Intuitive Surgical, Inc.

Thank you everyone for standing by and welcome to the intuitive second quarter 2024 earnings release. Now at this time, our participants are on a listen only mode. Later we will conduct a question and answer session. If you wish to place yourself in queue for questions at any time, please press 1 and 0 on your telephone keypad. You may remove yourself from that queue by repeating the 1 and 0 command. As a reminder, today's call has been recorded. I will now turn the call over to your host, head of investor relations, Brian King. Please go ahead.

Good afternoon and welcome to intuitive second quarter earnings conference call. With me today we have Gary Gutarts, our CEO, Dave Rosa, our president, and Jamie Simath, our CFO. 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 10K for the fiscal year ended December 31, 2023, and subsequent filings. 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 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 second quarter results, as described in our press release announced earlier today, followed by a question and answer session. Gary will introduce the call and provide an organization update. Dave will present the quarter's business and operational highlights. Jamie will provide a review of our financial results. Then I will discuss procedure and clinical highlights and provide our updated financial outlook for 2024. 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. The fundamentals of our business were healthy in the quarter, with solid procedure growth and strong capital placements resulting in healthy financial performance. In the quarter, we made good progress with all three of our system platforms, including taking our measured rollout of DaVinci 5 to our next phase, continuing to stabilize iron supply in support of customer expansion and expanding DaVinci SP installs in Europe while supporting SP procedure growth across regions. Some multi-port procedure headwinds continued from last quarter, and we will describe these later on the call. Before turning the time over to Dave, I'd like to thank Marshall Moore, our prior CFO and our outgoing head of global business services. Marshall will be taking his skills to pursuits outside of intuitive in September this year As he approaches his next endeavor, I thank him on behalf of all of us for his outstanding stewardship at intuitive for the past 18 years. We are pleased to announce that in addition to his role as CFO, Jamie will expand his responsibilities to leading our information technology and global facilities teams. I'll now turn the time over to Dave, who will take you through commercial and operational highlights in greater detail.

Thank you, Gary. Starting with procedures, we experienced solid growth in the quarter of nearly 17% compared with a strong Q2 2023, which reflected the return of patients post pandemic. Cholecystectomy, colon resection, lung resection, and foregut procedures led global procedure growth. General surgery led US procedure growth in the second quarter, and outside the US, procedure growth was led by non-urology procedures. Regional performance included strength in Europe, led by Germany, the UK, and Italy. And in Asia, we have mixed market conditions largely consistent with Q1. Brian will describe these dynamics later in the call. Turning to capital, we placed 341 DaVinci systems in the quarter, of which 320 were multi-port systems, including 70 DaVinci 5 systems. Our teams installed 21 SP systems and 74 ION systems in the quarter, with solid capital placements in the US, Japan, and India, and pressure in Europe and China. System utilization, defined as procedures per installed clinical system per quarter, grew 2% globally year over year for our multi-port platforms, lower than our historical trend, reflecting procedure strength a year ago due to patient backlogs. Utilization for SP and ION continued to grow in the double-digit range in the quarter. Turning to our finances, revenue growth of 14% in the quarter reflects solid procedure performance and strong capital placements. Product margins were above our expectations, reflecting a combination of cost reductions, fixed overhead leverage, and some one-time non-recurring benefits. Operating expenses reflected planned leverage in our enabling functions. Jamie will take you through our finances in greater detail later in the call. In Q2, we moved into the next phase of our rollout of DaVinci 5. Within the quarter, we placed 70 DaVinci 5 systems as the launch continues to progress in line with our plans. Customer feedback points to improvements in precision, imaging, ergonomics, and integration, the combination of which customers indicate has led to overall efficiency improvements. Both force feedback and case insights bring new capabilities and analytics to surgery. We are encouraged by early insights these capabilities are presenting and are working hard to improve production and supply for force feedback instruments and smooth our computational pipelines and workflows for case insights. We expect these capabilities to be powerful and the maturity and evidence of impact to build over coming quarters. We launch new products thoughtfully centered around outstanding customer experiences. As our customers pursue operational and clinical excellence, we continue monitoring several key metrics across our measured rollout of DaVinci 5 as we ramp our supply and respond to customer input. We expect our measured rollout to continue through the first half of 2025. Adoption of our digital products and services grew nicely in the quarter with routine use of intuitive app expanding to nearly 14,000 surgeons and surgeons using intuitive hub more than doubling versus a year ago. The long-term opportunity for computational tools is both significant and difficult. To recognize these benefits at scale requires a foundational infrastructure that includes robust curated data, secure data warehousing, and global privacy compliance. Our digital ecosystem including case insights leverages this infrastructure and enables us to collaborate with customers on a global scale to identify meaningful insights. These insights enable customers to optimize their robotic programs and ultimately reduce time to proficiency and improve clinical outcomes. As we said before, validations take time and are a worthy pursuit. Turning to ION, our teams have made material progress resolving supply constraints on catheters and vision probes. Excellence in manufacturing at scale in this space is complex and we continue to reinforce our capabilities. Our commercialization in Europe continues according to plan and our teams are progressing towards commercialization in China. Turning to SP, last week we received FDA clearance for thoracic procedures. We will be measured in our thoracic indication launch as we work to build a robust training and proctoring network as well as bring stapling to our SP platform. In closing, we are committed to our 2024 priorities, supporting our measured launch of DaVinci 5 and our other new platforms by region, supporting surgeons adoption of focused procedures, continuing to improve product quality and margins, and finally improving productivity and those functions that benefit from global scale. I'll now turn the time over to Jamie who will take you through our finances in greater detail.

