Intuitive Surgical, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Intuitive Q2 2020 Earnings Release. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. Instructions will be given at that time. Should you require assistance during the call, please press star and zero. As a reminder, this conference is being recorded. Now I'd like to turn the call over to Senior Director of Finance, Investor Relations for Intuitive Surgical, Calvin Darling. 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, Marshall Moore, our chief financial officer, and Philip Kim, whom I'm pleased to introduce, our head of investor relations. As for me, while passing the lead over to Phil, I plan to continue on in a support role with our investor relations team. 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 our Securities and Exchange Commission filings, including our most recent Form 10-K, filed on February 7, 2020, and Form 10-Q, filed on April 17, 2020. 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. Today's press release and supplementary financial data tables have been posted to our website. In addition, This quarter, we have also posted a chart illustrating 2020 weekly da Vinci procedure trends, which is 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 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 financial results. Then Philip 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. On this call, we'll describe our experience in the quarter, the actions we are taking, and our priorities going forward. Our focus now and in the past is the safety and well-being of patients, care teams, our communities, and our employees. Turning first to global procedures, we ended Q2 2020 down 19% compared with Q2 2019. The underlying driver for this decline has been the growth of COVID-19 in the communities that our customers serve. While we saw procedure declines in all categories, urology and thoracic procedures were relatively resilient, while gynecology experienced the greatest decline. Rates of recovery from lows by procedure type were more uniform. We've seen hospitals with adequate supplies of staff, PPE, and physical resources return to above 90% of pre-COVID procedure run rates over a few months period. Recovery above this number has depended upon the intensity of COVID in the region, patient's comfort to return to the hospital, availability of testing, and patient outreach. As we stand here in July, we see the continued growth of COVID in some regions, both domestically and internationally, making future predictions on hospital capacity for surgery difficult. Philip will take you through some examples of regional differences in procedure trends later in the call. With regard to capital placements, we installed 178 new systems in Q2 2020. This compares to 273 installs in Q2 2019 and 237 installs in Q1 2020. The new installs in Q2 2020 represent a clinical install-based growth of 9% after accounting for trade-ins. While these numbers are lower than prior year and prior quarter, frankly, they are greater than our expectation coming into the second quarter due to strong performance in Asia and some larger IDN placements in the U.S. That said, we know the correlation between system utilization in the form of procedure demand and capital availability at hospitals is a strong one. hospitals will seek to absorb existing capacity before installing new capital. So on average globally, we expect a challenging near- to midterm environment for future capital placements as COVID-19 wears on and hospital expenditures remain constrained. Because COVID is impacting locales differently, we see significant variability in procedure growth and new system placement interest by region. Marshall will take you through capital placement trends and risks later in the call. Stepping back and evaluating hospital approaches to surgery during this period, we see some principles that are being applied broadly. During local rapid growth of COVID in a hospital catchment area, their initial response is to align and train their workforce, stabilize their PPE and testing capability, and if ICU resources are scarce, defer surgeries that can be delayed with a managed risk to the patient. As staff, material, and ICU resources free up, either by diverting patients to alternative sites of care or within the four walls of the hospital, program directors triage patients in need of surgery and ramp back up. As sites become less impacted, we have observed that outreach, education, and diagnostic visits and procedures come back. The surge of COVID in communities that represent our core markets, either from initial spread or secondary growth, is occurring now. Add to this significant anecdotal evidence of delayed diagnostic visits for non-COVID illness, and we expect that the recovery tail of surgery will be a long one, likely to last many quarters. The ultimate timing and shape of the recovery remains uncertain. The drivers of a sustained recovery in surgery will likely vary regionally and may be predicated on the extent and duration of COVID outbreaks, the availability of human, material, and physical resources to concurrently treat both COVID and COVID disease, patient comfort in returning to care centers for diagnostics or treatment, and finally, the relative health of the broader economy and hospital finances. At Intuitive, we're focused on those activities and priorities within our control. They are as follows. First, we're focused on the health and well-being of our customers, our employees, and our communities. As COVID has ramped in our communities, we instituted employee health and safety protocols and have been tracking our performance and refining our methods. We are also working with our foundation and others to produce and donate PPE for customers in the communities in which we work and live, having delivered to date over 1 million pieces of PPE. Second, we've focused on inventory and supply chain management. So far, product availability has been strong, thanks to the relentless work of our supply chain teams and our partners. Third, we