utilization increased by 2%, lower than recent trends because of the strength in procedure growth and utilization in Q1 of last year that reflected a significant benefit from the treatment of patient backlogs. U.S. procedures grew 14%, driven by broad growth in general surgery. Bariatrics procedure growth in the U.S. continued to moderate and was flat year-over-year. O-U.S. procedures grew 20%, reflecting strong growth in general surgery and thoracic procedures. Brian will provide additional detail on our clinical performance later in the call.

Turning to capital. We placed 313 systems in the first quarter, compared to 312 systems in Q1 of last year. Excluding trading transactions, net new system placements grew 16% to 284 systems. In the U.S., we placed 148 systems in Q1, including eight da Vinci 5 placements, compared with 141 systems placed in Q1 of last year. Given constrained supply of da Vinci 5, system placements may be choppy this year, as some customers that are interested in da Vinci 5 decide whether to acquire a fourth generation system with an upgrade drive [Phonetic] or wait for adequate supply.

Outside the U.S., we placed 165 systems in Q1, compared with 171 systems last year. Current quarter system placements included 84 into Europe, 20 into Japan, and 10 into China, compared with 101 into Europe, 16 into Japan and 18 into China of -- in Q1 of last year. Placements in the U.K. were below our expectations and lower than Q1 last year because of the reallocation of NHS capital funding to help address industrial actions in the NHS. Placements in China continue to reflect the impact of domestic robotic competition and delayed tenders due to a broader central government focus on systematic governance across sectors, including healthcare.

First quarter revenue was $1.89 billion, an increase of 11% from last year. On a constant currency basis, revenue growth was 12%. Additional revenue statistics and trends are as follows. Leasing represented 51% of Q1 placements, compared with 42% in Q1 of last year. Given the customer preference for our usage-based models in the U.S. and the launch of da Vinci 5, we continue to expect the proportion of systems placed under our lease arrangements to grow over time.

Q1 system average selling prices were $1.39 million, as compared to $1.47 million last year. System ASPs were negatively impacted by regional and platform mix and lower pricing in China, partially offset by lower trade-ins. We recognized $29 million of lease buyout revenue in the first quarter, compared with $21 million last quarter and $24 million last year. da Vinci instrument and accessory revenue per procedure was approximately $1,780, flat to last year and down $20 compared to the last quarter. The sequential decline in I&A per procedure is primarily a result of procedure mix in the U.S., given strong growth in cholecystectomy and the moderation of growth in bariatrics. We have also seen larger IDNs in the U.S. look for operational efficiencies by reducing inventory.

Turning to Ion. There were approximately 19,500 Ion procedures in the first quarter, an increase of 90% as compared to last year. Since launching the Ion platform in 2019, on a cumulative basis, more than 100,000 procedures have now been performed. In Q1, we placed 70 Ion systems compared to 55 in Q1 of 2023 and 44 last quarter. Q1 results reflected a partial recovery from last quarter, as catheter supply improved. Our team continued to work on stabilizing supply of the catheter and vision probe. Q1 results included four Ion system placements in the U.K., following the European clearance last year. The installed base of Ion systems increased 61% year-over-year to 604 systems, of which 244 are under operating lease arrangements.

24 of the systems placed in the quarter were SP systems, including 8 systems in Europe, reflecting clearance early in the quarter. First quarter SP procedure growth was 60%, with healthy growth in Korea and the U.S., and early-stage growth in Japan. In the U.S., during the quarter, we completed a 510(k) submission for a thoracic indication, made continued regulatory progress toward a colorectal submission and enrolled additional patients in our IDE for nipple-sparing mastectomy. The SP installed base grew 55% from the year-ago quarter to 201 systems.

Moving on to the rest of the P&L. Pro forma gross margin for the first quarter of 2024 was 67.6%, compared with 67.2% for the first quarter of 2023 and 68% last quarter. The sequential reduction in pro forma gross margin primarily reflects higher fixed costs, including depreciation expense for expanded manufacturing capacity and higher costs associated with the launch of da Vinci 5. Our manufacturing and business unit teams made progress in the quarter on activities to improve gross margin over the medium term. This remains an area of key focus for us.

First quarter pro forma operating expenses increased 7% compared with last year, slightly lower than our -- than expectations due to the timing of certain expenses. Pro forma operating expenses as a percentage of revenue were 140 basis points lower than Q1 last year, reflecting planned leverage in enabling functions, partially offset by increased R&D to fund innovation and future growth. Pro forma other income was $72.5 million for Q1, higher than $67.1 million in the prior quarter, primarily due to higher interest income. Our pro forma effective tax rate for the first quarter was 22.5%, consistent with our expectations. First quarter 2024 pro forma net income was $544 million or $1.50 per share, compared with $444 million or $1.23 per share for the first quarter of last year.