Good afternoon. I will describe the highlights of our performance on a non-GAAP or proforma basis and will also summarize our GAAP performance later in my prepared remarks. A reconciliation between our proforma and GAAP is posted on our website. The Q2 DaVinci procedures grew 17%. The installed base of systems grew 14% to just over 9200 systems. An average system utilization increased by 2%. Lower than long-term historical averages reflecting procedure strength in Q2 last year as a result of patient backlogs. US procedures grew 14% driven by growth in general surgery. Bariatric procedures in the US declined in the mid single-digit range. OUS procedures grew 22% reflecting strong growth in general surgery, gynecology, and thoracic procedures. With respect to capital performance, we placed 341 systems in the second quarter compared to 131 systems in Q2 of last year. In the US, we placed 149 systems in Q2 compared to 157 systems placed last year reflecting in part lower trade-ins. US system placements in Q2 included 70 DaVinci 5 placements. Given a planned hardware and software update to DaVinci 5 in the second half of this year and continued focus on maturing manufacturing and expanding capacity, we expect that DaVinci 5 placements will be constrained through the first half of 2025. Outside the US, we placed 192 systems in Q2 compared with 174 systems last year. Current quarter system placements included 71 into Europe, 41 into Japan, and 14 into China compared with 76 into Europe, 33 into Japan, and 16 into China in Q2 of last year. We also saw relatively strong placements in India as well as markets served by our distributors including Australia. Placements in Europe reflect health system budget constraints as several European governments are resetting capital spending post-pandemic. Second quarter revenue is $2.2 billion, an increase of 14% from last year. On a constant currency basis, revenue growth was 15%. Additional revenue statistics and trends are as follows. Leasing represented 51% of Q2 placements, relatively consistent with recent trends. However, given customer preference for our usage-based models in the US and the launch of DaVinci 5, we continue to expect the proportion of systems placed under lease arrangements to grow over time. Q2 system average selling prices were $1.44 million as compared to $1.39 million last year. Higher -over-year system ASPs reflected a higher mix of DaVinci 5 and lower Q2 system placements. In Q2 of 2023, trade-ins represented 18% of total system placements as compared to 6% in Q2 of 2024. We recognized $28 million of lease buyout revenue in quarter two compared with $29 million last quarter and $12 million last year. DaVinci instrument and accessory revenue per procedure was approximately $1,800, an increase of approximately $20 compared to last quarter. The sequential increase in INA per procedure is primarily a result of customer ordering patterns in the US. Turning to our ION platform, procedures grew 82% to approximately 23,200 procedures in the second quarter. During the quarter, we placed 74 ION systems compared to 59 last year and 70 last quarter. During Q2, we caught up with the remaining backlog of system placements as supply of catheters and probes continued to improve. The installed base of ION systems increased 56% -over-year to 678 systems of which 275 are under operating lease arrangements. Second-core SP procedure growth accelerated to 74% with strong growth in Korea and the US and early-stage growth in Japan and Europe. 21 of the systems placed in the quarter were SP systems including 10 systems placed in Europe. The SP installed base grew 56% from the year-ago quarter to 222 systems. Moving on to the rest of the P&L, pro forma gross margin for the second quarter of 2024 was ahead of our expectations at 70% compared with .5% for the second quarter of 2023 and .6% last quarter. Second quarter pro forma gross margin reflected certain one-time benefits that we do not expect to occur. Excluding these one-time benefits, pro forma gross margin would have been 69.5%. The sequential improvement in pro forma gross margin primarily reflects lower inventory reserves, cost reductions in certain purchase components, lower freight rates and leverage of fixed overhead. In accordance with our plans, product margins for our ION and SP platforms improved in the quarter and will remain a focus for our business unit and manufacturing teams over the medium term. As a reminder, given recent and ongoing capital investments, we expect increased depreciation expense in the second half and a significant increase in depreciation expense starting in Q1 of 2025. Second quarter pro forma operating expenses increased 11% compared with last year reflecting the ongoing benefit of planned leverage in enabling functions. We continue to prioritize investments in R&D to fund innovation and future growth. During the quarter, we added approximately 550 employees, of which roughly half were in our manufacturing operations to support growth in customer demand. Pro forma other income was $79.4 million for Q2, higher than $72.5 million in the prior quarter, primarily due to higher interest income. Our pro forma effective tax rate for the second quarter was .5% consistent with our expectations. Second quarter 2024 pro forma net income was $641 million or $1.78 per share compared with $507 million or $1.42 per share for the second quarter of last year. I will now summarize our gap results. Gap net income was $527 million or $1.46 per share for the second quarter of 2024 compared with gap net income of $421 million or $1.18 per share for the gap net income. We end the quarter with cash and investments of $7.7 billion, higher than the $7.3 billion we ended last quarter. The sequential increase in cash and investments reflected cash generated from operating activities partially offset by capital expenditures of $309 million. With that, I would like to turn it over to Brian.

