Intuitive Surgical, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Intuitive Surgical Q1 2019 earnings release call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If you should require assistance on today's call, please press star then zero. And as a reminder, this conference is being recorded. I'd now like to turn the conference over to Calvin Darling, Senior Director of Finance, Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to Intuitive Surgical First Quarter Earnings Conference Call. With me today, we have Gary Guthart, our 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 Securities and Exchange Commission filings including our most recent Form 10-K, filed on February 4, 2019. 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 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. Marshall will provide a review of our first 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'll turn it over to Gary.

This first quarter was a solid start to 2019 for Intuitive. Customer response to our products and services is healthy, with continued growth in their use of DaVinci to deliver high-quality, minimally invasive surgery to a broad base of patients. As I've said in the past, 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. We have a substantial opportunity, and there's significant work to be done. Global procedure growth was strong at approximately 18% in the first quarter of 2019. Drivers of growth remain consistent with our trailing several quarters, with growth in general surgery accounting for strength in the United States. Growth in Japan continues to be healthy, with strength in urology, gastrectomy, and colorectal procedures. Growth in China met our expectations given constraints on capital placements. Placements of new systems in the quarter was strong, with growth in total placements rising 27% from Q1 of 2018. Net of trade-ins and retirements, our DaVinci installed base again grew 13% over Q1 2018 to approximately 5,110. The mix of system placements between our flagship XI system and our value X system generally aligned with our strategy regionally. Trade-ins of earlier generation systems increased this quarter, as customers pursue the features of our Generation IV systems and some hospitals seek to standardize. As we discussed on our previous earnings calls, customers are interested in leasing, including usage-based models. The proportion of systems placed under operating leases increased again from 29% in Q4 2018 to 33% in Q1 of this year. The increase in trade-ins, leasing, and usage-based models aligns with our strategy in supporting customers. It allows them greater flexibility to have the right systems in the right care delivery environments. For the investor, it can make revenue modeling for systems harder to evaluate relative to prior quarters, as trade-ins impact our reported ASP and leasing defers revenue to future quarters. Marsha will take you through greater detail later in the call. Turning to expenses, we described our plans for increased investment in 2019 as we launch new platforms, strengthen our computational capabilities, and invest in projects that support future scale and provide leverage opportunities as we grow. Over the past year, we've seen our increased flexibility with customers catalyze growth, which in turn enables us to invest in manufacturing efficiencies that lower our costs. Our spending fell near the top end of the range of projections we shared with you last quarter, supported by procedure growth above the top end of our procedure guidance range. Financial highlights of our first quarter are as follows. Procedures grew approximately 18% for the first quarter of last year. We placed 235 da Vinci surgical systems up from 185 in the first quarter of 2018. Our install base again grew 13% from a year ago. Revenue for the quarter was approximately $974 million, up 15%. Pro forma gross profit margin was 71.2% compared to 71.6% in the first quarter last year. Instrument and accessory revenue increased to $552 million, up 20%. Total recurring revenue in the quarter was $747 million, growing 20% over Q1 of 2018 and representing 77% of total revenue. We generated a pro forma operating profit of $362 million in the quarter, up 4% from the first quarter last year, and pro forma net income was $312 million, up 9%. As you know, we measure our efforts by their ability to positively impact the quadruple aim. Better outcomes, better patient experience, better care team experience, and lower total cost to treat per patient episode. 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 have deployed our investments toward these aims. We design instruments and accessories to enable repeatable, high-quality surgeries that are efficient and cost-effective relating to total cost to treat. Our team is in the process of launching several sophisticated products in pursuit of this aim, and customers are now adopting them broadly. Our 60-millimeter stapler is now in full launch and is used primarily in abdominal surgeries. Our second-generation 45-millimeter stapler has recently received 510K clearance, incorporating several of the learnings from our 80-millimeter line. Surgeon response has been strong, and adoption of our stapling line is encouraging. We also launched our third-generation vessel sealer. Its adoption has likewise been strong. Turning to systems, we are in our first phase launch of DaVinci SP. We installed six systems in Q1, constrained in the quarter by manufacturing availability, and bringing our clinical install base of SP to 21. Roughly 800 procedures have been performed to date. Recall we have two cleared indications for SP, urologic and transoral surgery. Surgeon and patient feedback have been positive for usability and patient experience in these early days of launch. Going forward, we expect continued progress in strengthening our production performance to support SP launch at scale. As we've described in the past, we are also pursuing additional clinical indications for SP and have engaged regulatory agencies regarding their requirements. The combination of additional indications for SP and production readiness at scale will pace the speed of SP commercial deployment. In flexible diagnostics, our ION platform is focused on the need for definitive early diagnosis of suspicious lesions for lung cancer. ION received FDA clearance in the first quarter. With 510 clearance, we have initiated our next phase focused on clinical use, customer feedback, and production optimization. First cases on the cleared system were performed at the end of Q1, and we plan a measured rollout this year. We do not anticipate material revenues from ION in 2019. In our cloud computing and informatics efforts, we routinely deliver programmatic insights to our customers using our systems, which have been smart and connected for the past decade. We received FDA clearance for our ARIS augmented reality product in the first quarter and anticipate first clinical use in 2019, focused on several high-volume da Vinci institutions that will lead clinical evaluation and analysis. We do not anticipate any revenue from IRIS in 2019. In closing, our business fundamentals are strong, and for the balance of the year, our focus remains in completing the tasks we set for ourselves. 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, who will review financial highlights.