I will now summarize our GAAP results. GAAP net income was $547 million, or $1.51 per share for the first quarter of 2024, compared with GAAP net income of $361 million, or $1.00 per share for the first quarter of 2023. First quarter GAAP tax expense was a benefit of $9 million, reflecting excess tax benefits associated with employee equity plans of $111 million. The adjustments between pro forma and GAAP net income are outlined and quantified on our website, and include excess tax benefits associated with employee equity plans, employee stock-based compensation, amortization of intangibles, litigation charges, and gains and losses on strategic investments.

We ended the quarter with cash and investments of $7.3 billion, flat to the end of last year. The sequential changes in cash included cash generated from operating activities, offset by capital expenditures of $242 million and the net impact of employee equity plans of $46 million.

And with that, I would like to turn it over to Brian.

[Brian King, Vice President, Treasurer and Head of Investor Relations at Intuitive Surgical]

Thank you, Jamie. Overall, first quarter procedure growth was 16% year-over-year, compared to 26% for the first quarter of 2023 and 21% last quarter. In the U.S., first quarter 2024 procedure growth was 14% year-over-year, compared to 26% for the first quarter of 2023 and 17% last quarter. First quarter growth was led by procedures within general surgery, with strength in cholecystectomy, colon resection and foregut procedures. Growth in bariatrics procedures continued to moderate, and was flat year-over-year.

Outside of the U.S., first quarter procedure volume grew 20%, compared with 28% for the first quarter of 2023 and 29% last quarter. Over 70% of procedure volume growth led by procedures beyond urology, with strength in colon resection, hysterectomy and lung resection procedures. In Europe, first quarter growth continued to be led by general surgery and gynecology procedure categories. Germany and the U.K. procedure performance led the region, with both experiencing strong growth in colon and rectal resection and hysterectomy procedures.

In Asia, growth in the first quarter was led by China, with strong procedure performance in urology and gynecology procedures. Year-over-year procedure growth in the country benefited from a comparison period, where procedures were beginning to recover from COVID during the first quarter of 2023. In Japan, while we experienced a moderation in growth in urology, overall procedure growth was healthy, with strength in general surgery procedures, such as colon and rectal resection, and gynecology procedures. Effective June 1, 2024, five additional procedures will have reimbursement in Japan, with two existing rectal resection procedures receiving an increase in reimbursement for equivalency to laparoscopic surgery. The opportunity for these procedures is relatively modest, but continues to support the adoption of minimally invasive robotic surgery across a growing set of procedures.

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.

In the first quarter of this year, Dr. Jae Hwan Choi and team from University of South Florida and Tampa, Florida, published a meta-analysis of randomized controlled trials, describing outcomes of robotic-assisted abdominal pelvic surgery in the journal, Surgical Endoscopy. This analysis included a review of 50 publications published through April 2021, included over 4,800 patients from randomized controlled studies, and covered a variety of abdominal pelvic surgical procedures, including anti-reflux, gastrointestinal, colorectal, urologic, hernia repair and gynecologic procedures. The authors compared robotic-assisted outcomes with those from both open and laparoscopic procedures.

When compared to the open approach, robotic-assisted procedures had lower rates of post-operative complications, with a 32% lower risk of post-operative complications across all procedures, as well as less estimated blood loss with a mean difference of 286.8 milliliters. Furthermore, length of stay was, on average, 1.7 days shorter for robotic-assisted procedures. Relative to the laparoscopic approach, rates of conversion to open for the robotic-assisted group was approximately half the rate of the laparoscopic approach. Length of stay was also shorter for robotic-assisted procedures.

Interestingly, the authors also reported an analysis on the impact of surgeon experience, comparing inexperienced versus experienced surgeons, and found that the experienced robotic-assisted surgeons had a lower risk of intraoperative complications, with significantly less risk in the experienced group as compared with the laparoscopic group, as well as a lower risk of conversion to open for the experienced surgeon relative to the laparoscopic group, with comparable operative times compared to laparoscopy with experienced surgeons.

The authors concluded, in part, that their results suggest robotic surgery may shorten length of stay and rates of conversion to open when compared to laparoscopy, with experienced mitigating potential differences in operating time, while improving rates of intraoperative complications and conversions to open surgery.