Thank you, Jamie. Overall, second quarter procedure growth was 17% compared to 22% the second quarter of 2023 and 16% last quarter. In the U.S., second quarter 2024 procedure growth was 14% compared to 19% for the second quarter of 2023 and 14% last quarter. Second quarter growth was led by procedures within general surgery with strength and colostectomy and four gut procedures and also thoracic procedures. Bariatric procedure growth declined in the mid single-digit range. Outside of the U.S., second quarter procedure volume grew 22% compared with 28% for the second quarter of 2023 and 20% last quarter. Growth was led by non-urology procedures with strength and colon resection, hysterectomy and lung resection procedures. In Europe, second quarter growth continued to be led by procedures beyond urology primarily from general surgery and gynecology procedure categories. Germany, the U.K. and Italy procedure performance led the region with each experiencing strong growth in colon and rectal resection, hysterectomy and other general surgery procedures. In Asia, growth in the second quarter was led by Japan and India while growth in China was stressed and Korea procedure growth continued to be impacted by physician strikes. In Japan, overall procedure growth was solid with continued strength in colon and rectal resection, gynecology and lung resection procedures. In India, while still in the early stage of adoption, we saw strength in gynecology and general surgery procedures, particularly with growth in hysterectomy, colostectomy and hernia repair. China procedure growth was lower than prior period averages when compared to the same quarter a year ago, which experienced a recovery in procedures impacted by COVID. System utilization remained strong while capital placements continued to be impacted by delayed tenders and emerging domestic robotic systems. Now, turning to the clinical side of our business. Each quarter on calls, we highlight certain recently published studies that we deem to be notable. However, to gain a more complete understanding of the body of evidence, we encourage all stakeholders to thoroughly review the extensive detail of scientific studies that have been published over the years. Earlier this year, Dr. Zhang and team from the Guangzhou University of Chinese Medicine published a systematic review and meta analysis in the international journal of surgery that looked at open, laparoscopic and robotic assisted surgery approaches to rectal cancer management. This meta analysis covered 56 studies and included over 25,000 patients, of which approximately 11,000 patients received robotic assisted surgery, over 13,000 patients laparoscopic surgery and over 390 patients received open surgery. When compared to the procedures, patients undergoing a robotic assisted approach had an approximately two day shorter length of stay. Specifically when compared to lap, the robotic assisted group was associated with a 1.7 day shorter length of stay. Relative to open surgery, the length of stay was five and a half days shorter. The robotic assisted approach was also demonstrated a protective effect for converting to an open procedure with 61% lower odds of conversion associated with robotics relative to the laparoscopic approach. Finally, when compared to the laparoscopic and open control group, the robotic assisted approach showed less estimated blood loss, approximately 40% lower odds of urinary retention and when compared to open, a higher number of harvested lymph nodes. The authors concluded, quote, the robotic approach emerges as the most favorable option for managing rectal cancer when compared to open, laparoscopic and trans anal techniques as it delivers the finest blend of oncological, functional and patient recovery outcomes. The digital interface of surgical robots enables a shift in the paradigm of surgical training, facilitating shorter learning curves that are more comprehensive and notably reducing the morbidity and mortality associated with them. End quote. I will now turn to our financial outlook for 2024. Starting with procedures. On our last call, we forecasted full year 2024 procedure growth within a range of 14% and 17%. We are now narrowing our forecast and expect full year 2024 procedure growth of .5% to 17%. The low end of the range assumes further softening in bariatric procedures along with increasing headwinds in Asia from prolonged physician Korea and in China from delayed tenders and emerging robotic systems impacting capital placements and therefore procedure growth. At the high end of the range, we assume bariatric stabilizes at current quarter rates and headwinds in Korea and China do not get worse. Turning to gross profit. We are increasing our pro forma gross profit margin to be within .5% and 69% of net revenue. Our actual gross profit margin will vary quarter to quarter depending largely on product, regional and trade in mix and the impact of new product introductions. Turning to operating expenses. We are lowering our guidance for pro forma operating expense growth to be between 10% and 13%. We are refining our non-cash stock compensation expense to range between 680 million to 700 million in 2024. We are narrowing our guidance for other income which is comprised mostly of interest income to total between 300 million and 320 million in 2024. With regard to capital expenditures, we continue to estimate a range of 1 billion to 1.2 billion primarily for planned facility construction activities. With regard to income tax, there is no change to our guidance of 2024 pro forma income tax rate to be between 22% and 24% of pre-tax income. That concludes our prepared comments. We will now open the call to your questions.

