Intuitive Surgical, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the intuitive third quarter 2020 earnings release. During today's conference call, phone lines are in a listen-only mode. Later on, we will have an opportunity for a question-and-answer session. As a reminder, today's conference call is being recorded. If you should require any operator assistance on the call, you may press star and then zero. An operator will assist you offline. At this time, I'd like to turn the conference over to our first speaker, Head of Investor Relations, Philip Kim. Please go ahead.

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 our Securities and Exchange Commission filings, including our most recent 10-K filed on February 7, 2020, and Form 10-Q filed on July 23, 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. 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. Marshall will provide a review of our financial results. Then I will discuss procedure and clinical highlights. 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 third quarter was a productive one, with a return to growth in DaVinci procedures amid continuing adaptation to customer needs. In the field, performance varied strongly by region, given differences in pandemic impact. Operational performance inside the company has been strong, with remarkable focus and diligence by our teams. Turning first to global procedures, Q3 2020 procedures grew 7% compared with Q3 2019, Procedure growth varied widely by country, with growth returning to most of the countries we serve with a direct commercial team. U.S. growth was in the mid-single digits, and procedure growth in China stood out as particularly strong. Analyzing current global quarterly procedure performance compared with Q3 2019 by clinical category, general surgery is rebounding most quickly, posting double-digit growth with mid-single-digit growth in gynecology and modest growth in urology. Overall, we have seen utilization increasing for our customers as their resources become available, indicating that surgeons and hospitals are maintaining their commitment to minimally invasive surgery. DaVinci enables access to high-quality minimally invasive care, increasing the number of patients who can return home sooner, and decreasing the demand on ICU resources, clearly important in the era of COVID-19. Currently, two factors are at play at hospitals and as hospitals treat both COVID and non-COVID patients. First, there are some deferred cases that were scheduled in the spring and summer that have now come back to the hospital for treatment. Second, diagnostic procedures such as colonoscopies and PSA tests have been delayed and may not be back to pre-COVID levels now. The delay in diagnostic visits will delay disease detection and, like prostate screening changes in 2012, create a reservoir of patients with more advanced disease. This push-pull of those patients who delayed a scheduled surgery coming back into hospitals now and the delay of disease identification due to diagnostic visit postponement makes hospital patient volumes hard to model for coming quarters. That said, full diagnostic recovery is in everyone's interest, and we expect surgery to return to pre-pandemic levels over the midterm. Philip will take you through procedure trends later in the call. Given the slowdown in procedures due to the pandemic, we expected weaker capital demand in the third quarter. For the quarter, we installed 195 new systems. This compares to 275 installs in Q3 2019 and 178 installs in Q2 2020. Year-over-year install-based growth was 8% at the end of Q3 after accounting for trade-ins. We know the correlation between system utilization in the form of procedure demand and the need for new capital capacity at hospitals is strong. Many hospitals will seek to absorb existing capacity before installing new capital. In regions in which da Vinci systems are more common, hospitals may delay adding new systems until utilization recovers. Average globally, we continue to expect a challenging near to midterm environment for future capital placements as COVID-19 wears on and hospital finances remain strained. Because COVID is impacting locales differently, We see significant variability in procedure growth and new system placement pipelines by region. Marshall will take you through capital placement trends and risks later in the call. At Intuitive, we're focused on those activities and priorities within our control. Our team in the field, in our labs, in our factories, and working in homes and offices is performing well. We adapted our priorities for 2020 to meet the challenge of the pandemic and the needs of those we serve. First, we are focused on the health and well-being of patients, customers, our employees, and our communities. Second, we're focused on inventory and supply chain management. So far, product availability has been very strong, thanks to the relentless work of our supply chain teams and our partners. Third, we implemented our customer financial relief program and our extended use instruments program. The timeliness and the design of these programs has been well received by our customers. We continue to invest in our high priority development programs, recognizing that high quality MIS is more important in the coming years, not less so. Fifth, we're accelerating activities that help us adapt to the current environment and for which demand is likely to be durable post COVID. Finally, we have constrained spend where we believe it is inefficient in the current environment. With these priorities as our guide, our operational and financial performance serve both our customers and our company well in the quarter. Intuitive commercial and learning teams adjusted their work methods to meet customers where they are, figuratively and literally. Over the years, our teams have built a strong network of capable field trainers, sales reps, surgeon proctors, and