In March this year, Dr. Nicole Lunardi from the University of Texas Southwestern, along with colleagues from other hospitals and data support from the Intuitive Health Economics Outcomes Research team reported outcomes, describing the use of robotic technology in emergency general surgery cases. Published in JAMA Surgery, this analysis used the PINC AI Healthcare Database, a database that collects data from over 800 facilities to identify adult patients undergoing urgent or emergent cholecystectomy, colectomy, inguinal and ventral hernia repairs between 2013 and 2021.

For reference, emergent procedures were described as those required for life-threatening or potentially disabling conditions, while urgent procedures were those where immediate intervention was needed and prioritized as first available. Over 1 million urgent or emergent procedures were identified. During the study period, the use of robotic-assisted surgery for all procedures experienced a 3.5-fold increase in cholecystectomy, a 6-fold increase for colectomy and 38-fold increase in inguinal hernia repairs. Notably, increases in the robotic-assisted approach corresponded to decreases in the open approach for these procedures, as well as a decrease in laparoscopy for cholecystectomy and colectomy procedures.

Furthermore, a propensity score matched analysis demonstrated a lower risk of conversion to open for the robotic-assisted approach when compared to laparoscopy. Cholecystectomy procedures with a 45% lower risk of conversion, colectomy with a 63% lower risk, inguinal hernia repair with a 79% lower risk, and ventral hernia repair with a 70% lower risk of conversion. The authors concluded, "The application of robotic surgery in emergency general surgery has steadily increased in the past decade, which is especially useful in older patients with several comorbidities. As observed in this cohort study, compared with laparoscopic surgery, robotic surgery appears to have resulted in lower rates of conversion to open surgery from 2013 to 2021. Robotic surgery also leads to a shorter or comparable post-operative length of stay in the hospital. Nevertheless, open surgery remains a key component for most emergency general surgery. As robotic surgery continues to increase in emergency general surgery, barriers to implementation need to be addressed and optimized through coordinated efforts across stakeholders."

I will now turn to our financial outlook for 2024. Starting with procedures. On our last call, we forecasted full-year 2024 procedure growth within a range of 13% and 16%. We are now increasing our forecast and expect full-year 2024 procedure growth of 14% to 17%. The low-end of the range assumes further weakness in bariatrics procedures, along with challenges in China from increasing provincial robotic competition and delayed tenders impacting capital placements, and therefore, procedure growth. We also assume there is no benefit of patient backlog in the year. At the high-end of the range, we assume bariatrics continues at flat to slightly positive growth rates and factors in China don't have a significant impact on our business. In addition, we assume any backlog of patients would decline throughout the year.

Turning to gross profit. We continue to expect our pro forma gross profit margin to be within 67% and 68% of net revenue. Pro forma gross profit margin in 2024 reflects the impact of growth in our newer products, da Vinci 5, Ion and SP, and the impact of capital investments that will come on to support the growth of our business. 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 mix.

Turning to operating expenses. We are holding our guidance for pro forma operating expense growth to be between 11% and 15%. We continue to expect our non-cash stock compensation expense to range between $680 million to $710 million in 2024. We are holding our guidance for other income, which is comprised mostly of interest income, to total between $290 million and $320 million in 2024. With regard to capital expenditures. We continue to estimate a range of $1.0 billion to $1.2 billion, primarily for planned facility construction activities. With regard to income tax, there is no change to our guidance of 2024 pro forma income 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.

Questions and Answers

[Operator]

Thank you. [Operator Instructions]

We will go to the first question at this time, and that's from Robbie Marcus, J.P. Morgan. Please go ahead.

[Robert Marcus, Analyst at J.P. Morgan]

Oh, great, and congrats on a very nice quarter. Gary, I was hoping you could touch on -- what surprised me the most was the procedure volume off a really difficult quarter here, at 16%. Maybe walk us through your view of what's driving it? Obviously, you gave color on some of the procedures. But it's a really strong number. And what gives you the confidence that it's sustainable with the raised guidance for the rest of the year?

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

Yeah. I'm going to turn that first question over to Jamie. Thanks, Marcus. Jamie, why don't you go, and then, I'll add a few thoughts thereafter.

[Jamie Samath, Chief Financial Officer at Intuitive Surgical]

Yeah. Where we saw particular strength regionally was in the U.S. and the U.K. in particular. What you also see in O-U.S. markets, as Brian described, is this continuing growth in procedures beyond urology. That first is focused on cancer procedures, colorectal, thoracic, hysterectomy; some early stage growth in benign in our international markets. So, the combination of those things, I think, were behind the performance in Q1.

