Intuitive Surgical, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Intuitive Surgical Q1 2020 earnings release. At this time, all participants are in listen-only mode. Later we'll have an opportunity for your questions. Instructions will be given at that time. If you should require assistance today, please press star zero and operator will assist you offline. As a reminder, today's conference is being recorded. I'll now like to turn the conference over to Kelvin Darling, Senior Director of Finance, Investor Relations for Intuitive Surgical. Please go ahead.

Thank you. Good afternoon and welcome to Intuitive's 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 uncertain risks and uncertainties. These risks and uncertainties are described in detail in our Securities and Exchange Commission filings, including our most recent Form 10-K filed on February 7, 2020. Our SEC filings can be found through our website or at the SEC's website. Investors are cautious 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. Today's press release and supplementary financial data tables have been posted to our website. In addition, this quarter we have also posted charts illustrating DaVinci procedure trends in Q1, which are intended to provide additional perspective and detail regarding the impact of COVID-19 on our business. 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 financial results. Then I will discuss procedure details. 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. Our first quarter 2020 performance reflects the rise of COVID-19 and the global response to it. On this call, we'll describe our experience in the quarter, our framework for engaging those who rely on us, and our priorities and actions in these challenging times. Our focus now and in the past is the safety and well-being of patients, care teams, our communities, and our employees. For the first two and a half months of the quarter, procedure performance was at the high end of our expectations, with procedure trends consistent with the prior quarters. General surgery in the United States was strong, as was urology outside the United States. As we disclosed previously, recommendations by surgical societies and healthcare organizations to delay certain surgeries to conserve resources for COVID care are having a material impact on surgery broadly, including robotic-assisted surgery. We support government and hospital policies to direct resources to COVID care and recognize these policies vary greatly by region and by hospital system. We are analyzing customer procedure deferrals in response to COVID. Patients undergoing DaVinci procedures do so in response to an underlying disease. While these procedures may be delayed in the short term, without treatment of some sort, the disease and its impairment persist and often worsens. Said simply, the vast majority of these patients will ultimately seek treatment. We are analyzing both the clinical drivers of return to treatment and customer plans and processes to recover. The categories of benign disease and cancer are not entirely predictive of the urgency of surgical intervention. Clearly aggressive cancers require treatment and are delayed at significant risk to patients. Likewise, some benign conditions require timely intervention as well. We're working internally and with customers to understand their needs to restart surgery for those patients whose condition requires action. The effect of COVID on the surgical market has impacted different regions differently. Starting with China, procedure performance was impacted by COVID earliest with sharp declines in surgery as resources were diverted to respond to COVID care. Procedures in China have been recovering steadily since that time. However, steep declines in procedures that can be deferred are occurring in other regions, particularly Europe and the United States. For the quarter, procedures grew 10% over Q1 of 2019. Given early strength followed by sharp declines in the last two weeks of the quarter, I refer you to the materials we posted to our website prior to this call to get a better picture of the dynamics in Q1. With regard to systems, our total number of placements for the quarter was below our expectations in spite of having strong capital performance in the first two months of the quarter. In March, rapid changes by hospitals delayed some system placements and are likely to significantly impact system contracts and placements in future quarters. Financial pressures exerted on hospitals in response to treating COVID patients and deferring other care are likely to be significant and are unlikely to resolve quickly. Marcel and Calvin will take you through procedure and capital dynamics in the quarter in greater detail later in the call. To help articulate our priorities and actions during this period of change, we have adopted the phased framework described in the American Enterprise Institute's National Coronavirus Response. In Phase 1, which is the -to-spread phase of coronavirus response, intuitive priorities are as follows. First, we are focused on the health and safety of all those we serve – our customers, our communities, our employees, and our suppliers – implementing early and continuous updates to our health and safety policies and processes. Second, we are supporting our customers according to their priorities – clinical, operational, and economic. Third, we are focused on continuity of supply by working with our suppliers and distributors. To date, our delivery capability and inventory positions are on firm footing. Fourth, we are securing our workforce economically. We have built an outstanding team over the years and we believe their strength will be essential in the recovery that follows. Fifth, in partnership with our intuitive foundation, we are contributing material, product, and volunteers to the front lines of COVID support. We have designed, produced, and delivered PPE to local hospitals and our staff have volunteered in several communities. And sixth, we are eliminating avoidable spend during the -to-spread phase of the virus. The current situation in hospitals responding to viral care is fluid and the depth and duration of this disruption is difficult to predict. New issues are arising with respect to surgery that will require mitigation and time. Some hospital customers and some of our suppliers will experience significant financial stress in this period. Regulatory agency priorities and resources are shifting globally as they devote their resources to infectious disease detection and treatment needs. And lastly, surgeons are being dedicated to front line COVID work or being idled by a lack of resources in this period. We are adjusting quickly to the issues described and we're confident in both the need for surgery and in our products as the response to COVID evolves. We're planning for phase two, the return to surgery for those patients who cannot wait. Those countries that have been managing the disease the longest have returned to DaVinci surgery steadily over time or have been able to maintain DaVinci surgery concurrently with COVID care. We are analyzing the order in which different procedures are likely to return and the strategies likely to be employed by hospital systems to manage surgical practices while still providing COVID care. For example, some health systems are dedicating specific sites to COVID care while operating rooms for outpatient surgeries are dedicated in other locations. We'll support customers closely as they bring capabilities back online. We're also adapting our training and intuitive telepresence capabilities to support team training and skills retention in a phase two world. We're optimizing our R&D facilities and methods to allow us to progress on important innovation programs while employing up to date workplace safety guidelines. Lastly, we look forward to accelerating clinical trial activities and the associated regulatory work as trial sites increase their surgical volume. In constructing our financial plans in the current environment, we're balancing five objectives that reflect our priorities mentioned above. They are first, customer focused economic policies that meet their needs during this disruption. Second, employee policies that secure our valuable workforce needed for hospital recovery and to drive our innovation. Third, securing and stabilizing critical supply chain resources. Fourth, eliminating spending that is not effective during this period. For example, pausing hiring and volume related roles and spend on projects that cannot progress in the current phase. And finally, shareholder policies that don't interfere with the priorities mentioned above. We remain in close contact with our customers, our community representatives, our employees and our suppliers during this period. While the depth and duration of the current challenges are difficult to predict, the need for both COVID and non-COVID care is clear. Given time and resources, health systems have continued to choose DaVinci. The collaborations and solutions orientation among our stakeholders is clear and inspiring. I believe our long-term opportunity is substantial and our business is well positioned financially and organizationally to weather this COVID outbreak. I'll now turn the call over to Marshall who will take you through financial matters in greater detail.