cloud-enabled DaVinci systems. Our professional education and commercial teams engage this network, implementing on-site, digital, and regional programs such that customer engagement and training programs are approaching pre-pandemic levels, a remarkable achievement. Across the company, our teams have prioritized their efforts and practiced fiscal discipline. Based on quality and automation improvements and continued attention, our manufacturing teams are managing our product costs well, leading to strong gross margin performance while we implemented our customer relief program and our extended use program for Generation 4 instruments. While the pandemic has created near and midterm uncertainty in the form of competing healthcare priorities and economic stresses, I have high confidence in the need for high-quality, minimally invasive surgery and therapies in the long term. To deal with the current and future stresses on the healthcare system, payers, hospitals, and surgeons are looking for solutions that improve outcomes, decrease in-hospital resource consumption, and lower total costs to treat. In other words, the core pillars of the quadruple aim we had set as our goal many years ago. We have a team that has demonstrated fiscal discipline, particularly in light of the pandemic. Over time, we plan to increase investment in our innovation engines to improve the quadruple aim at our customers and to expand our market opportunity. And we will continue to invest in our virtuous cycle of quality and efficiency gains in production that fuel quality improvement, manufacturing cost reductions, and pricing flexibility for our customers that can lead to increased volume. Looking at product operations in the quarter, Our advanced instruments and endoscopy programs are producing strong clinical and financial results. Customer adoption of our stapler product line, our vessel sealers, and our E100 generator has been encouraging. Utilization of these products and their targeted clinical procedures and their reorder rates have been strong. Despite disruptions caused by COVID in 2020, uptake of newly launched products as well as our newest Endoscope, Endoscope Plus, has also been strong. As we've said in the past, a great clinical procedure takes the customer the right system, the right instruments, the right imaging, the right training, and the right support. As our Generation 4 ecosystem has matured, customers achieve high utilization rates for our target procedures and Gen 4 accounts. Our ION program continues to advance with 11 systems placed in the quarter, many of which are in large teaching institutions. ION diagnostic procedures are also returning to significant growth. Early clinical studies comparing ION to existing alternatives in the market both handheld and robotic, are beginning to be published and are encouraging, supporting the architectural decisions made early by our design team. While our progress in our precise trial for ION has been slowed, we are seeing a return to cases as our clinical trial partners come free. Lastly, our team continues to incorporate learnings from customers in improving our system, our manufacturing, and our supply chain as we work diligently to support ION at greater scale. Turning to our SP system, its clinical evidence continues to mount, and advocacy for the system by surgeons who use it is increasing. Procedures on SP rebounded nicely in the third quarter. I'm quite encouraged by the commentary from surgeons on the performance of the system and the potential for it to impact a wider variety of procedures over time. In the United States, we're pursuing expanded clinical indications in a number of areas, with our colorectal IDE trials readying initiations. Our system and first clinical case sites are standing by to start the study pending feedback from FDA and barring additional headwinds from COVID-19. If these go to plan, we expect first cases in Q4 of this year or Q1 of 2021. Our cloud simulation intelligence and analytics programs are also performing well. We've accelerated our cloud and remote technology efforts this year with use of our remote case observations and our network simulators ramping quickly. In the quarter, our network surgical simulators were used over 87,000 times, roughly doubling year over year. Our IRIS augmented reality program entered limited launch in Q4 of last year and has recovered well in Q3. Lastly, our customer analytics efforts have been well utilized by hospitals in 2020 and are scaling nicely. As we finalize our 2021 planning, it's worth reflecting for a moment. The opportunity for improvement in acute interventions, including surgery, is a substantial and decades-long journey. The fourth quarter of 2020 will mark the 25th anniversary of the founding of Intuitive and the 21st year of clinical use. Looking back at what has been achieved and forward to the important work that remains to be done, we are committed both to our organic innovation and to expanding the universe of bright minds who can improve medicine with the types of science and technology Intuitive pioneered. To that end, we launched our Intuitive Ventures Group, a part of our futures initiatives, whose mission is to accelerate opportunities at the frontiers of medicine. Intuitive Ventures Group's first fund is $100 million, and our team is engaging globally with entrepreneurs, having funded some in the quarter. We look forward to seeing what solutions they bring to complex problems. In closing, our priorities for the next few quarters remain 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. We'll support them according to their needs. Third, advancing our priority programs, instruments, accessories, endoscopy, systems, and intelligence programs. And finally, discipline and spend management during this period of change. I'll now turn the call over to Marshall, who will take you through financial matters in greater detail.