And as you kind of look at then the inputs from the teams, as we get feedback from our customers, I think, then, we kind of reflect that in the rest of the year guidance. Obviously, the guidance is only up 1-point at the low- and the high-end of the range. So, something we're watching carefully.

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

Yeah. I think, Jamie got it.

[Robert Marcus, Analyst at J.P. Morgan]

Maybe just as a quick follow-up. At the SAGES conference now, and the doctor feedback is phenomenal on da Vinci 5, from our end and the doctors we spoke to. I was hoping you could just give us some early feedback on what you've heard across the field, doctors' willingness and hospitals' willingness to not just add new systems, but upgrade the fleet? And just what you've been hearing? Thanks a lot.

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

Yeah. In terms of early feedback, we're hearing -- I think, what we were hoping for in terms of our design intent, they're appreciating the improvements to precision and imaging to workflow, and the teams' efforts on human factors design and user interface, strong commentary on ergonomics. And I think forced feedback is something that is new and will create opportunities to really understand the clinical implications of force application during surgery. I think that will be exciting and powerful over time.

I think, it's really hard for us, sitting where we are today, to predict the depth and timing of a replacement cycle. We're excited. I think that folks are excited about what's the potential of the product. That said, Xi is great. Xi has a lot of clinical indications. And we're going to have some supply constraints here, as we work through our launch.

Jamie, I don't know, if there's anything you'd like to add to that.

[Jamie Samath, Chief Financial Officer at Intuitive Surgical]

No. I think, you got it, Gary.

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

Thanks, Rob.

[Operator]

We'll go to the next line, Larry Biegelsen, Wells Fargo. Please go ahead.

[Larry Biegelsen, Analyst at Wells Fargo & Company]

Thanks for taking the question. I'll echo Robbie's congratulations on a nice quarter here. Just two on da Vinci 5 for me. Maybe starting with Gary. The supply constraints, when do you expect those to be resolved? How long into 2025 will the limited launch last? And what will trigger the full launch?

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

Yeah. Thanks, Larry. There's three things that are going on for us. One of them is optimizing the supply chain, making sure that we have the quality that we want, that will for sure go through all of '24 and some part of the early part of '25. So, that's one. The second thing is, we want to incorporate feedback from our customers. We want to make sure that we're adjusting the things that we need to adjust to make sure they're highly satisfied.

And then, the last thing is we have additional feature content and hardware improvements and other things that are planned that our design teams are going to execute on, whether it's software or other updates or some of the things we can do in imaging, that we want to do as we bring it through. So, it's kind of a three-part set of activities. And we think it's pretty well planned out. I wouldn't expect big changes from our plan. And if there are changes in the future, then we'll be sure to talk about them.

[Larry Biegelsen, Analyst at Wells Fargo & Company]

That's helpful. And Gary, you haven't been specific about new indications that da Vinci 5 could open. But can you help us understand what the features are of da Vinci 5 that could allow physicians to new -- do new procedures and why? Thanks for taking the question.

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

Yeah. Our first thought here in bringing the system to market has been to allow surgeons to go deeper into the existing indications we have already. So, the indications for da Vinci 5 largely mirror the Xi and X indications that we had already. But we do think that it will invite new surgeons and care teams into robotic-assisted surgery. I think it allows us to deepen our relationship with that customer base, and we're excited about it.

In terms of core capabilities, da Vinci 5 has some really core things. Better imaging, that right now, today is better and will get better over time. Precision and high performance, and tracking performance, allows for really subtle and fine surgical motions, and we think that's really powerful and it's core -- it's a core capability. Faster workflow opens new opportunities for people, too. So, we do think there are additional clinical indications we can pursue. We are evaluating them. We have not finalized on everything yet, and likely, they will require conversations with FDA. So, we're not prepared at this time to tell you what they might be. But, as we get a little closer and work through it, then we'll describe it once we've settled our approach.

[Operator]

And we will go to the next line, Travis Steed, Bank of America. Please go ahead.

[Travis Steed, Analyst at Bank of America Securities]

I wanted to ask a little bit more color on the strong Xi placements and the capital environment even ahead of the dV 5 lunch. And it sounded like the massage changed on system placements in 2023, I think -- or 2024. I think, before it was, system placements could be lower in '24. And now, it's just choppy. So, does that mean there's a chance that system placements are up in 2024?

[Jamie Samath, Chief Financial Officer at Intuitive Surgical]

Yeah.

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

Jamie, why don't I...

[Jamie Samath, Chief Financial Officer at Intuitive Surgical]

Oh, go ahead, Gary.

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

No, Jamie, go ahead and take it. I apologize.