Good afternoon. I will describe the highlights of our performance on a non-GAAP or pro forma basis. I will also summarize our GAAP performance later in my prepared remarks. A reconciliation between our pro forma and GAAP results is posted on our website. Procedures and shipments are consistent with our preliminary press release of April 8. Key business metrics for the first quarter were as follows. First quarter 2020 procedures increased approximately 10% compared with the first quarter of 2019 and decreased approximately 9% compared with last quarter. Procedure growth continues to be driven by general surgery in the US and urology worldwide. Calvin will review details of procedure growth later in this call. First quarter system placements of 237 systems increased 1% compared with 235 systems last year and decreased 29% compared with 336 systems last quarter. We expanded our install base of DaVinci systems by 11% to approximately 5,669 systems. This growth rate compares with 12% in the last quarter and 13% last year. Utilization of clinical systems in the field measured by procedures per system declined approximately 2% compared with 6% growth last quarter and 5% growth last year. Let me walk through the impact of COVID-19 pandemic on procedures and system placements and how it varied by market. Prior to the spread of COVID-19, we experienced procedure growth trends consistent with those experienced in the fourth quarter, including strength in general surgery, growth in mature procedures in the US, and growth in OUS urology. We also saw early strength in capital placements, particularly in the US, with over half the systems placed in the quarter being arrangements where the sales cycle was mostly completed in the fourth quarter. Beginning in January, we saw a substantial reduction in DaVinci procedures in China, and by early February, procedures per week in China had declined by 90% compared with the weekly rates experienced in early January. As COVID-19 subsided in China in March, DaVinci procedures began to recover, and by the end of the quarter, China procedures per week were approximately 70% of the early January rate. We saw varied impacts on DaVinci procedures in some other early countries affected by COVID-19. COVID-19 had little impact in Korea and Japan in the quarter, and severe impact in Italy. In summary, the COVID-19 disruption to DaVinci procedures varied by country, and the disruption to worldwide DaVinci procedures was not significant through the middle of March. As the pandemic spread to Western Europe and to the US, we experienced a significant decline in DaVinci procedures in the last half of March. Procedures per week in the US, which represented approximately 70% of our procedures in 2019, declined approximately 65% relative to earlier in the quarter. Procedures in France, Germany, and the UK also declined, but to a lesser extent than the US. We have provided you with supplemental information on our website to enable you to understand the magnitude of the impacts on procedures and the variation between countries. As I indicated, most of the sales cycle for approximately half of the system placements in the quarter were completed in the fourth quarter. As we progressed through the quarter and the impact of the pandemic progressed, customers deferred decisions to purchase or lease systems into future quarters, and in some cases indefinitely. The depth and extent to which COVID-19 will impact individual markets will vary based on the availability of testing capabilities, PPE, ICUs and ORs, medical staff, and government interventions. As COVID-19 continues to spread, it is likely that DaVinci procedures will decline from those experienced in the first quarter. In addition, we would expect that system placements will follow the decline in procedures. While some markets like China appear to be recovering, it is possible that a recurrence of COVID-19 will negatively impact DaVinci procedures, and not all markets will recover at the same pace. Additional revenue statistics and trends are as follows. Utilization of the install base declined by 2% compared with the fourth quarter of 2019, reflecting the impact of the pandemic on procedures coupled with the fourth quarter system placement strength. When procedures increase, customers will first look to utilize existing DaVinci capacity, which is likely to depress capital placements. First quarter placements included a higher concentration of multiple system arrangements with hospitals and IDNs seeking the standardized on fourth generation systems. Many of these replacements were completed as capital leases. As a result, first quarter trade-ins were higher and operating leases were lower as the percentage of total placements than in the fourth quarter of 2019. We would anticipate in an environment of COVID-19, as economic pressures increase, more customers will seek leasing or alternative financing arrangements than purchases. Trade-in activity can fluctuate and be difficult to predict. However, given the impacts of COVID-19, we expect the number of trade-ins to decrease. We recognize 12 million of leased buyout revenue in the first quarter compared with 34 million last quarter and 12 million last year. There were no returns of DaVinci systems for leases that ended in the quarter. Leased buyout revenue has varied significantly from quarter to quarter and will likely continue to do so. Instrument and accessory revenue per procedure grew to just over $2,000 per procedure compared with $1,980 in the fourth quarter of 2019, reflecting instruments and accessory purchases prior to the decline in procedures. We expect that hospitals adjust inventory levels for lower surgery volumes, instrument and accessory revenue will decrease. Three of the systems placed in the first quarter were SP systems, reflecting both our measured rollout of SP and the impact of COVID-19. Our rollout of SP surgical system will continue to be measured, putting systems in the hands of experienced DaVinci users while we pursue additional indications and optimize training pathways in our supply chain. Given the impact of COVID-19, our ability to perform a clinical trial associated with an SP colorectal procedure is likely delayed. We placed eight ion systems in the quarter. Ion system placements were also impacted by COVID-19. Ion system placements are excluded from our overall systems count and will be reported separately. Procedures and other information associated with ion are excluded from our prepared remarks and will be reported separately when they become material. Our rollout of ion will continue to be measured while we optimize training pathways in our supply chain. The completion of the precise study will be delayed due to COVID-19. We cannot predict when the precise clinical study will be completed. Outside the U.S., we placed 55 systems in the first quarter compared with 81 in the first quarter of 2019 and 140 systems last quarter. Current quarter system placements included 25 in Europe, 10 into Japan, and 9 into China compared with 49 into Europe, 13 into Japan, and 3 into China in the first quarter of 2019. Moving on to gross margin and operating expenses. Proforma gross margin for the first quarter was .7% compared with .2% for the first quarter of 2019 and .2% last quarter. The decrease compared with the first quarter of 2019 and last quarter primarily reflects product mix, higher fixed costs on lower production, and costs associated with SI product transitions partially offset by cost reductions. As revenues are pressured by COVID-19, we will reduce production levels, which will result in higher labor costs and under-absorbed overhead and a significant reduction of product margin. Proforma operating expenses increased 15% compared with the first quarter of 2019 and decreased 8% compared with last quarter. Spending in the first quarter reflected normal business activities in the March and then a curtailment of costs associated with the impact of COVID-19. While certain spending will decrease in the second quarter as a result of the reduction in revenue and activities limited by the pandemic, much of our spending will continue. Major categories of spending and likely trends for the second quarter are as follows. We will continue to support our customers. We will continue to invest in innovation focused on the quadruple aim. We will invest in manufacturing in our supply chain to ensure supply for our customers. We will ensure we are prepared for periods when the spread of COVID-19 is contained. Certain costs will decline as underlying activities are restricted by COVID-19, including travel and related expenses, clinical trials, surgeon training, and customer data collection. We will eliminate spending that is ineffective due to COVID-19, like surgeon and hospital events. We are pausing the hiring of volume-related roles like sales reps and manufacturing employees. We continue to believe that we have a unique opportunity to expand the benefits of computer-aided surgery and acute interventions around the world and will continue to invest in the business for the long term. Our pro forma effective tax rate for the first quarter was 20%, compared with our expectations of 20% to 21%, reflecting geographic mix. Our actual tax rate will fluctuate with changes in geographic mix of income, changes in taxation made by local authorities, and with the impact of one-time items. Our first quarter 2020 pro forma net income was $323 million, or $2.69 per share, compared with $312 million, or $2.61 per share for the first quarter of 2019, and $417 million, or $3.48 per share for last quarter. I will now summarize our gap results. Gap net income was $314 million, or $2.62 per share for the first quarter of 2020, compared with gap net income of $307 million, or $2.56 per share for the first quarter of 2019, and gap net income of $358 million, or $2.99 per share for last quarter. The adjustments between pro forma and gap net income are outlined and quantified in our website and include excess tax benefits associated with employee stock awards, employee stock-based compensation and IP charges, amortization of intangibles and acquisition-related items, and legal settlements. We ended the quarter with cash and investments of $5.9 billion, compared with $5.8 billion at December 31, 2019. Cash generated from operations was partially offset by stock repurchases and investments in working capital and our infrastructure. We repurchased approximately 192,000 shares for $100 million, at an average price of $522 per share. Our current thoughts on capital deployment are in the following order. We recognize the hardship that COVID-19 places on our customers and will work with customers to ease the burden of lower da Vinci utilization, including providing customers with more flexible financing. We will work to secure a supply chain and build appropriate levels of inventory to ensure customer supply, particularly as procedures resume. We will invest in securing our employees. We will continue to our open market repurchase program consistent with our prior practice. And with that, I'd like to turn it over to Calvin, who will go over procedure performance.

