INTUTIVE-SURGICAL Earningcall Transcript Of Q2 of 2024

Jamie E. Samath -- Chief Financial Officer

Good afternoon. I will describe the highlights of our performance on a non-GAAP or pro forma
basis, and we'll also summarize our GAAP performance later in my prepared remarks. A

reconciliation between our pro forma and GAAP results is posted on our website. Q2 da Vinci
procedures grew 17%.

The installed base of systems grew 14% to just over 9,200 systems, and average system
utilization increased by 2%, lower than long-term historical averages, reflecting procedure
strength in Q2 last year as a result of patient backlogs. U.S. procedures grew 14%, driven by
growth in general surgery. Bariatric procedures in the U.S.

declined in the mid single-digit range. OUS procedures grew 22%, reflecting strong growth in
general surgery, gynecology, and thoracic procedures. With respect to capital performance, we
placed 341 systems in the second quarter compared to 331 systems in Q2 of last year. In the
U.S., we placed 149 systems in Q2 compared to 157 systems placed last year, reflecting in part
lower trade-ins.

U.S. system placements in Q2 included 70 da Vinci 5 placements. Given a planned hardware and
software update to da Vinci 5 in the second half of this year and continued focus on maturing,
manufacturing, and expanding capacity, we expect that da Vinci 5 placements will be
constrained through the first half of 2025. Outside the U.S., we placed 192 systems in Quarter 2
compared with 174 systems last year.

Current quarter system placements included 71 into Europe, 41 into Japan, and 14 into China,
compared with 76 into Europe, 33 into Japan, and 16 into China in Q2 of last year. We also saw
relatively strong placements in India, as well as markets served by our distributors, including
Australia. Placements in Europe reflect health system budget constraints as several European
governments are resetting capital spending post-pandemic. Second quarter revenue was $2.2
billion, an increase of 14% from last year.

On a constant currency basis, revenue growth was 15%. Additional revenue statistics and trends
are as follows. Leasing represented 51% of Q2 placements, relatively consistent with recent
trends. However, given 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
lease arrangements to grow over time. Q2 system average selling prices were $1.44 million as
compared to $1.39 million last year. Higher year-over-year system ASPs reflected a higher mix of
da Vinci 5 and lower trade-ins, partially offset by a higher mix of system placements in Japan
with a weaker yen exchange rate and lower pricing in China. In Q2 of 2023, trade-ins represented
18% of total system placements as compared to 6% in Q2 of 2024.

We recognized $28 million of lease buyout revenue in Quarter 2 compared with $29 million last
quarter and $12 million last year. da Vinci instrument and accessory revenue per procedure was
approximately $1,800, an increase of approximately $20 compared to last quarter. The

sequential increase in I&A per procedure is primarily a result of customer ordering patterns in
the U.S. Turning to our Ion platform, procedures grew 82% to approximately 23,200 procedures
in the second quarter.

During the quarter, we placed 74 Ion systems compared to 59 last year and 70 last quarter.
During Q2, we caught up with the remaining backlog of system placements as supply of
catheters and vision probes continued to improve. The in-store base of Ion systems increased
56% year over year to 678 systems, of which 275 are under operating lease arrangements.
Second quarter SP procedure growth accelerated to 74% with strong growth in Korea and the
U.S.

and early stage growth in Japan and Europe. Twenty-one of the systems placed in the quarter
were SP systems, including 10 systems placed in Europe. The SP installed base grew 56% from
the year-ago quarter to 222 systems. Moving on to the rest of the P&L, pro forma gross margin
for the second quarter of 2024 was ahead of our expectations at 70% compared with 68.5% for
the second quarter of 2023 and 67.6% last quarter.

Second quarter pro forma gross margin reflected certain one-time benefits that we do not
expect to recur. Excluding these one-time benefits, pro forma gross margin would have been
69.5%. The sequential improvement in pro forma gross margin primarily reflects lower inventory
reserves, cost reductions in certain purchase components, lower freight rates, and leverage of
fixed overhead. In accordance with our plans, product margins for our Ion and SP platforms
improved in the quarter and will remain a focus for our business unit and manufacturing teams
over the medium term.

As a reminder, given recent and ongoing capital investments, we expect increased depreciation
expense in the second half and a significant increase in depreciation expense starting in Q1 of
2025. Second quarter pro forma operating expenses increased 11% compared with last year,
reflecting the ongoing benefit of planned leverage in enabling functions. We continue to
prioritize investments in R&D to fund innovation and future growth. During the quarter, we added
approximately 550 employees, of which roughly half were in our manufacturing operations to
support growth in customer demand.

Pro forma other income was $79.4 million for Q2, higher than $72.5 million in the prior quarter,
primarily due to higher interest income. Our pro forma effective tax rate for the second quarter
was 22.5%, consistent with our expectations. Second quarter 2024 pro forma net income was
$641 million or $1.78 per share, compared with $507 million or $1.42 per share for the second
quarter of last year. I will now summarize our GAAP results.