[Jamie Samath, Chief Financial Officer at Intuitive Surgical]

Yeah. I think the first dynamic is trade-ins. Given the limited supply in dV 5, those placements will be during the measured launch, focused on incremental placements. So, not a lot of trade activity coming from dV 5. And if you look at what's left in the installed base for our third-gen Xi, you've got about 350 systems globally, of which 50 are in the U.S. So, we do expect trade-in volumes to be down quite a bit in '24.

With respect to overall system placements, I know, we made the comments on the last call, but generally, we don't guide system placements. So, we'll let you run that through your models, given the updated procedure guidance. But certainly, we've acknowledged that placements could be choppy, while we're constrained on dV 5. In Q1, we didn't really see any customers pushing back on. I don't want an Xi. We want to wait for dV 5. But since the launch, which obviously was only in March, we've had our Connect conference. We've had SAGES this week. A significant number of surgeons and executives have now seen dV 5, put their hands on it. So, we're acknowledging that, customers may choose to wait. We don't have enough evidence or indication yet to see which way that will go.

[Travis Steed, Analyst at Bank of America Securities]

Great. And maybe, Gary, if you could spend some time, just kind of a bigger picture question on dV 5 and the capabilities it brings to training, being able to practice some of the edge cases, helping with proctoring. I'm just curious, how you see the impact on robotic surgery adoption and driving better outcomes from some of this dV 5 training capabilities, that's going to roll-out? And how long some of this stuff actually is going to take?

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

In terms of raw capability, I think that it will help care teams acquire skills more quickly, and it also helps them in the case. You can kind of think of that as context-sensitive help. The device is kind of aware of where it is and what it's doing, and can share that information with the care team, so that as they're doing things, whether it's changing tools or setting it up, it provides real-time help to help guide them through it, and I think that's a really good thing. It just makes it easier to use.

Our Intuitive Hub has integration technologies that start with da Vinci 5, and we'll get better over time as we release software updates and hardware updates. And so, that starts to close an analytical loop for our customers from what they're seeing in the case to video review to video analytics, to feeding back information to their phones and their laptops and whatever their means of consuming that data is. And so, that gives them an analytical loop, which should also help. And we'll also continue to evolve our simulation training. And some of our other packages are online learning, that will help them as well.

So, I think all of this is going to take a little bit of time, but I think the design concept, I think, our designers did a beautiful job. I think, the design concept of integrating these ideas, making it easy for care teams, for surgeons to follow that journey should help us.

Final point I'll make is that, our labs and during our early experience with da Vinci 5, it looks like force reflection helps novice to -- new to robotics, new to robotic-assisted surgery, acquire their skills faster. So, it should invite more surgeons in and ease their journey. It remains to be proven. It's not done and done, but we think it's encouraging. And so, stay tuned. I think, keep asking that question. And as the data starts to come out, we'll be pleased to share it with you.

[Travis Steed, Analyst at Bank of America Securities]

Great. Can't wait to see, and congrats.

[Operator]

Okay. And we'll go to the next slide, Rick Wise, Stifel. Please go ahead.

[Frederick Wise, Analyst at Stifel Nicolaus]

Good afternoon. Hi, Gary. Maybe it would be helpful to hear in a little more detail your thoughts on a couple of points that maybe some of the headwinds. Bariatrics, flat year-over-year. I wasn't sure completely what I was hearing about trends. Is it getting worse still? Does the -- is the rate of pressure easing? I appreciate talking about the guidance. You talked about a range, given the range of outcomes. But I just want to make sure I understood what you're saying.

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

Yeah. Let me share my perspective, Rick. Thanks for the question. And then, Brian, I'll kick it to you to talk about the range.

I think what we can tell you is what we see, and what we've seen is, continued deceleration, such that it's flat year-over-year. There are a lot of opinions out in the field and we can all talk to them. I think the reality is nobody really knows yet. We're going to have to live through it together. And as a result, it's going to be dynamic. We do know that bariatrics surgery is well tolerated, and it's a good option. And we also know that people are interested in pharmaceuticals. And that the pharmaceuticals work as long as you take them for a subset of the population and then stop working if you don't.

What that means for future surgery? I think, there's a range of opinions, and I would not hang a lot of confidence on any of them just yet. And that's why we have a range. And, Brian, perhaps, you can just touch on how you see bariatric surgery affecting the range. Just reiterate that if you would.