Thank you, Marshall. Our overall first quarter procedure growth was approximately 10%, compared to 18% during the first quarter of 2019 and 19% last quarter. Our Q1 procedure growth was driven by 9% growth in U.S. procedures and 11% growth in OUS markets. Our lower first quarter 2020 procedure growth rates were a direct result of hospitals reallocating resources to meet the increasing demands of managing COVID-19. Hospitals postponed deferrable surgical procedures to make more resources available to treat COVID-19 patients. Impacts to da Vinci procedure volumes were first felt in China in January and moved to other OUS markets as the quarter progressed. As of mid-March, our overall procedures were trending towards the higher end of our expectations, including the benefit of an extra working day in Q1 2020. At this stage of the quarter, the impacts of COVID-19 in the earlier impacted countries were offset by strength in U.S. general surgery and mature procedures. Beginning in mid-March, we saw significant declines in procedure volume in the U.S. and Western Europe. On a worldwide basis, weekly procedures performed exiting Q1 were approximately 50% lower than the run rate through mid-March. In the U.S., weekly procedures exiting the quarter were approximately 65% below the run rate through mid-March. Procedure categories realizing significant declines were hernia repair, benign gynecology, and bariatric procedures. Lesser impacted procedures were thoracic and colorectal surgeries. Outside of the United States, weekly procedures exiting the quarter were approximately 25% below the run rate through mid-March. The lower OUS decline primarily reflects procedure volume recoveries in China offset by broad declines in Western Europe. In Q1, procedures in Japan were less affected by COVID-19. Growth in Japan procedures continued at a growth rate over 40%. We provide these data points to inform investors of the procedure dynamics experienced during the first quarter, which were unprecedented. Due to the uncertain scope and duration of the COVID-19 pandemic and uncertain timing of global recovery and economic normalization, we withdrew our financial and procedure guidance on April 8th. And these Q1 procedure results aren't necessarily indicative of any forward-looking trend. That concludes our prepared comments. We will now open the call to your questions.