implemented our customer financial relief program in the quarter. The timeliness and the design of the program has been well received by our customers. Fourth, we continue to invest in our high-priority programs, recognizing that high-quality MIS is likely more important in the coming years post-COVID, not less so. Fifth, we're evaluating those activities that should be accelerated in the current environment and for which demand is likely to be durable post-COVID. Finally, we're constraining spend where we believe it is suboptimal in the current environment. Turning to instruments, beginning Q4 this year, we plan to introduce an updated set of select and or risk instruments for use with DaVinci X and XI that will enable increased use beyond the current 10-use lifespan, part of our extended use program. Extended use will vary from two to eight additional uses per instrument and is the result of continuous and significant investment in the design and production of our instrument technologies that have resulted in improved quality and durability. In addition, we'll concurrently lower the price of some other instruments that are most commonly used in lower-acuity procedures. We are dedicated to support our customers' pursuit of the quadruple aim, defined as better patient outcomes, better patient experiences, better care team experiences, and lower total cost to treat per patient episode. The long-term opportunity for our products and services is substantial, both in high-acuity complex procedures and in shorter-duration lower-acuity cases where customers are understandably more cost sensitive. Some under risk instruments are used in every procedure, so our extended use program helps all customers, and in particular those performing lower acuity cases, which are among the fastest growing procedures. As the program rolls out, high in a cost for customers performing lower acuity procedures will be highly competitive with non-robotic MIS approaches. I have described our commitment to a virtuous cycle of value adjustment for our customers, driving volume increases, allowing us to invest in design and manufacturing at scale, and giving us the opportunity to share these savings with our customers to allow them to use our products more broadly. This program is another step in this journey. Our extended use program has been years in the making, and its timing is fortuitous relative to COVID. We are pleased to bring it to our customers now. The program will negatively impact our near-term revenue, but not substantially impact our gross margin for affected instruments. It is the right decision for our customers and, therefore, for intuitive long-term. Marshall will take you through financial implications of this program later in the call. Turning to advanced instruments, our DaVinci Energy platform, which includes our next-generation energy instrument and system, SynchroSeal and E100, have made surprisingly good commercial progress in the second quarter in spite of current environmental challenges, a testament to customer reception to its speed and precision. We also initiated our first commercial cases for E100 and SynchroSeal in Japan in the quarter, and lastly, our 45-millimeter SureForm stapler launched in Europe in this second quarter. Turning to other programs of interest, our ION program continues to march forward in the face of COVID headwinds. Three systems were placed in the quarter, and our clinical trial is progressing. Design and manufacturing teams continue to make progress on incorporating learnings to allow us to drive towards wider distribution in the future. While our progress in our precise trial for ION has been slowed, we're seeing a return to cases as our clinical trial partners come free. For our SP program, our teams continue to support our early customers. Average monthly utilization for SP in Korea continues to exceed that of XI's. a strong positive that speaks to early interest in the platform by surgeons and their patients. In addition to our learning from Korea, we are working with regulatory agencies regarding expansion of indications. The regulatory environment in the U.S. and EU has become more complex for new systems over time, made more challenging by diversion of resources at hospitals and at regulators to fight COVID, which impacts clinical trials and regulatory reviews. We'll update progress on additional indications for SP as we have greater clarity. In our intelligence and analytics programs, our teams are performing well, and we are leveraging our prior investments in cloud computing, training technologies, and analytics prowess. We focused on our integration of cloud technologies within touch to accelerate access to remote proctoring in certain regions. We had already moved to a network subscription model for our simulation technology platform called SimNow, which is helping us decrease travel for surgeons for some elements of surgical training. Use of our hospital analytics programs is accelerating, even through the turbulence of 2020, helping hospitals and us in planning for system use in dynamic times like these. Before concluding my prepared remarks, let's step back. We cannot yet see the end of the COVID-19 pandemic. When the lessons from this event are absorbed, I believe high-quality, minimally invasive care will be more important to the future, not less so. A balanced approach to improving the quadruple aim remains our North Star. Our priorities for the next few quarters are as follows. First, continued strong performance on customer, employee, and community safety while ensuring supply chain stability. Second, continued support of our customers adapted to their specific conditions. Different customers are at different stages in this period, and we'll support them according to their needs. Third, advancing our priority programs, instruments, accessories, endoscopy systems, and intelligence programs. And finally, discipline spend management during a period of change. I'll now turn the call over to Marshall, who will take you through financial matters in greater detail.