[Brian King, Vice President, Treasurer and Head of Investor Relations at Intuitive Surgical]

Sure. And just to reiterate again, the low end of the range assumes that there's further weakness in bariatrics -- bariatric procedures, right? So, at the low end of the range, further weakness in bariatrics procedures. At the high end of the range, we assume that bariatrics continues at flat to slightly positive growth rates. And I think, again, to Gary's point, it will be dynamic and we're just going to have to see how it plays out throughout the year.

[Frederick Wise, Analyst at Stifel Nicolaus]

Okay. Great. And let me turn to some of the new and incremental features you talked about, Gary. I'm sure all of us on the call have been talking to doctors, that have been hearing a variety of additional features. Some sound quite compelling. Can you give us any flavor? I mean, first, I'll be happy to hear from you what some of them could be. But how quickly -- given what you know today, how -- when could we see those features that, again, I would assume would enhance the value? Are we going to see them this year, second half? Or is it more likely that's something for next year, as you get supply chain where you want it to be? Thank you.

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

Yeah. I think as we add capabilities in time, we have some imaging things that we want to do. We have some things in terms of software upgrades and analytics power and some things we want to do in terms of integration. That's much more likely to be '25 and later than '24. A lot of '24 will be making sure that we and our suppliers feel great about what we've got, and then, adapting to any immediate feedback that we see.

[Operator]

And we will go to the next line, Adam Maeder, Piper Sandler. Please go ahead.

[Adam Maeder, Analyst at Piper Sandler & Co.]

Good afternoon and thank you for taking the questions, and congrats on the nice quarter. I wanted to start by asking about the force feedback instruments. I was hoping, Gary, you could share a little bit more color on the feedback that you're getting from clinicians thus far into launch? And then, if I understand correctly, you have six force feedback instruments that are used across different common procedures. Will you look to expand the portfolio of that technology going forward? And if so, what might that look like? And then, I've a follow-up. Thank you.

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

Sure. We're getting a variety of feedback on the instruments themselves. Just a reminder for everyone, they have very sensitive sensors that are built into the distal end, in the body end of the instruments that are sterilizable and cleanable, and they report back contact forces with tissue, which at a sensitive way, which has been a goal for us and for surgery for a long time. So, it's a hard technology. We've been really excited to bring it to market.

We will hear everything from, hey, I'm getting great results with da Vinci X and Xi today that has very limited version of haptics. It really doesn't have in-body sensing. It does have a little something, but it's not sensing in a technical sense. And that's true. They're getting great results. So, it's a new sense.

That said, people are quite interested to explore where it will take them. And what's interesting is that when you're using a force sensing instrument, it's sensing whether you turn on force reflection into the surgeon's hands or not. So, the surgeon can feel it. They can turn it on, or they can turn it off, but still measure, so that they have the feeling experience of an X or an Xi. And what they find when they turn it on and off is that the amount of force that they apply during surgery to tissue decreases when force reflection into the hands is on. And so, the big question is, what's the clinical value of that? What will be the implications for patient outcomes? By procedure and by technique, and that's what they're going to go explore and we will help them do that exploration.

So, now, we're talking about the future. What could happen? I suspect, I believe this is a personal opinion. There will be types of procedures and types of patients, where having lower force applied to tissue during the surgery is going to be clinically meaningful, and we have to go prove that. So, I think it's quite interesting. The technology is sophisticated. We are, with our manufacturing partners, learning how to make these at scale with good yield and robust. It's a worthy endeavor, but it is not easy. And we're going to focus on it and make sure that we get what we want. We want to make sure we have robust and high-yield products. We want to extend their lives to healthy economics of our customers and our economics. So, that is our first focus.

As to the six instruments, I'm going to look to Jamie as to whether the sixth number is right? I think it is. Certainly, over time, we have the opportunity to extend it to other instruments. But that first set of six are the ones that we thought were right. Six is the right number, Jamie?

[Jamie Samath, Chief Financial Officer at Intuitive Surgical]

It is. And it's a combination of graspers and needle drivers, and those instruments that are used in very common tasks, dissection, retraction and suturing.

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

Thanks, Adam.

[Operator]

All right. We'll go to the next line, Drew Ranieri, Morgan Stanley. Please go ahead.

[Drew Ranieri, Analyst at Morgan Stanley]

Thanks for taking the questions. Maybe just on SP for a moment, with the indication expansion in Europe. Can you talk about that a bit more, Gary? And I was hearing from a surgeon today that the CRSA conference in November in Rome could be pretty important for just getting broader adoption from European surgeons. But does that inform how you could approach the U.S. market with a broader indication? And then I just had a follow-up.