Thank you. Now if you have not already done so, you may press 1 then 0 on your telephone keypad if you wish to place yourself in queue for questions. Once again, 1 followed by 0. First question from the line of Larry Beegelson, Wells Fargo. Please go ahead.

Good afternoon. Thanks for taking the question and congratulations on a really nice quarter here. Of course, I have to start with DaVinci 5, a really strong start here, 70 placements. I heard the comments about being constrained through the second half of 2025, but DaVinci 5 was almost half of your US placement so it looks like a strong launch. So how should we think about the ramp in DaVinci 5 placements in the second half and how should we think about trade-ins going forward which are probably a little lower than I expected this quarter in the US and I had one on that.

Hey, Larry. It's Jamie. I would say for the second half of 2024, you should expect DV5 placements in the US to increase modestly quarter to quarter and that in part reflects the fact that we do have this hardware software update that we described and so you have to organize how you do that build plan through the factory carefully for that update. We said we'd a measured rollout through then the first half of 2025. With respect to how we've organized the measured rollout of DV5, we've really focused the sales force on looking to place DaVinci 5 for incremental capacity for our customers versus the trade-in cycle. I think we'd rather get to a broad launch where we essentially have unconstrained supply relative to demand before we look at the trade-in cycle. Just a couple of comments on the trade-in cycle. I think that I wouldn't expect a trade-in cycle to suddenly emerge and take off quickly. I think what we've seen in the past is that that's progressive and over multiples of years and in part that will reflect the fact that many customers will want to evaluate DaVinci 5. They'll see evidence grow over time in terms of its capability and feature set and of course their desire for DaVinci 5 will depend on their individual program and what they see the value of that in part given the higher pricing or lease costs for DaVinci 5.

That's very helpful. I wanted to ask about China. You mentioned it a couple of times on the call today. We recently saw a new stimulus announced there. My question is, and you've talked about the anti-corruption initiative, is that still having an impact and how are you guys thinking about the new stimulus that was announced there? Will that help drive placements? Thanks for taking the question.

Larry, it's Dave. Answering the second part of your question first around the stimulus, in talking to our teams we don't see that it's going to have a material impact on the placements systems or an impact on the quota. With respect to the operating environment of China and the anti-corruption that you referenced, there's no question that the operating environment remains challenging. The health system in China is kind of rebasing around economics and med tech. I think that's clear across the industry. On the placement side, customers are continuing to value our offerings clearly. We're seeing, as you know, the emergence of domestic systems. In spite of those challenges and everything that's going on in the environment in China, we're still seeing double digit growth in procedures. We remain confident and look forward to continuing our investments and focus in China.

Thanks for taking the questions, guys.

And we'll go to the next question from the line of Travis Steed, Bank of America. Please go ahead.

Hey, congrats on the good quarter. If there's any way you can help us understand the demand side of the DB5 equation, I know we're in a constrained rollout, but 47% of the placements in the US were DB5s this quarter. I don't know if there's any way to rank order some of the factors you need to mark off and check off the list to kind of get the full launch. I heard the software or hardware upgrade, but I assume there's some other variables to consider as well?

Yeah, hey, Travis. It's Dave again. There are a couple of the factors that we've discussed in the past, and it's really kind of three primary areas. One is making sure that we are maturing our supply chain and our manufacturing capacity so that we're again able to get to the quality, to the cost, to the yields that we expect as we approach a broad launch. The second part is what Jamie described around the software and hardware update where we're trying to get that integrated into our systems and balancing the factory output. And then the third thing is listening to our customers. And so as these placements happen, we're listening to our customers and responding to their feedback, and we'll be releasing some software updates along the way here in order to respond to that feedback. And so we want to get that in place before we get to broad launch.

