Intuitive Surgical, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Intuitive Surgical Q4 2018 Earnings Release Call. Now, at this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session. To place yourself in queue for questions at any time, please press star 1. You may remove yourself from that queue by depressing the pound key. As a reminder, today's call is being recorded. I will now turn the call over to Senior Director of Finance, Investor Relations, Kelvin Darling. Please go ahead, sir.

Thank you. Good afternoon, and welcome to Intuitive Surgical's fourth quarter earnings conference call. With me today, we have Gary Guthart, our president and CEO, and Marshall Moore, our chief financial officer. 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 the company's Securities and Exchange Commission filings, including our most recent Form 10-K, filed on February 2, 2018, and 10-Q, filed on October 22, 2018. 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 latest events section under our investor relations page. In addition, 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 fourth 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. Marshall will provide a review of our fourth quarter financial results. then I will discuss procedures and clinical highlights and provide our updated financial outlook for 2019. And finally, we will host a question and answer session. With that, I will turn it over to Gary. Thank you, Calvin.

Entering 2019, our business is showing strength. In 2018, over 1 million surgeries were performed using DaVinci Systems, accompanied by approximately 1,500 peer-reviewed clinical journal articles. The total number of procedures performed since first launch exceeded 6 million. And the total peer-reviewed clinical database contains over 16,000 articles. While these milestones represent a step forward, I believe that outstanding product design, robotics, advanced imaging, and informatics are just starting to take their place in surgery and in acute interventions more broadly. Surgery and acute interventions are sophisticated interactions among highly trained professionals. They have a common goal of delivering outstanding care to a patient in need. Starting with a careful understanding of operating and interventional environments, engineers and interaction designers collaborate closely with physicians to develop smart, connected devices with the goal of the quadruple aim. First, decreasing complications. Second, increasing patient satisfaction. Third, increasing care team satisfaction. And fourth, improved efficiency and lowering of the total cost to treat. Considering our current da Vinci systems and the procedures in countries that are our focus today, We believe applicable procedures exceed 5 million annually. As we consider our new concepts coming to market, including but not limited to our da Vinci single port system, our advanced imaging technologies, and our ion-flexible catheter system, the long-term total opportunity for our products to make a positive difference in physicians' and their patients' lives is greater still. Given the positive response of our customers and in pursuit of the substantial opportunity to improve surgery and intervention that lies ahead, we plan to accelerate some investments over the next several quarters. We'll review our guidance on spend later in the call. Given our pre-release this month, I'll be brief in summarizing our 2018 highlights. Global procedure growth was strong, with approximately 19% growth in the fourth quarter and 18% for the full year. Growth in procedures was largely consistent through the year, with the United States showing particular strength in hernia repair, colorectal procedures, and practice-related general surgery procedures, including cholecystectomy. Mature procedural growth in the United States, including prostatectomy and hysterectomy, was solid again in 2018, though we expect slowing in these mature procedures going forward in some countries. In Japan, procedures grew over 40% in the second half of 2018, in response to additional reimbursements granted in Q2. Aggregate European procedure performance was generally in line with our expectations again this quarter, with particular strength in the UK and France. Calvin will review procedure trends in greater detail later in the call. Our capital placement performance in 2018 was also strong, with growth in total placements rising 35% from 684 in 2017 to 926 in 2018. And of trade-ins and retirements, our DaVinci install base grew 13% over 2017. The mix of system placements between our flagship XI system and our value X system generally aligned with our strategy regionally. As we discussed on our last earnings call, customers are interested in leasing and alternative capital placement models. The proportion of systems placed under lease increased again in the quarter from 25% in Q3 of 2018 to 29% in Q4. Financial highlights of our fourth quarter results are as follows. Revenue for the quarter was over $1 billion, up 17%. Proforma gross profit margin was 71.8%, compared to 72.4% in the fourth quarter last year. Instrument and accessory revenue increased to $539 million, up 18%. Total recurring revenue in the quarter was $722 million, representing 69% of total revenue. We generated a pro forma operating profit of $412 million in the quarter, up 7% from the fourth quarter of last year, and pro forma net income was $353 million, up 16%. We launched the Intuitive Foundation with an initial contribution of $25 million in the