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

Yeah. I'm actually here in Europe, have been for the last couple of weeks, talking to SP surgeons here. I think the early uptake and early excitement is quite palpable. Where we have had broad indications? As you know, in Korea and now, Japan. We've seen a nice uptake in adoption and good study, good clinical study. And I think that the surgeons here are building on that. They're learning from and adapting what they see in the rest of the world. And getting excited about it. So, I'm encouraged.

How deep that goes? It's still early days here in Europe. We will see. But we're starting to see fairly long case studies in things like colorectal surgery coming out of Asia and other places. We have submitted, as Jamie had mentioned, for an additional indication in the United States. We have another one coming. We have IDE trials ongoing.

So, we have some natural experiments to see what occurs. We know the experiment in Korea has worked out well. We're in process in Japan. And now, we're in the early experience for broad indications in Europe. That should help us generate data and accelerate additional indications over time. In the U.S., and I have to say, I think, it remains a build for SP, but I'm encouraged by the build.

[Drew Ranieri, Analyst at Morgan Stanley]

Thank you. And maybe this is more for Jamie. But, Jamie, could you talk about the commentary about lower pricing in China for the quarter? Just talk about that a little bit more. And maybe put that into context on, if this is temporary, if it's permanent or more to come and just the overall competitive situation in China, would be great. Thank you.

[Jamie Samath, Chief Financial Officer at Intuitive Surgical]

Yeah. It's primarily a function of the competitive environment we've described with the domestic robotic players. What we actually have now, given last year, we qualified a domestically manufactured Xi is actually some segmentation between the domestically manufactured product and an imported product. And the domestic product gives us the opportunity to both participate in tenders that require a locally-produced system, but also allows us to segment on price.

But the primary impact on China pricing is really competition. And you kind of see that theme broadly with other medtech players in terms of the impact of VBP. It doesn't apply in this case, but kind of the macro theme of pricing pressure does.

[Operator]

And we will go to the next line, and that will be Matt Miksic, Barclays. Please go ahead.

[Matt Miksic, Analyst at Barclays Investment Bank]

Hey, thanks so much for taking the questions, and congrats on a really strong quarter against tough comps. So, a couple of follow-ups, if I could, on a couple of things that you mentioned, Gary, in your last answer to -- around force feedback and sort of the clinical impacts of optimizing or reducing the force used during surgery, which is kind of buzzing around here at SAGES quite a bit this year in the sessions.

And I'm wondering -- appreciate always the data that you talk about during the prepared remarks and recent clinical data. I'm wondering, how far out are we going to see clinical reference, like that to studies around the use of force feedback versus not? And also maybe efficiencies driven by a lot of the dots you're talking about, smoother operating arms and being able to get through cases faster. Is that a year out? Are we six months or are we two years out for dV 5 research like that? And again, appreciate you taking the questions.

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

Yeah. It's a good question. Thank you. I -- this is approximate, not specific, so take it with some error bars. But I think what you're going to see in force feedback, study is going to be a progression. You'll see narrow series, single institution studies come out first that are kind of directional. They talk about what they're seeing in their own, and then, you'll see a little bit -- and that should be the kind of thing that comes out in the next 12 months.

And then, over the next period after that, over the next couple of years, you'll see multiple center trials that are comparing in a little more structured way. So, I think you can predict the path of the journey. But I think this is something that you're going to see from narrower input to start to broader input in the next year to prospective studies that start to report over the next year after that. So, I think it's a build. But I think it's going to be a powerful build in the end.

I think, with regard to efficiencies, we're hearing anecdotal reports already that the surgeon autonomy features that are in da Vinci 5, the ability for them to control their own fields and to control the equipment -- ancillary equipment in the room, has been really positive, and they're reporting efficiencies already.

I think, real-world evidence is going to be powerful on the efficiency side. I think that's the kind of thing that people can benchmark their own cases. We -- also our data collection capabilities between Intuitive Hub and the My Intuitive app allow them to measure that very quickly. So, I think you'll see the real-world evidence of that build, and it will be. In the coming months and quarters, and that'll be exciting for us.

[Matt Miksic, Analyst at Barclays Investment Bank]

That's great. Thank you.

[Operator]

And we will go to the next line. Let's go to the line, Brandon Vazquez, William Blair. Please go ahead.

[Brandon Vazquez, Analyst at William Blair]

Thanks for taking the question. I want to focus on Ion real quick. You had a nice rebound in the quarter there after some supply last quarter. Just curious, do you see a little bit of catch-up there or not? And then, even as these numbers are getting bigger, you're still putting up some really strong growth. So, curious where you're seeing the most growth there, new accounts or existing utilization, and how sustainable you think it is?