Ladies and gentlemen, you may do so by pressing 1 and 0. Our first question will come from David Lewis with Morgan Stanley. Please go ahead.

Good afternoon. Can you hear me? We can. Hi, David. Okay. Sorry about that. I'm sure it happened. So, Gary, I just want to talk about capital cycle a little bit. I mean, I know we're not going to get specifics on 2020, but if I think about the 2008 financial crisis, you know, the strain on hospitals is certainly different today than it was back in 2008. And your business model, frankly, is very different today than it was back in 2008. How would you compare and contrast the impact on your business, you know, through COVID-19 relative to what we saw in the last major financial crisis impacting hospitals? And I had a quick follow-up.

Yeah, thank you. You know, I'd start with I think there are apples and oranges from the underlying costs. So clearly this is health care related and policy driven in terms of deferrals. As a result, a little bit hard to predict how the capital cycle will recover. You had mentioned, and it's true, we have a lot more flexible approaches that are available to us with regard to making systems available. Marshall mentioned in his script, they'll consume existing capacity first as they go. We've been in contact with our customers routinely. There's a backlog growing for surgery. These folks are going to need surgery. And really our opportunity, our job as a company is to make sure we can support them however we can in terms of access to systems or motion of systems to allow them to use what they have out there. And as those systems become full again, we can think about how to increase capacity going forward. And we have a few tools in the toolkit. Marshall, anything you'd like to add?

No, I think you hit it. I think you'll see more financing, more leases and alternative financing arrangements.

Okay. Let me just make a quick follow-up on Capital Marshall for you. You talked about in your script a couple things. But you talked about certain orders that are being delayed or canceled versus pushed indefinitely. Can you give us any sense from a percentage perspective what percent of the order book was in your mind delayed versus what was either canceled or indefinitely delayed? And then you just mentioned lease rate. You've been hovering around that 40% level. Is there a reason to assume we should see a more material step up in the lease rate? You said it would fluctuate as it has normally. But in my view, it would be that lease rate could hike up more materially now because you're incentivized to provide flexible financing for hospitals to get these systems in. So any color there would be very helpful. And I'll jump back in queue. Thank you.