Travis, I would just add, you know, your question, part of your question is on the demand side. I would say that in the early phase of a launch, you have a tendency to see early adopters look for latest technology and also the larger institutions, the large IDNs, and so you have to kind of give it some time to see the full set of customers in terms of what that interest will be. And there's segments of customers, again, that will look for evidence to build over time, for customer belief to build over time. And so you probably need some time to see the full set of customers in terms of what the full picture of demand for DaVinci 5 is. And again, that takes some time. DaVinci 5 is a platform that, as we did with XI, will invest in over time, and so you'll build a set of capabilities also over time.

That's helpful. And Jamie, maybe on the gross margin side, you know, very strong and only one time lose 50 basis points, it's kind of under the pressure, maybe initially gross margins will be a little lighter with DV5. Can you elaborate on the strength and margins this quarter?

Yeah, I would just say that we kind of described from a sequential basis what drove the improvement quarter on quarter. It was lower in the two reserves. Our teams did an outstanding job with respect to component cost performance with our suppliers and in the logistics area. And that kind of came in earlier than we expected. Those are a set of teams that for a couple of years had been working on supply because of COVID and the pandemic and what happened in terms of supply constraints. And those teams in more recent periods have refocused on cost reductions, and we saw that come in early, and so we were really pleased to see that. And so great performance in the quarter. You saw us improve the guidance for the year. I would say as we look at the second half, you will see increased appreciation, as I described. You will see a high proportion of the new products, new products, and in the Q2 of the 70 placements, only 11 of them were purchase arrangements. So kind of a muted effect in terms of gross margin in the quarter. The other placements are operating releases where you see the economics play out over time.

Great. Thanks a lot.

Okay, we'll go to the next line. Robbie Marcus, J.B. Morgan. Please go ahead.

Oh, great. Thanks, and I'll add congratulations on a very solid quarter here. I wanted to ask about the feedback in the field. You talked about in the script a bit. We've all talked to doctors and have heard from them. I'd love to hear from you, you know, both what the physicians are saying, but also what the institutions are saying. Clearly, demand is there. 70 units this fast is really strong. But what's the pushback, if any, for centers? How do they feel about the ability to drive better economics and faster procedures and better outcomes with DaVinci 5 and the feedback so far from the physicians?

Yeah, Robbie, maybe I'll start. This is Dave. You know, just starting with some of the feedback that we've discussed before, you look at what customers are immediately appreciating and some of the things you would expect around ergonomics, increases in precision and vision, the head-in UI, on-screen graphics and other things. And so, taken together, each one of those features are leading to some efficiency gains in particular in sort of console time. And that has been kind of noticed across the customer base. And I think that's where we're starting, you know, we're hearing a little bit about what can that mean in terms of adding a procedure a day, increasing utilization of the system. And so that's what both our surgeon customers and our executive customers are noticing as a result of their investment in DaVinci 5. You know, some of the other features, case insights, force feedback, we're excited to work with customers and we know that's going to take time to develop and really quantify some of those impacts. In terms of pushback, today what we're seeing is a little bit what Jamie talked about. We're starting, you know, customers will have to evaluate the value of DaVinci 5. You know, we have these early adopters that are excited about what it can be. And as we through our measured launch, we'll continue to have to underscore and reinforce the value that it brings and communicate that to executives and their teams.

I'll just jump in and add a little. We expect to be evaluated against the quadruple or the quintuple aim with regard to DaVinci 5. And we're confident that we're going to get there. I think we're going to develop the data to support that perspective. The apples to apples price differences aren't that great once you add insufflator and some of the other things that are built in. We've just got to justify that difference. One of the questions I would ask, and Dave, you can answer it, is are there any procedures that physicians prefer using DaVinci XI to DaVinci 5? In other words, is there any preference to stay with what they've got?

Yeah, so Gary, in all of my discussions and with the team, surgeons prefer the use of DaVinci 5 for the reasons we talked about.

So I think on the administrative side, as long as you can demonstrate that the quadruple aim or the quintuple aim is being satisfied, that they're getting value for the relatively modest apples to apples price increase, I think we feel pretty good. I would say on force reflection and on case insights, these are powerful foundational new capabilities that are going into the market. And I think that's really interesting and we'll work with leading customers to start evaluating where do they make sense and where don't they. We of course believe that they're going to be procedures and patient populations where they make a ton of sense and they generate real value. So early, it's about data generation and research and feedback. And later, we'll start to drive that through clinical publications and other things. So I think there's a left-hand, right-hand here, some of it is what you get today. You get precision, you get imaging, you get ergonomics, you get throughput. And there's some things that in this platform, you get to participate in its research and development and that will come later. And then it's a core technology platform upon which we can build. Jamie mentioned it earlier. So it's that set of sequences that it gives us some confidence to keep pushing hard.