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

Jamie, why don't you take that one?

[Jamie Samath, Chief Financial Officer at Intuitive Surgical]

Yeah. I'd say, it was a partial recovery in the quarter. We haven't completely resolved both catheter supply and the vision probe. We still have a little bit of backlog in terms of number of systems, that's pending kind of stabilization of that supply.

With respect to where are we placing those systems? It's actually a blend between existing accounts and new accounts. We still have a number of opportunities, what I call greenfield accounts. And so, both are a focus for the sales team.

[Brandon Vazquez, Analyst at William Blair]

Okay. And one quick follow-up, maybe, on the surgical side. The 1% utilization growth, I appreciate, off of a tough comp and we're kind of normalizing. But I think we kind of -- we usually use utilization growth as an indication for system placements, and then it implies a certain procedure growth as well. Just talk to us a little bit about what you kind of think a below historical average utilization growth in the quarter might mean for those key moving pieces in the next couple of quarters. Thanks.

[Jamie Samath, Chief Financial Officer at Intuitive Surgical]

Yeah. I mean...

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

I'll start...

[Jamie Samath, Chief Financial Officer at Intuitive Surgical]

Well, go ahead, Gary.

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

I'll jump in, and then, Jamie, take it. I think that in the prepared remarks, we had said, you had a nice capital placement year, and we had a bolus of post-COVID come back into Q1. I think the uncertainty part of this is really just going to be what the in-patient volumes look like in the next quarters of 2024. In other words, just the patient census as it comes through.

But you're right. I think that it's an indicator of capacity. So, depending what that patient census looks like, that'll determine the high end and the low end of utilization growth in terms of how many procedures people want to put on those systems.

Sorry, Jamie, go ahead. You might discuss the modeling there.

[Jamie Samath, Chief Financial Officer at Intuitive Surgical]

I would just say that, if you look at Q1 utilization over an extended period, look at what the CAGR is versus the year-over-year comparison, you see that start to be in a more normal range of 3% to 4%. I do think that in the year-ago quarter, you had a number of institutions that actually set themselves up to do sprints with respect to their ability to treat patients. And so, I do think that was elevated and -- at that level of utilization growth of 13%. It wasn't particularly sustainable.

So, as I look forward to the rest of the year, I'd expect some levels of utilization growth, or let's say, closer to our long-term averages. There's still some patient backlog benefit in the year-ago quarters, even in Q1 and Q3. So, it's not perfectly matched, but I think there's room for normalization over time.

[Operator]

And we will go to the next question from the line of Jayson Bedford, Raymond James. Please go ahead.

[Jayson Bedford, Analyst at Raymond James]

Good afternoon. Thanks for taking the question. Just maybe, Ion in China, obviously a large opportunity there. Just a couple of questions, and I apologize if I missed this. But does Ion fall within the existing robotics quota? And then, for Ion, you mentioned clearance is the first step. Can you just talk through the other steps to commercialization and associated timing of those steps? Thanks.

[Jamie Samath, Chief Financial Officer at Intuitive Surgical]

Yeah. We have some work to put Ion at a point where it's actually available to sale -- to sell, so that will take us some time. We're not expecting to have commercialization, really, until the back half of 2024. And China is a market, where, like many cases, when we launch a new product in a market, we do that progressively, as we kind of build our infrastructure in terms of training capabilities and engage with customers. So, I'd say, back half of '24 is when you start to see the potential for Ion placements in China.

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

On the issue of is it competing for the same quota, Jamie?

[Jamie Samath, Chief Financial Officer at Intuitive Surgical]

Oh, sorry. Yeah. We -- our understanding is, it's not in the quota given the price.

[Jayson Bedford, Analyst at Raymond James]

Thank you.

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

And Jayson, if you have one more follow-up, that'll wrap it up for us.

[Jayson Bedford, Analyst at Raymond James]

No, that's fine. Thank you.

[Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors at Intuitive Surgical]

Okay. 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 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 the 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.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Brian King, Vice President, Treasurer and Head of Investor Relations
• Gary S. Guthart, Chief Executive Officer and Member of the Board of Directors
• Jamie Samath, Chief Financial Officer

Analysts

• Robert Marcus, J.P. Morgan
• Larry Biegelsen, Wells Fargo & Company
• Travis Steed, Bank of America Securities
• Frederick Wise, Stifel Nicolaus
• Adam Maeder, Piper Sandler & Co.
• Drew Ranieri, Morgan Stanley
• Matt Miksic, Barclays Investment Bank
• Brandon Vazquez, William Blair
• Jayson Bedford, Raymond James