Intuitive Surgical, Inc. (NASDAQ:ISRG) Q1 2024 Earnings Call Transcript

Intuitive Surgical, Inc. (NASDAQ:ISRG) Q1 2024 Earnings Call Transcript April 18, 2024

Intuitive Surgical, Inc. beats earnings expectations. Reported EPS is $1.5, expectations were $1.4. ISRG isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you everyone for standing by and welcome to the Intuitive Q1 2024 Earnings Release Call. At this time, all participants are on a listen-only mode. [Operator Instructions] As a reminder today’s call is being recorded. I will now turn the call over to your host, Head of Investor Relations for Intuitive Surgical, Brian King. Please go ahead.

Brian King: 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 undue reliance on such forward-looking statements.

Please note that this conference call will be available for audio replay on our website at intuitive.com on the events section under our investor relations page. Today’s press release and supplementary financial data tables have been posted to our website. Today’s format will consist of providing you with highlights of our first quarter results as described in our press release announced earlier today, followed by a question-and-answer session. Gary will present the quarters 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 Guthart: 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 of 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 and 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, and Q1 2023 benefited from the return of patients and 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 install 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 the first cases. As we engage 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 DaVinci 5 components. We will remain in our measured rollout 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 focus 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: Good afternoon. I will describe the highlights of our performance on a non-GAAP or proforma basis. And we’ll also summarize our GAAP performance later in my prepared remarks. A reconciliation between our proforma and GAAP results is posted on our website. In Q1, da Vinci procedures grew 16%. The installed basis 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.

OUS 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 rate 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 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 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. 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 leased 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 eight 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: 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. J.

John Choi and team from University of South Florida and Tampa, Florida published a meta-analysis of randomized control trials describing outcomes of robotic assisted abdominal pelvic surgery in the journal of surgical endoscopy. This analysis included a review of 50 publications published through April 2021, included over 4,800 patients from randomized control studies, and covered a variety of abdominal pelvic surgical procedures, including anti-reflex, 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 experience mitigating potential differences in operating time, while improving rates of intraoperative complications and conversions to open surgery. In March this year, Dr. Nicole Linares 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 and 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 postoperative 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 performance 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 billion to $1.2 billion, primarily for plan 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.

Operator: Thank you. [Operator Instructions] We will go to the first question at this time and that’s from Robbie Marcus, JP Morgan. Please go ahead.

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Q&A Session

Robbie Marcus: Oh, great. And congrats on a very nice quarter. Gary, I was hoping you could touch on, you know, what surprised me the most was the procedure volume off a really difficult quarter here 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 raise guidance through the rest of the year?

Gary Guthart: Yes, 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: Yes where we saw particular strength regionally was in the U.S. and the U.K. in particular. What you also see in OUS 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 guidance. Obviously, the guidance is only up a point at the low and the high end of the range, so something we’re watching carefully.

Gary Guthart: So, I think, Jamie, you got it.

Robbie Marcus: Maybe just as a quick follow-up, I’m at the SAGES conference now and, you know, 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 Guthart: Yes, 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 team’s efforts on human factors design and user interface, strong commentary on ergonomics, and I think force 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: Nope, I think you got it Gary.

Gary Guthart: Thanks, Robbie.

Operator: Okay, we’ll go to the next line, Larry Biegelsen, Wells Fargo. Please go ahead.

Larry Biegelsen: [Technical Difficulty] for taking the question. I echo Robbie, 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 Guthart: Yes, thanks. Larry, there’s three things that are going on for us. One of them is optimizing the supply chain, get — making sure that we have the quality that we want that will for sure go through all of ‘24 in 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 that 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: 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 do new procedures and why? Thanks for taking the question.

Gary Guthart: Yes, our first thought here and 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 index 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, it’s 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 in its 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.