Intuitive Surgical, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Intuitive Surgical Q3 2019 Earnings Release Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. Should you require assistance during the call, please press star then zero. And 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, sir.

Thank you. Good afternoon, and welcome to Intuitive's third 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 July 22, 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 third 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 and Marshall will provide a review of our third 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.

Thank you for joining us today. Intuitive has been enabling customers in their delivery of high-quality, minimally invasive surgery for 20 years. and we believe the adoption of robotics and computer-aided interventions is early relative to its long-term potential. 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. This third quarter of 2019 was another solid one for Intuitive in pursuit of these aims. Our performance in the quarter is a reflection of our progress, with procedures and system placements showing continued strength. For the quarter, global procedure growth was nearly 20%, aided by an increase of approximately a surgery day relative to Q3 of 2018. Growth again centered on general surgery in the United States, with positive contributions to the global growth rate from Germany, Korea, and Japan. China procedure growth continues to be limited by install-based growth, Total procedure growth in China is responding positively, considering the release of system quota and subsequent placements. In the United States, year-over-year procedure growth for the quarter was 18%. General surgery again accounted for the largest increase year-over-year, accompanied by solid growth in urology and stable growth in gynecology. We also saw strength in bariatrics and colon cystectomy. Hernia repair and colon resection growth rates were solid in the quarter, Improvements in system utilization by customers and alternative capital placement models are having a positive impact on our business. Our U.S. sales force productivity improved in the quarter as our new team members gained experience. Calvin will take you through global procedure dynamics in more detail later in the call. With regard to our installed base, placement of new systems in the quarter was solid, with growth in total placements rising 19% from Q3 of 2018. Net of trade-ins and retirements, our DaVinci install base grew 12% over Q3 2018 to approximately 5,406. The mix of system placements this quarter moved towards our flagship XI system, and trade-ins were healthy. The proportion of systems placed under operating leases was 33% this quarter compared with 32% last quarter. As a reminder, total placements and the percentage of systems placed under lease or usage-based arrangements can vary substantially quarter to quarter. Turning to expenses, we are investing in building our capability in international regions, launching new platforms, strengthening our computational capabilities, and executing projects that support future sale and provide leverage opportunities as we grow. Our spending is on track with our expectations. It is supported by solid procedure growth, capital placements, and product cost reductions. Financial highlights for our third quarter results are as follows. Procedures grew nearly 20% over the third quarter of last year. We placed 275 da Vinci surgical systems up from 231 in the third quarter of 2018. Our install base grew 12% from a year ago. Revenue for the quarter was approximately $1.1 billion of 23%. Proforma gross profit margin was 72% compared to 71.5% in the third quarter last year. Instrument and accessory revenue increased to $606 million, up 25%. Total recurring revenue in the quarter was $817 million, growing 24% over Q3 of 2018 and representing 72% of total revenue. We generated a pro forma operating profit of $462 million in the quarter, up 18% from the third quarter of last year. Pro forma net income was $409 million, up 21%. and we repurchased $70 million in shares at an average price of $493 per share. Turning to our investments and products, I'll start first with systems. We are in our Phase I launch of DaVinci SP as we work to expand clinical clearances and build SP products at scale. In the quarter, we proactively held shipments on SP endoscopes and limited new system installations for a limited time as we investigated a robustness concern on the SP endoscope. We resumed shipping endoscopes and systems in the quarter. Given the slowdown on endoscopes, we installed four systems to bring our install base of SP to 38. Customer response and early clinical results using SP remain encouraging. In addition, utilization rates for SP in Korea, where clinical indications are the broadest, are at XI levels already, a testament to surgeons' engagement and our team's skill in design for usability. With regard to additional indications for SP, We have been in discussion with FDA regarding data requirements for a colorectal indication. We expect this to require an IDE trial that includes follow-up analysis. This implies we do not expect the third indication of SP in the U.S. in 2020. While we had planned for a smoother launch of SP in product availability and new indication timelines, our teams are focused on building at scale and satisfying regulatory requirements for additional indications. Interest in SP is healthy, and clinical outcomes are encouraging, forming the basis of our belief in the long-term potential of the platform to improve care. The 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. Since our 510 clearance in Q1 of this year, we initiated our first phase of launch focused on clinical use, customer feedback, and production optimization. First cases on the cleared system were performed at the end of Q1. There are now nine systems in the field performing cases with the total case experience in the hundreds. To date, the rollout is meeting our expectations with a mix of clinical trial sites and commercial sites. User feedback during this initial launch period has been strong. For instruments and accessories, our team moved to full United States launch of our 45 millimeter SureForm stapler and obtained clearance for it in Japan and Korea in the quarter. We also obtained 510K clearance for a new curved tip SureForm 45 millimeter stapler and a new gray reload designed to staple thin structures. Recall that surgical stapling is a family of products that help surgeons in a range of procedures covering parts of the body from the rectum to the thoracic cavity. Robotically held staplers are a sophisticated technology, and our team is doing an excellent job filling out the product portfolio. Our experience has shown that procedure adoption occurs when the holistic needs of the care team are met, when the right system and imaging products come together with the right instruments and accessories. Stapling is another example of this synergy, with surge in adoption of Generation IV da Vinci systems with SureForm staplers gaining momentum. Turning to imaging and analytics, we are working on computing and real-time cloud technologies to allow for tasks from tele-mentoring to augmented reality. We now have over 20 active tele-mentoring sites that together have supported hundreds of cloud-enabled real-time surgery sessions as we progress in building our real-time cloud capabilities. Feedback on the utility of these sites for case observations and mentoring has been supportive. In augmented reality, we are working through logistics and installation of our first IRIS accounts to gather customer and clinical feedback. We expect first clinical cases on the IRIS system in the next few months. Lastly, our surgical simulation products have become widely adopted in the installed base, with more than 3,200 da Vinci simulators in the field. Before turning the time over to Marshall, let's step back and consider Intuitive's evolution over the past few years. Over this period, general surgeons have increased their adoption of our offerings, underpinned by improvements in the quadruple lane in procedures they perform, from colon and rectal procedures to hernia repair, cholecystectomy, and bariatric surgery. General surgery procedures span a broad range of complexity and economics. At the same time, we've extended our reach into key countries to support the adoption of robotic-assisted surgery into their healthcare environments. We have flexed our company to better serve these customers. with the launch of new systems, new instruments, and updates to our software, along with changes to our sales and support models and pricing structures. Given the large global opportunity to pursue the quadruple aim, we believe the next few years for the company will be dynamic. We will guide the company to meet our customers' clinical and economic needs across this wide range of procedures and geographies. Doing so will involve continued investment in innovation for both technology and economic models, and we see a path to do both. 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 da Vinci, I'm sorry, our SP and ion platforms. Third, driving intelligent surgery innovation. And finally, supporting additional clinical and economic validation in our focus procedures in countries. And I'll turn the call over to Marshall, who will review financial highlights.