GAAP net income was $527 million or $1.46 per share for the second quarter of 2024,
compared with GAAP net income of $421 million or $1.18 per share for the second quarter of

2023. 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 $7.7 billion, higher
than the $7.3 billion we ended last quarter. The sequential increase in cash and investments
reflected cash generated from operating activities, partially offset by capital expenditures of
$309 million.

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

Brian King -- Vice President, Treasurer, and Head of Investor Relations

Thank you, Jamie. Overall, second quarter procedure growth was 17% compared to 22% for the
second quarter of 2023 and 16% last quarter. In the U.S., second quarter 2024 procedure growth
was 14% compared to 19% for the second quarter of 2023 and 14% last quarter. Second quarter
growth was led by procedures within general surgery, with strength in cholecystectomy and
foregut procedures and also thoracic procedures.

Bariatric procedure growth declined in the mid single-digit range. Outside of the U.S., second
quarter procedure volume grew 22%, compared with 28% for the second quarter of 2023 and
20% last quarter. Growth was led by nonurology procedures with strength in colon resection,
hysterectomy, and lung resection procedures. In Europe, second quarter growth continued to be
led by procedures beyond urology, primarily from general surgery and gynecology procedure
categories.

Germany, the U.K., and Italy procedure performance led the region with each experiencing strong
growth in colon and rectal resection, hysterectomy, and other general surgery procedures. In
Asia, growth in the second quarter was led by Japan and India, while growth in China was
stressed. And Korea procedure growth continued to be impacted by physician strikes. In Japan,
overall procedure growth was solid with continued strength in colon and rectal resection,
gynecology and lung resection procedures.

In India, while still in the early stage of adoption, we saw strength in gynecology and general
surgery procedures, particularly with growth in hysterectomy, cholecystectomy, and hernia
repair. China procedure growth was lower than prior-period averages when compared to the
same quarter a year ago, which experienced a recovery in procedures impacted by COVID.
System utilization remained strong, while capital placements continue to be impacted by
delayed tenders and emerging domestic robotic systems. 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. Earlier this year, Dr. Zhang and team from the Guangzhou
University of Chinese Medicine published a systematic review and meta-analysis in the
International Journal of Surgery that looked at open, laparoscopic, and robotic-assisted surgery
approaches to rectal cancer management.

This meta-analysis covered 56 studies and included over 25,000 patients, of which
approximately 11,000 patients received robotic-assisted surgery, over 13,000 patients
laparoscopic surgery, and over 390 patients received open surgery. When compared to the
control group of both laparoscopic and open procedures, patients undergoing a robotic-assisted
approach had an approximately two day shorter length of stay. Specifically, when compared to
lap, the robotic-assisted group was associated with a 1.7 day shorter length of stay. Relative to
open surgery, the length of stay was 5.5 days shorter.

The robotic-assisted approach was also demonstrated a protective effect for converting to an
open procedure, with 61% lower odds of conversion associated with robotics relative to the
laparoscopic approach. Finally, when compared to the laparoscopic and open control group, the
robotic-assisted approach showed less estimated blood loss, approximately 40% lower odds of
urinary retention, and, when compared to open, a higher number of harvested lymph nodes. The
authors concluded, "The robotic approach emerges as the most favorable option for managing
rectal cancer when compared to open, laparoscopic, and transanal techniques, as it delivers the
finest blend of oncological, functional, and patient recovery outcomes. The digital interface of
surgical robots enables a shift in the paradigm of surgical training, facilitating shorter learning
curves that are more comprehensive and notably reducing the morbidity and mortality
associated with them." 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 14% and 17%. We are now narrowing our forecast and expect full year 2024
procedure growth of 15.5% to 17%. The low end of the range assumes further softening in
bariatric procedures, along with increasing headwinds in Asia from prolonged physician strikes
in Korea and in China, from delayed tenders and emerging domestic robotic systems, impacting
capital placements and, therefore, procedure growth.

At the high end of the range, we assume bariatric stabilizes at current quarter rates and
headwinds in Korea and China do not get worse. Turning to gross profit, we are increasing our
pro forma gross profit margin to be within 68.5% and 69% of net revenue. Our actual gross profit
margin will vary quarter to quarter, depending largely on product, regional, and trade-in mix, and
the impact of new product introductions. Turning to operating expenses, we are lowering our
guidance for pro forma operating expense growth to be between 10% and 13%.

We are refining our noncash stock compensation expense to range between 680 million to 700
million in 2024. We are narrowing our guidance for other income, which is comprised mostly of
interest income to total between $300 million and $320 million in 2024. With regard to capital
expenditures, we continue to estimate a range of 1 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 & Answers: