Intuitive Surgical, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Intuitive Surgical Q2 2019 Earnings Release Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call, please press stars and zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host. Mr. Calvin Darling, Senior Director of Finance, Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to Intuitive's second 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's Securities and Exchange Commission filings, including our most recent Form 10-K, filed on February 4, 2019, and 10-Q, filed on April 19, 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 second 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 second 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 for joining us today. This second quarter of 2019 was a solid one for Intuitive, with healthy customer interest and demand for our products. Overall procedure growth met our expectations, while capital placement succeeded them. Global procedure growth was approximately 17% in the second quarter of 2019. Growth again centered on general surgery in the United States, with positive contributions to the global growth rate from Germany, France, and Japan. In China, we are pleased with procedure performance given the recent release of systems under the new quota. Turning to the United States, year-over-year growth in the quarter was 16%. General surgery growth again accounted for the largest increase year-over-year, accompanied by expected moderation of growth in U.S. urology and gynecology. Underlying this performance, we saw continued strength in bariatrics and cholecystectomy with modest tempering of growth rate in hernia and colon resection. Given the different types of procedures being performed by general surgeons, we see additional demands on system access and accounts as well as increased demands on our representatives' time to support different procedure types. We believe system placement strength in the U.S. is driven in part by the desire of general surgeons for increased access. We have efforts ongoing to manage these issues. Calvin will take you through global procedure dynamics in more detail later in the call. With regard to our install base, placement of new systems in the quarter was strong, with growth in total placements rising 24% from Q2 of 2018. Out of trade-ins and retirements, our DaVinci install base again grew 13% over Q2 2018 to approximately 5,270. The mix of system placements this quarter moved towards our flagship XI system, while both sales of X systems and trade-ins remained healthy. The proportions of systems placed under operating leases was 32 percent this quarter compared with 33 percent last quarter. We do not anticipate this quarter-to-quarter variance as indicative of a larger trend in leasing. With regard to capital average sales price, the mix of systems and geographies last quarter resulted in a lower ASP when compared to historical trends. The second quarter saw a reversal of mixed dynamics. with more fully featured system sales and a greater proportion of system placements in direct markets, resulting in an ASP that is higher than recent quarterly averages. As we said last quarter, this variance in ASP quarter to quarter is the result of system and regional mix, not a fundamental change in our philosophy. Turning to expenses, we continue to invest as we launch new platforms, strengthen our computational capabilities, and execute projects that support future scale and provide leverage opportunities as we grow. Our spending met our expectations, falling within the range of projections we shared with you last quarter and supported by solid procedure growth in capital placements. Financial highlights of our second quarter results are as follows. Procedures grew approximately 17% over the second quarter of last year. We placed 273 da Vinci surgical systems up from 220 in the second quarter of 2018. Our install base again grew at 13% from a year ago. Revenue for the quarter was approximately $1.1 billion, up 21%. Proforma gross profit margin was 71.3%, compared to 71.1% in the second quarter last year. Instrument and accessory revenue increased to $579 million, up 22%. Total recurring revenue in the quarter was $780 million, growing 21% over Q2 of 2018 and representing 71% of total revenue. We generated a pro forma operating profit of $455 million in the quarter, up 17% from the second quarter of last year, and pro forma net income was $388 million, up 18%. 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. 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. For our customer, surgery has been digitized for the past 20 years. While we've made significant progress over our history, we believe continuous improvement is required, and we have deployed our investment 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. Taking one example of our advanced instrument platforms, our second-generation SureForm staplers are now on the market at both 60-millimeter and 45-millimeter instrument lengths and represent product families. Our 60-millimeter stapler has four staple lengths available and is sold in the U.S., Europe, Korea, Australia, and now Japan. Our 45-millimeter SureForm stapler has five different staple length cartridges, as well as a straight tip and curved tip instrument, and is available in initial launch in the United States and our direct EU markets. Measured through Q2, surgeons have fired intuitive staplers clinically over a million times cumulatively since our stapling launch. Turning to systems, we're in the first phase launch of DaVinci SP. We installed 13 systems in Q2 to bring our clinical install base of SP to 34. Our teams have done a nice job resolving the manufacturing variances that slowed our installs in Q1. The highest per system utilization of SP is occurring in Korea, where regulatory clearances support the access to a large range of clinical applications. The Korean experience with SP is encouraging with regard to the broad possibilities for our platform. In Korea, procedures in urology, gynecology, general surgery, and head and neck surgery are being performed. In the United States, we have two cleared indications. for SP, urologic and transoral surgery. As you know, we're pursuing additional clinical indications for SP and have engaged regulatory agencies regarding their requirements. These requirements are in discussion, which implies projected timelines for additional indications are not yet available. Our pipeline of interested SP customers is healthy, and a combination of additional indications for SP and our readiness for deployment at larger scale pace the speed of our SP commercial expansion. In flexible diagnostics, our ION platform is focused on the need for accurate and timely biopsies to support 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 product production optimization. First cases on the cleared system were performed at the end of Q1. and we plan a measured rollout this year. Placements to date are at hospital sites collecting data. So far, three have been initiated, and over 50 procedures have been performed so far. We're pleased with early clinical results and look forward to our customers' continued progress. We expect commercial placements to commence in the next few months, along with the initiation of additional clinical collection sites. We do not anticipate material revenue from ION in 2019. Turning to imaging and analytics, this week we announced the acquisition of the 3D robotic endoscope business from our longtime supplier, Scholle FiberOptic. The transaction is subject to closing conditions, and thereafter we look forward to welcoming their employees to the intuitive team. Leading visualization has been a core pillar of our offerings, and we believe it is essential to the future of intelligent surgery. This acquisition strengthens our design and supply chain capabilities and increases our manufacturing capacity for imaging products. 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 and countries. Before I turn the call over to Marshall, I'd like to take a moment to acknowledge our Chief Operating Officer, Mr. Salbronia, who announced his intention to step back from day-to-day operations after 20 years at Intuitive. Sal has made enormous contributions to building our product line, our capabilities, and in the past few years, our leadership team. I extend my personal thanks and that of the company for his efforts over these past two decades. We anticipate working with Sal post-transition on projects of mutual interest. I'll now turn the call over to Marshall, who will review financial highlights.