Well, Gary, you anticipated my follow-up question. Let me ask another one here. One of the items of feedback I've heard from physicians is that case insights and the force sensing can help existing physicians be better, but more importantly, could help physicians that do a lot of lab procedures or open procedures make it easier for them to adjust to robotics. Is that something you're hearing? I know it's early in the launch year, but how do you think about those features and the ability to get more conversion from lab to robotics?

So I do think there are several ways to consider force feedback and think about it. One of them is we do think it can have an impact on learning curve. And so as laparoscopic surgeons or newer surgeons to the platform adopt it, we believe that force feedback and looking at force feedback through case insights can improve their time to proficiency on the robot. When it comes to kind of longer-term clinical outcomes and what force feedback and the data surrounding it is what Gary described. We believe it to be a powerful component of looking to the future and saying, how do we improve surgical outcomes? Does gentler surgery imparting less force on tissue have a difference in outcomes? Our hypothesis strongly yes. And so that's what's going to take multiple quarters in time to develop. But I do believe there's kind of two segments where force feedback can have that impact.

Thank you very much.

And we'll go to the next line. And that is the line of David Roman, Goldman Sachs. Please go ahead.

Thank you and good afternoon, everybody. I wanted to start on an question appreciating some of the supply chain dynamics that may have contributed positively to Girls in the Quarter. But maybe you could go into a little bit more detail about what you're seeing in the field from an adoption perspective. To what extent you're seeing higher diagnostic yields on Ion result in earlier intervention for patients and whether those interventions are taking place utilizing DaVinci or not.

Yeah. So with respect to getting a patient into the diagnostic pipeline, that's kind of an independent variable from Ion and or DaVinci. And so that's through screening or incidental findings. But once they're in there, then Ion is offering a really, really effective way to go and biopsy that lesion. And so we look at kind of two main variables there. One is the size of the lesion and then one is the diagnostic yield. And so the important part of this is to diagnose smaller and smaller lesions. The smaller the lesion, it is correlated to cancer stage. And that's where if you get it at stage 1a, you can have very, very high survival. So we're pushing towards smaller lesion size. And then diagnostic yields that are as good as possible, approaching TTNA levels or CT guided biopsy levels and eventually we hope to exceed those. And so those together, Ion is proving to be a really effective tool at doing that well while maintaining an improved safety profile over CT guided needle biopsy. And so when somebody is diagnosed with Ion and it is deemed to be cancer, then oftentimes they may move to a DaVinci procedure. It's really up to the tumor board and that physician about the best way to treat that patient. It may be with DaVinci. It may be with radiation or some other alternative. So oftentimes they're coupled but not all the time.

That's a very helpful context. Thank you. And maybe I could ask a financial question on the follow up here. I think it's like the operating expense targets for the year. Most of the reduction actually looks like it stems back to what might have been a slower start to the year. I think you grew OPEX about 7% in Q1 and saw an acceleration here in Q2. But maybe you just help unpack a little bit of the dynamic underpinning the operating expense growth for the balance of the year and how we should think about sort of normalized OPEX growth. Is that sort of the seven number where you started the year, kind of the low double digit number, where you're trending now? And then I don't know if you're willing to offer any perspective on the incremental depreciation but you were kind of in like the $90 million range in Q1 and $100 million range in Q1 of this year. Are we talking about a $10 million per quarter increase, $20 million? And any framing you give might be helpful on that side as well.

Yeah. Quarter to quarter it can be a little lumpy depending on those expenses that kind of are not consistent across quarters. So I just say if you take the first half, OPEX grew 9% and you look at the updated guidance, it says the second half grows 11 to 15, 16-ish percent. So an acceleration in the second half. From a framing perspective, roughly we're looking to maintain R&D about revenue growth and it's been at 11%. You know, the last couple of years, first half is about 11% and then you've seen us describe how we've been leveraging, enabling functions. In terms of then what the OPEX guidance was on the last call versus what it is today, there are some of those lumpy expenses that are no longer in the year just because of timing. We have looked at some headcount that we had planned for the year that we've pushed into 2025. That's really around focus, not around anything other than focus. Where you see opportunities to continue to leverage maybe at greater rates than we expected, then we'll realize those efficiency benefits. But we do expect second half operating expenses to be high in the first half and that's primarily driven by depreciation. Not ready to be specific about what the relative increase in depreciation expense is, but it is contemplated in that ramp up in second half operating expenses.

Great, thank you very much.

And we'll go to the next line. That will be the line of Rick Wise. Steve, please go ahead.

Good afternoon, everybody. Hi Gary, hi Dave. I was hoping that you could talk a little bit more about the procedure growth outlook broadly. You bumped up the range and we're very clear about the low and the high end. But I was just curious, I'm not sure I understand from your perspective, is our bariatric or GLP-1 pressures leveling off here? Have they leveled off? How reasonable is it to think you could get to the upper end? And sort of the same question for the Asia pressures you talk about as well. Could you just elaborate a little bit on that? Thank you.

Yeah, with regard to how to think about the range, I'm going to ask Brian to step in and do that. So Brian, do that and then we'll come back to talk a little bit about GLP-1s and I'll perhaps take that and then I think on China, I'll kick it to Dave.

So Rick, I'm just going to reemphasize or restate what the range was. So just reemphasize 15.5 to 17 percent is procedure guidance for the year. At the low end, we're assuming that bariatric procedures continues to soften. We did talk a bit about even last quarter and this quarter in Asia around physician strikes that were impacting procedures in Korea, along with delayed tenders impacting procedure or capital placements in China, which therefore impacts overall procedures or procedure growth. And at the high end of the range, we're really assuming that that bariatric essentially stabilizes at current quarter rates and again that Korea and China do not get any worse.

Yeah, speaking of bariatrics, two effects are going on. The GLP-1s are changing the surgical market and even within that, there's some share change between laparoscopy and robotics that's going on. So you have two things that are coming through and they net out. It is not the impact of GLP-1s on the bariatric surgery market from our perspective and aggregate has not bottomed yet. And the reality is I don't think anybody knows when and where that will exactly settle for a couple of reasons. I think some of it is looking at the puts and takes of effectiveness and you have constrained access to the drugs and you have some new drugs in the pipeline. So that will play out over time and if somebody told you they knew the answer, I'm not sure I'd believe them. Having said all that, we're not depressed about it. I think that it will play out. I think there's a role for bariatric surgery and I think in our customers' hands with our systems, I think that surgery is done well. So I think we're just going to have to all go through it together. I think we're going to live that experience together. With regard to kind of a longer term outlook of procedures in China and overall sentiment, Dave, I'll kind of kick to you.

Yeah, you know, what I would say about the longer term kind of outlook here is our offerings, we, as I said before, are highly valued in China. The systems are utilized at a high clip and, you know, there's value that surgeons and patients place on high quality, minimally invasive care. And so that's the, I think, the draw of this. In terms of some of the headwinds, and to me, there are kind of two areas. One is the capital environment that we talked about. And with constrained capital environment and placements, it has an impact on procedure growth. And then there's other areas around that's kind of rebasing by the government around economics. And so it has various impacts. It can have impacts in provinces around charge codes. And that is another headwind for us in terms of procedure growth and utilization long term.

Yeah, two comments I'd make on both the headwinds. I think at some point I'd expect both of them to be time limited. I think there'll be an equilibrium that'll be found between GLP-1s and surgery at some point. I also feel like the economic rebaselining in China and the integration and emergence of domestic systems, those things will start to find an equilibrium also. How long is that going to take is, I think, what's underlying this question. And the answer is we don't know. But I think that minimally invasive surgery in China is highly valued. There's a belief in robotic assisted surgery as being important. And our products and ecosystem is valued. So I think that we're enthusiastic about competing in

that. Yeah. Gary, if I could just one follow up. The question I have gotten, I think, most frequently post the launch of DB5 is, what new procedure, what new incremental TAM will DaVinci 5 unlock? I had the privilege of interviewing Dave, who might be near at hand today, that question at SRS. And I said the way DaVinci 5 unlocked the general surgery, Tam, what will DaVinci 5 unlock? And Dave very eloquently said, it's going to unlock the routine robotic surgery every day. Do you agree with Dave? And is that, are your customers understanding that vision or getting that that's what you're aiming at? Just any reaction to those thoughts, I'd appreciate it. Thank you, Dave.

You're welcome, Rick. Yeah, I'll start. Yeah, I agree with him. No shock. I maybe just reiterate our position. There's two different ways that it can help grow long term. And one way is to go deeper into the procedure base we're in already to help care teams and physicians who have thus far not wanted to adopt or have chosen not to adopt or have had a some of the functionality of DV5 and what it does, a little bit of easier access to other capital, for example, if XI has become more used in more places, it can release access constraints together as a portfolio. Those are powerful things. And that speaks to what Dave spoke about. We don't think we're done getting additional indications on DV5. And those are things that happen in the future. And as we get closer and see what those opportunities are, we'll describe them.

Thank you. Okay, we'll go to the next line. Drew Raniere, Morgan Stanley, please go ahead.

Hi, thanks for taking the questions. Maybe just something that we also heard from SRS was that DVXI is still very well considered in the field and there's surgeons that still want to get their hands on it. So just can you talk a little bit more about some of the underlying demand for XI in the US? And Jamie, I think you pointed out too that you kind of expect DV5 to sequentially improve throughout the year. So maybe just talk to us about what that means for XI, given that you're thinking about building capacity for robotic surgery.