For leasing, yeah, in the quarter what happened, we had a number of customers that had started the sales cycle back in Q4 and were interested in the standardizing on four generation systems. And it so happens that a number of those customers wanted to do, wanted to structure the arrangements such that they were purchases. They were accounted for as purchases. And as a result, we had fewer leases this quarter. So I don't think this quarter is indicative of our normal sort of run rate for leases as a result. Leasing going forward probably is more akin to what we were experiencing, more in the 38% range. That's under normal circumstances. And I actually believe given the COVID virus and its impacts that it will increase from there. So and it's but it's hard to predict depending on the customer and the circumstances. As far as how many customers may have postponed indefinitely or may have postponed a quarter, you know, the conversations with them are always a little bit, you know, hey, we're going to postpone. And then they sort of throw in words about maybe another quarter, maybe another couple of quarters. And and some say, well, we'll get back to it, but we don't have a specific timetable. And for those that say that they don't have a specific timetable, that's what I'm referring to as indefinitely. I don't think that there are customers running from from robotic surgery. I think they actually want to do robotic surgery. And I think that they'll come back sometime when COVID virus is handled in and the procedures come back.

Okay. Thank you so much.

Next question, please.

Yes. The next question will come from Bob Hopkins, Bank of America. Please go ahead.

Sure. Thank you. And good afternoon. I want to thank you for the incremental data that you provided this quarter on the trends throughout the quarter by geography. That was very helpful to see. And so my first question is really on the chart on China was showing a pretty nice recovery from from trough to where you are right now. I was wondering if you could just walk through your views on how good a proxy China might be for a U.S. recovery, like why or why not? You know, how could that be different? Just your general thoughts on that would be great. Thank you.

Thanks, Bob. Yeah, you know, you see in that chart, China, you see other other countries as well, Japan and so on. And what you can really see is that country policy changes the shape. I think we're encouraged by a couple of things. One is people's interest or customers interest in using DaVinci is durable. That's been great. You had asked a specific question of how predictive is China? And I think the answer there is too soon to tell for the rest of the regions. I'm encouraged by it. I think it indicates the durability of demand. Having said that, I think policy matters and I think how people allocate their health care resources are going to change, too. You can see in Japan already that the progress of their approach to disease is evolving and what that looks like on procedures will evolve. So stay tuned is the short answer. Calvin, anything you'd like to add? No, I think that's that described it pretty well.

Okay. And then just one quick follow up. Yeah, I just maybe a comment on why Japan has been so resilient. And then you did mention the prepared remarks, something about I think I missed it on one of the clinical trials. It's been delayed. I was wondering if you could just highlight or reiterate exactly what you were communicating there. Thank you.

You know, on the Japan side, I think that in general, their system for managing the coronavirus is a little bit different than we've seen in other countries and it's evolving in time. So to date, hospital operations were relatively lightly impacted as it relates to surgery relative to other countries. What that will look like in the future, I don't know. We'll see how that evolves. It's been interesting and instructive for us to look at data from Japan, look at data from Korea, from China, from Europe, Germany, Italy, UK, France. And that informs us going forward in terms of getting prepared for the reopening of some of the hospital wings and surgical wings as they happen. So too soon to make the final call, but we have, I think, pretty good real time information. I'm going to refer to Marshall the question about clinical trial.

Clinical trial, what I was referring to was SP. We planned on doing a, we believe we have to do a clinical trial to get the next indication, which is colorectal. You know, doing a clinical trial when at this point in time is probably not going to happen right away. Having said that, I don't think we had plans to do it right away. We had several steps we had to go through before we got there. So I say it's delayed. It could be delayed and don't know exactly when it'll get done.

Calvin,

you had more

to add.

Yeah, and on the ION side as well, data capture for the ION precise study that we've talked about on these calls is currently delayed. We believe that positive clinical data will be important catalysts for broader usage of the platform. But given the lack of visibility, we're not in a position to provide a definitive revised timeline, but it's unlikely that the precise study will read out this year. But you look at the new platforms, both ION and SP are both in the measured rollout phases of market introduction and early stage utilization rates for both platforms has been encouraging. ION commercial procedure rates were up over 110 percent from Q4 of 19 to Q1 of 20, 2020. SP procedure rates grew 14 percent from the fourth quarter and they're up about 190 percent year over year. So they're really encouraging in these early phases. In Korea specifically, where we have a broad clearance for SP, the utilization per system is at this point time higher than it is for XI.

Thank

you. Thanks, Bob.

Our next question will come from Tycho Peterson with JP Morgan. Please go ahead.

