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. I will also summarize our GAAP performance later in my prepared remarks. A reconciliation between our pro forma and GAAP results is posted on our website. Core metrics continue to be healthy in Q3, with global procedure growth of 19% and an increase in the installed base of da Vinci systems of 13% and an increase in average system utilization of 6%. Our key financial indicators were also healthy. Third quarter recurring revenue grew 21%. Pro forma operating margin was 36%, and pro forma earnings per share increased 23% over last year. Procedures in the US grew 17%, reflecting a lower benefit from patient backlogs as compared to the first half of 2023.
Last quarter, we highlighted that our growth rate in bariatric's procedures in the US had slowed given patient interest in weight loss drugs. In Q3, we continued to see double-digit growth albeit at a modestly lower growth rate as compared to Q2. Bariatric's procedures represent between 4% and 5% of total global procedures. Based on third-party data, we believe we continue to gain market share in the bariatric surgical segment.
OUS procedures grew 24% with relative strength in India, Germany, the UK and Japan. Procedure growth in China was consistent with our expectations, lower than last quarter due to a strong base period given the recovery from COVID-related lockdowns in the year ago quarter. Consistent with recent trends, growth in non-neurology procedures outside of the United States was accretive, growing at approximately 31%. Within the larger cancer categories, our fastest-growing OUS procedure is colon resection, a high-value procedure led by adoption in Japan, Germany and the UK.
With respect to capital performance, we placed 312 systems in the third quarter as compared to 305 systems last year. As a reminder, system placements in Q3 of last year benefit from a delay in the shipment of approximately 15 systems from June into July as a result of supply chain challenges we encountered in June of last year. Late in Q3, we started to see delays in tender processes in China, primarily as a result of anticorruption efforts by the central government, resulting in lower system placements in China in Q3. We expect tender delays to continue to impact system placements in China in Q4.
Q3 revenue was $1.7 billion, an increase of 12% year-over-year. Q3 revenue growth was driven by procedure growth, partially offset by an 11% decline in systems revenue due to the significant increase in the mix of operating lease arrangements. On a constant currency basis, third quarter revenue growth was also 12%. Given recent movements in exchange rates, at current rates, the US dollar is approximately 3% stronger on a revenue-weighted basis as compared to the average rates realized in Q3. Revenue denominated in non-USD currencies represent approximately 24% of total revenue.
Additional revenue statistics and trends are as follows: in the US, we placed 159 systems in the third quarter compared to 175 systems placed last year. Outside the US, we placed 153 systems in Q3 compared with 130 systems last year. Current quarter system placements included 60 into Europe, 32 into Japan and 10 into China compared with 54 into Europe, 32 into Japan and 15 into China in Q3 of last year. 62 of the 312 systems placed in Q3 were trading transactions compared to 71 trading transactions in the third quarter of last year. As of the end of Q3, there are approximately 440 SIs remaining in the installed base, of which 85 are in the US.
Operating leases represented 52% of third quarter placements compared with 37% last year. In the US, 70% of system placements in Q3 were under operating lease arrangements compared to 48% last year. Of the 163 operating lease placements in the quarter, 93 were usage-based arrangements, an increase compared to 54% last year, reflecting customer preferences, particularly in the US. While leasing may fluctuate from quarter-to-quarter, we continue to expect that the proportion of placements under operating leases will increase over time.
Q3 system average selling prices were $1.4 million as compared to $1.39 million last quarter from $1.5 million last year. The year-over-year decrease in system ASPs was primarily driven by lower pricing and geographical mix. We recognized $17 million of lease buyout revenue in the third quarter compared with $12 million last quarter and $17 million in Q3 of 2022. da Vinci instrument and accessory revenue per procedure of approximately $1,830, compared with approximately $1,840 last quarter and $1,800 last year. On a sequential basis, lower I&A per procedure reflected the impact of customer ordering patterns, partially offset by a full quarter impact from the I&A price increase that went into effect halfway through last quarter.
Turning to our Ion platform. In Q3, we placed 55 Ion systems as compared to 50 in Q3 of 2022. Third quarter Ion procedures of approximately 14,500 increased 125% as compared to last year. 16 of the systems placed in the third quarter were SP systems, 12 into the US and 4 into Korea. SP procedures grew by 54%, and average system utilization growth continued to accelerate growing 21% compared to Q3 of last year.
Moving on to the rest of the P&L. Pro forma gross margin for the third quarter was 68.8% compared with 68.5% last quarter and 69.8% last year. As a reminder, pro forma gross margin in Q3 of last year included a onetime benefit of approximately 50 basis points related to the favorable conclusion of certain indirect tax matters. The remaining year-over-year difference in pro forma gross margin is primarily due to a higher mix of the Ion revenue, which currently carries significantly lower margins as compared to the da Vinci business and lower system ASP, partially offset by the I&A price increase.
Inventory increased to approximately 180 days in Q3, higher than historical averages, driven by 2 factors: first, we have modestly increased our inventory targets given supply chain stresses over the last couple of years; and secondly, given significant capital investments we are making in manufacturing facilities and capacity, we are building bridge inventory to facilitate an elevated number of line transfers to new locations. As a result, we expect higher levels of inventory relative to historical norms into 2025.
Third quarter pro forma operating expenses increased 8% year-over-year, driven primarily by higher headcount-related costs. During the quarter, our head count increased by 489 employees, of which approximately 275 were for our manufacturing operations in support of revenue growth. SG&A expenses as a percentage of revenue were lower by 100 basis points as compared to Q3 of last year and largely reflected planned leverage in our enabling functions.
Pro forma other income in Q3 was $58 million compared to $42 million last quarter and $7 million last year. Other income primarily consists of interest income and the increase as compared to last quarter was driven by higher interest rates and higher average cash and investment balances. Pro forma other income in Q3 of last year also reflected higher than typical foreign exchange losses resulting from remeasurement of the balance sheet as a result of the strengthening US dollar.
Capital expenditures in Q3 were $256 million, primarily comprised of infrastructure investments to expand our facilities footprint and increase manufacturing capacity. Our pro forma effective tax rate for the third quarter was 22.5%, consistent with our expectations. Third quarter pro forma net income was $524 million or $1.46 per share compared with $429 million or $1.19 per share for Q3 of last year.
I will now summarize our GAAP results. GAAP net income was $416 million or $1.16 per share for the third quarter of 2023 compared with GAAP net income of $324 million or $0.90 per share for the third quarter of 2022. The adjustments between pro forma and GAAP net income are outlined and quantified on our website and include excess tax benefits associated with employee stock awards, employee stock-based compensation, amortization of intangibles and gains and losses on strategic investments.
We ended the quarter with cash and investments of $7.5 billion compared with $7.1 billion last quarter. The sequential increase in cash and investments reflected cash from operating activities and proceeds from employee stock exercises partially offset by capital expenditures.
And with that, I would like to turn it over to Myriam, who will discuss clinical highlights.