quarter. The Intuitive Foundation's mission is to support clinical and technology research and acute interventions, as well as philanthropy in the communities which we serve and in which we live. Financial highlights of the full year 2018 results are as follows. Revenue for the year was $3.7 billion, up 19%. Pro forma gross profit margin was 71.5% for the full year, compared to 71.9% for 2017. Instrument and accessory revenue increased to $2 billion, up 20%. Total recurring revenue in the year was $2.6 billion, representing 71% of total revenue. We generated a pro forma operating profit of $1.5 billion in the year, up 17% from 2017, and pro forma net income was $1.3 billion, up 23%, with the difference in growth rate between operating profit and net income largely driven by the 2017 Tax Act and interest income earned. Looking ahead, a review of clinical outcomes for complex surgery and acute interventions across large populations still highlights a substantial need for improvement. We measure our efforts by their ability to positively impact the quadruple aim. Real progress requires more than minimally invasive tools and more than digital technologies. These technologies are necessary, but not sufficient. We believe intelligent surgery takes the integration of three elements. First, a deep understanding of human interactions that inform holistic system design. Second, the development of high-quality, smart, and cloud-connected robotic imaging and instrument systems. And lastly, informatics and AI to deliver relevant, validated insights. While we've made significant progress over our history, we believe continuous improvement is required, and we've deployed our investments toward these aims. We're bringing together several efforts in pursuit of our mission. We are early in our phase one launch of DaVinci SP. We installed 15 systems in 2018, and a few hundred procedures have been performed to date. Surgeon and patient feedback have been positive for usability and patient experience in these early days of launch. We submitted our 510K for our second indication, transoral robotic surgery, in Q4 of 2018 and are responding to FDA questions on this second indication. We're also working through supply chain optimization as we begin to ramp production for SP in anticipation of additional clearances and broader launch. Our first step into flexible diagnostics, ION, is nearing phase one launch. We submitted our 510 in 2018 and have responded to FDA questions this month. We anticipate a phase one limited launch of ION in 2019, focused on the need for definitive early diagnosis of suspicious lesions for lung cancer. In instruments and accessories, we plan to broaden the launch of our SureForm 60 millimeter stapler for da Vinci in the first half of 2019. The 60 millimeter stapler is used primarily in abdominal surgeries, including bariatric surgery. Surgeon response has been encouraging and our team has performed well in establishing its supply chain. Over the past several years, we've been increasing our cloud computing and informatics capabilities. Today, we routinely deliver programmatic insights to customers using our systems, which have been smart and connected for the past decade. We believe there are opportunities to further enhance these capabilities. Our advanced imaging programs and augmented reality programs are making progress. We anticipate first clinical use of our augmented reality program in 2019. As described in our pre-release, we've also been increasing investments in building our business operations in countries important to our future. Our efforts in China will accelerate in 2019 with the da Vinci distribution arm of Fosun Pharma, Chindex, joining our joint venture this quarter. Combined with the release of the next system quota and the clearance of DaVinci XI in China, we will be accelerating investments to establish our base to serve China over the long term. In 2018, we also acquired our DaVinci business in India and Taiwan and anticipate strengthening our investments and presence over the next several quarters. We describe the multi-year nature of these investments in our JP Morgan talk, using Intuitive Japan as an example. Market development in country is an arduous multi-year process. It involves building a strong management team and company culture, establishing strong working relationships with surgical societies, policymakers, regulators, and key customers, as well as building training and proctoring capability, along with a local clinical evidence base. As we bring these efforts together, we plan to accelerate our spend rate above our historical norms for the next several quarters. As described above, the increase in spend is driven primarily by funding and growth of our joint venture in China, the ramp of our informatics efforts, infrastructure to support our procedure growth, including manufacturing lines and facilities, and the launch of our new platforms. We pace the rate of investment not just by the opportunity for growth, which we believe is substantial, but by our ability to integrate talented staff and execute against our objectives. In closing, as we start 2019, our focus will be on, first, supporting adoption of da Vinci in general surgery and in key procedures in global markets. Second, launching our SP and ion platforms. Third, driving intelligent surgery innovation. And finally, supporting additional clinical and economic validation in our focus procedures in countries. I'll now turn the call over to Marshall to review financial highlights.