Hey, thanks. I'm wondering if you could just talk a little bit about procedure mix, you know, the types of procedures that may come back a little bit faster versus others, presumably low score prostate cases may lag and non-invergent hernias may lag. But I'm just curious, you know, even based on your experience in China in terms of the procedures that came back a little bit faster, if you could comment on that at all.

Sure. Just as a broad brush, clearly high risk cancers are things delayed at real risk to patients and emergent or inflamed benign disease likewise. One caution, each country has a little bit different mix of procedures going into 2020 prior to COVID becoming a bigger issue. So the mixes are a little bit different. Calvin, why don't you speak a little bit to what we've seen today?

Well, yeah. And again, procedures, it's really they're following a continuum of urgency, you know, that are applied situationally. And like you say, clearly the aggressive cancers require treatment and are delayed at significant risk to patients. And likewise, some benign conditions require timely intervention as well. You know, we're working toward with customers to best understand the segments and our future plans and elaborate things. We'll elaborate further as the things progress. You know, I've mentioned in the prepared comments, you know, at least in the ending parts of the first quarter, the more impacted procedures were things like hernia repair, benign gynecology and bariatrics with lesser impacts on things like thoracic procedures and colorectal procedures.

You know, on my just personal channel checks, hospitals are now creating large backlogs of patients who are going to need surgery. And there's I'm encouraged about their their commitment to DaVinci as they go through that. So I think at some point the logistics of the availability of PPE and other resources will start to free up a little bit. And and as they have time, then they'll have to attend to that that group of patients and we'll be there to support.

And then maybe a follow up on the capital comments. I appreciate the nature of the discussions may shift more toward alternative financing. But can you just talk maybe to the degree to which hospitals are actually engaging in capital discussions at this point as opposed to still dealing with covid work and also curious in your thoughts on Europe, just given capital outlook there.

Thank you. Like I said in prepared remarks, you know, capital demand, we saw deferral of purchase decisions at the end of the quarter. I would expect that to continue. I would expect that also that hospitals as as covid as they are able to dedicate resources to the procedures that may be in backlog that they'll use up existing capacity and therefore it won't immediately result in capital demand. Yeah, we still have conversations with some of the hospitals on capital. I it's just not possible to predict exactly where it's going to come out for the quarter. With regard

to Europe, any color you want to give Marshall Europe,

Europe, we didn't see quite the same level of reduction in terms of procedures at the end of the quarter. That's not that doesn't mean to say that that'll sustain itself. It's possible that as the virus spreads that there could be additional pressures on procedures and having said that capital as you know we did 25 systems this quarter in what I reported in my prepared remarks. That's that's far lower than we had anticipated for the quarter. And so we're still we're seeing the same kinds of interactions with customers in Europe as we are in the US.

No, Tyco you've heard us say this before and it's really true in the data that this quarter as well. Europe doesn't act as one. So what's happening in Italy feels and looks different than in Germany from our perspective from France and from the UK. So each will will progress a little bit on a little bit different pathway.

Okay, thank you.

Thanks, Tyco.

Thank you. Our next question will come from Larry B. Gelson with Wells Fargo. Please go ahead.

Good afternoon. Thanks for taking the questions. One on procedures, one on just on systems on procedures. I appreciate the the numbers, the percentages you provided us. I think those were exit rates from March and you know the slides look like you know those percentages continue to go down. So I apologize if I missed this, but did you know, would you be willing to provide any color on what you've seen, you know, in the first couple of weeks here in April just to give us a better sense to how to think about Q2? And I did have one follow up.

We're not not ready to publish what's happened thus far in April. I don't think it's it's shockingly different from what the beginnings of your scene of what you're seeing in the charts we've given you there. But I'd also say that I don't think the next two weeks are are particularly predictive of anything. I think this will flow globally here over the next weeks and months. And we're really focused on how to make sure that we're supporting our customers well and flow out of it.

And Gary, thinking ahead, hospitals are going to be faced with two challenges. I think one is capacity constraints to handle postpone procedures. And second, moving procedures to alternative sites that I think you mentioned in your prepared remarks like ASC's potentially to isolate non-COVID patients or vice versa. What can you do to help hospitals with these two challenges? Thanks for taking the questions.

Yep, appreciate it. Well, a couple of things. We we are well represented in outpatient departments and hospitals already. We are absolutely able and willing to move systems to locations of care wherever they might be. We do have experience with systems and ASC's to the extent that people want to move into ASC environments. We work fine in those environments. We will be working on getting training and other resources geographically positioned where we think that folks can need additional support as they start to ramp up. Recognizing that we don't think a lot of people will be jumping on planes in phase two so we can sort of forward deploy our resources to help people as they get ready. And lastly, it's staying in touch with our customers in surgery departments and making sure that we have inventory forward deployed for them for the kind of procedures they want to do.

Thanks for taking the

questions. Thank you.

Thank you. Our next question will come from Rick Weiss. Stifle, please go ahead.

Good afternoon. Hi, Jerry. Hi, Marshall. A couple of things. Maybe let's start with thinking about the slowdown in capital you've talked about and obviously related procedure decline. And I know I'm looking ahead, far ahead, and you're not comfortable really predicting the next quarter. But I just want to think about the recovery. Gary, how do we think about, let's say, if the slowdown in capital persists throughout 2020 or well into 2020? Does that suggest that 2020 recovery won't be back to, let's say, 2019 levels? And it's going to, it would take probably possibly until 2022 for us to see you get back at that sort of a historical growth because of that slowdown in capital, which might be slower to recover and therefore procedures slower to accelerate over time. Overall, if you follow what I'm trying to get at.

I think the way I'd have you think about it is from the point of view of demand for surgery, demand for robotic assisted surgery. In that setting, I think the world is queuing up a set of patients who will need care. Makes sense. I understand it. I think conserving of PPE and ICUs and other valuable resources at this time makes sense. As some of those constraints start to loosen, I think everybody will have to adjust and adapt to caring for patients who have other conditions. That is the demand that will drive everything behind it from INA and other inventory to access to capital and systems. We are well positioned from an inventory point of view. We are well positioned operationally and financially to move systems where they need to go to put systems out on lease or usage based models or other things to support customers the way they want to be supported and will be quite agile. On the capital side, you may see shifts in the way capital is deployed in the way that we're compensated for that capital relative to prior quarters sort of historical norms. We'll be leaning forward to help people when they need that help. How fast that happens, I think that has a lot to do with government policy and health system policy is when they pivot to go treat other patients. That will determine everything else.

Gotcha. And just a sort of a separate but related question, Gary. Several of our ongoing physician conversations suggested that as things recover, actually robotic capacity won't be sufficient to meet demand, which is an interesting thought. And they suggested actually that on a recovery, robotic surgery will lose market share, so to speak, of some of those deferred patients to laparoscopic surgery to open surgery. I have no idea. I'd be curious to know if you have any high level thoughts about that. Those position comments. Thank you so much.

Yep. Thanks, Rick. It's possible. I think that folks rotating into open surgery patients who are great candidates for MIS is doing that set of patients that disservice. So we will see. That may happen. Hard for us to control with regard to capacity for robotics. Remember, there are a lot of robots out there and they are right now underutilized as as that flows back. We can help. Will some folks want to use lap? Maybe. From the point of view of surgeon preference, surgeon comfort, what their choices are. Just remember, surgeons are intentional about the method of surgery they choose. They don't accidentally fall into robotic surgery training. They make those commitments and time investments for a reason and they have a preference. So if we can fulfill their preference, great. That'll be great. If we're unable to do so and they choose lap because they couldn't get access where they wanted. Well, that may happen, but that's really, I think, an intuitive job to make those systems available to them if they would like to use them.

Thanks so much.

Thanks,

Rick. Thank you. Our next question from Larry Koosh Raymond James. Please go ahead.

Thanks. Good afternoon, everyone. I guess, Gary, to start with, just curious thinking about R&D. What changes are you making to, you know, allow the innovation engine to not stall out here? I'm just curious how you're accomplishing that and what sort of processes, procedures you're putting in place.

Thank you. First thing has been to ensure, to protect the safety of our staff and those who supply us while we do our R&D. So step one has been to stay up to date on the latest employee work safety methods. We started our incident response team relatively early. We were up and running at full speed in terms of our incident response team in early January. And so they start looking at best practice, relaying out our on-site facilities as they need to be relayed out, enabling work from home where we can. We were pretty capable at remote work capabilities, just given the distributed nature of our campuses. So it's really flexing in that regard. And then we've put in place a robust process for allowing on-site work where we think it can't be done otherwise for training our staff and staying with it. And so we've done that. Of course, there's a loss of efficiency as you go through this. And so there's no doubt that in the first weeks of this, you start to slow down and then we're fighting hard to recover. Team attitudes have been fantastic. The agility and creativity of teams to get their work done, their willingness and desire to do so has been really encouraging. So, so far, so good. Some things will go slower to the extent that we have clinical trials out there and those are being conducted in hospitals that are being impacted by COVID. Those things will slow down. The principal investigators in those places are highly committed first to patient care and then as a second priority to doing the research they'd like to do. And so that will come back as time permits for them to do so.

Okay, terrific. And then I guess the other question is, you guys are obviously having a lot of conversations with surgeons, with hospitals. I'm just sort of curious if you can comment on what you are hearing relative to maybe some of the bigger geographies in Europe or in the U.S. When they may be able to start to get some of these surgeries going. You know, as you guys have indicated multiple times on this call, there is a continuum and there are procedures that can be deferred but not for potentially long periods of time. So I'm just curious, I know that it's a fluid situation but just anything you might be hearing as to when this might start to start up again.

Clearly varies by country and is the reason that we put a couple of those charts on our website for you to look at is just to see the difference in how different countries are doing it. The places that are able to engage earliest have taken strategies where they have put COVID care in one location and allowed surgery to occur in a different location or hot and cold zones within their own institutions that have allowed them to manage both concurrently, so long as they have staff and PPE to do it. Giving you a general answer is really not possible at this time because of the puts and takes by region. What I will say is surgeons are there for a reason. They are, it's impressive, they are both community oriented and clearly understanding the need to support their communities as they flex into this crisis. At the same time, they're surgeons and they're looking forward to going back to surgery. The backlogs that you hear about are significant and they are concerned about those patients who are surgical patients who need care. The last comment I'd make is that very few of the procedures that are done using robotic assisted surgery are easily resolved by non-surgical means. That we are in a part of surgery where surgery is by and large the first choice. As a result, I don't think a lot of these procedures are going to dissolve in time just by waiting. I think they're going to have to be done surgically. So it really will be a question of where do they get done, when do they get done, and what kind of technology is used to do it. Okay, great. Appreciate the thoughts. Thank you.

Thank you. Our next question will come from Aymet Hazan, Golden Speck. Please go ahead.

Oh, thanks. Hey, good afternoon. Just a quick follow up on the European system side. Just thinking about operating leases out there and how that situation might evolve. Can you just kind of maybe remind us of, you know, the tendency of certain countries to adopt via leases out there and whether you're sensing any kind of a change or improvement in that outlook as we think about them being more constrained to spend on capital potentially over the next year or so?

Marshall, would you take that? Yeah, there are limitations as to what you can do within each European country. All of them have different rules as to registration and with different regulators around financing. Having said that, we really had launched leasing in Germany and the UK two years ago or so and France a little bit after that. And we did see a nice uptick in leasing, particularly in Germany. I think going forward, you'll see leasing in all those markets. We're prepared to be able to offer it. We now understand structures we can do and what the requirements are from a reporting perspective. And I think we're set. So I would anticipate, given the impact of the COVID-19, that we would see additional leasing there.

And then just one quick kind of bigger question, bigger picture, longer term one for Gary. It's early days, but how are you thinking, if at all, about secular changes for hospital systems and health care more broadly after this crisis is over? Is it kind of relates to your markets?

I think it's a little too soon to tell. We certainly are thinking about how customers might adapt. And you can think about a few things. I guess I'd focus you on really kind of phase two and phase three of this coronavirus response. The economy starts opening back up and we have a fair amount of testing. But you're still dealing with COVID as an uncured disease. How do hospitals manage that? I think that's a lot of where our thoughts are now. That may have to do with side of care and other kind of flexible ways. We think minimally invasive surgery broadly and robotic assisted surgery is important in that setting. Keeping people out of the hospital, allowing them to recover quickly at home. These are things that I think are generally good for the health care system. And there may be some adaptation by health systems to be flexible about how to deliver that. And we're working through that internally and with them. And it gets exciting. What happens after that? As this goes on a couple of years, I think we'll all have to wait and see. Last questioner, please.

Yes, that will come from Matt Taylor, UBS. Please go ahead.

Hi, thanks for taking the question. So I just wanted to ask a follow-up question on some of the things you were talking about qualitatively earlier in regards to helping systems when they get back to working normally and helping them be efficient and flex up on the upside. I know you've done some work there with your internal consulting groups to make systems more efficient. It seems to be working. And I was just wondering if you could offer some thoughts on how much more they could flex up in the short run. What are some of the best practices and what are the best systems doing with regards to utilization today?

Yeah, if you think forward, the major things here have been really making sure that teams are consistent, teams that know how to work together, work together frequently. They know how to parallelize tasks. And they use kind of best practices. It is not limited to robotic surgery, but works really well therein. With regard to how we can help, making sure that training resources are available. We have been investing, as you know, in an intuitive telemedicine network. I'm really pleased that we made that set of investments. And in the future, that allows us to project expertise in at a distance. That means people don't have to be on planes. In a post-COVID world, that's probably helpful for us and something that we want to rotate towards as we go. As I said earlier in the call, I think we can forward deploy some of our training resources and help get teams up and running and trained that would help people work through backlogs as best as they can.

Great. Thank you very much.

All right. Well, thank you. That was our last question. In closing, we continue to believe there's a substantial and durable opportunity to fundamentally improve surgery and acute interventions. During this period, our teams continue to work closely with hospitals, physicians, and care teams to support them in their mission, wherever that may lead. We believe value creation in surgery and acute care is foundationally human. It flows from respect for and understanding of patients and care teams, their needs, and their environment. Thank you for your support. We look forward to talking with you again in three months. Thank you.

Thank you. And that does conclude your conference for today. Thank you for using AT&T Event Conferencing. You may now disconnect.