Yeah, I would just say in the US, demand for XI kind of has two segments to it. You have customers that need incremental capacity. DaVinci 5 isn't available in the time that they need it. And so they're entering into arrangements with us to take XI now to serve that expansion of capacity they need. And then they have upgrade right built into the arrangement to move to DaVinci 5 when it becomes available, likely in broad launch. You have another segment of customers in the US who kind of wait and see with respect to what the value will be of DaVinci 5. And again, they look for building evidence and kind of a broadening of customer belief. And part of that consideration is the profile of that customer, what their strategy is, what their procedure mix is. And of course, as part of that consideration, they're looking at the incremental price, which as Gary described, when you do the full stack isn't actually that significant. But those customers that have tight capital budgets who like XI, which is a capable system, are more await and see. So I think in terms of as you look forward, that will evolve with respect to how DaVinci 5 capacity expands and the extent to which more customers can take that system. But there is a segment of customers that really like XI.

And has there been any change in thinking about bringing DaVinci 5 to the broader global markets? I know that you're working on a couple of regulatory filings right now, but any update on timings or further market expansion? Thanks for taking the questions.

Yeah, just in terms of our OUS plans, I think it's consistent with what we have communicated, which is we're in discussions with Korea and Japan and don't expect to launch in Europe before the end of next year. And so as we look beyond that, it's just too early to detail out those plans. And we'll let you know as they get a little bit more into focus here.

Okay, and we'll go to the next client here. Adam Maeder, Piper Sandler. Please go ahead.

Hi, good afternoon. Thank you for taking the questions and congrats on the nice quarter. Two from me, the first one is on DV5. And I specifically wanted to ask about the hardware and software changes that you plan to make in the back half of the year. What do you hope to improve upon? What are the magnitudes of the changes that you plan to implement? It sounds like they're relatively minor, but wanted to confirm that and then I had a follow-up. Thank you.

Sure, sure. I'll take that. So some of the near-term additions that we're talking about include the integration of hub capabilities of intuitive hub. And then from the surgeon having this head-end experience, when they're in the console, they'll be able to start accessing and intuitive 3D models, being able to manipulate them from the console with the controls there. And also they'll have the ability to access and replay intraoperative video. And then we'll also include and integrate in simulation. So that kind of gives you a flavor, I think, of some of the pieces that we're adding that we've talked about in these hardware and software upgrades. In addition, there will be some software upgrades that include responding to customer feedback as well. And some of the things that we've heard as we're going through our measured launch here. And then if you look a little further out, some intraoperative technology building blocks that we're working on, such as procedure step mapping and 3D depth mapping that will use some AI and ML algorithms and leverage this compute power of DaVinci 5. And those things will set us up for some more advanced features in the future that leverage that foundation.

That's a really good color, Dave. Thank you for that. And for the follow-up, I wanted to ask about SP. Congrats on the thoracic indication. I'm curious how much you think that expands the opportunity for SP here in the States. I know you're also working on colorectal, so I'm curious if you have timelines there. And then together, does that kind of give you the indication base to push SP more aggressively in the US? Thanks for taking the questions.

Yeah, in terms of thoracic, in the early period, that procedure actually is optimal when you have a stapler and we're in development for a stapler for SP. And so we'll be able to work with early adopters on the thoracic indication, but it's really when the stapler comes that you're able to more robustly drive adoption. One of the advantages of SP is, of course, then the opportunity to access the body in ways that does less damage to healthy tissue. So today in the US, in terms of thoracic for multiport, we're already relatively highly penetrated. And so really the question then is relative value of SP compared to XI. What was the second part of your question? I'm sorry if you could repeat it.

Yeah, happy to. I was just asking about colorectal timing. I think you have the IDE study that's ongoing. And I think that'll be your answer. Does that give you critical mass from an indication standpoint to push more aggressively with SP in the US?

Yeah, the work on the IDE has progressed. We don't have any additional detail at this point. And obviously that then adds another category with respect to the set of indications in the US. And I think it does give us the opportunity to both supplement SP procedure growth in the US and add to the growing utilization we see of the SP platform in the US. But I think we also have the opportunity for additional indications over time in the US. Colorectal like thoracic will also require the SP stapler.

Operator, we'll take one more question from one more caller and then wrap.

Okay, that will be from the line of Richard Neewitter, Swiss Securities. Please go ahead.

Thanks for taking the question. Maybe for Jamie, just, Jamie, in the past you've talked about, you know, a long-term or an intermediate to long-term three, four-year time frame to get back above sustainably 70% gross margin. A, correct me if that's not true, but I'm pretty sure that that's what you've said in the past. I'm just curious just with some of the initiatives, maybe paying dividends earlier than expected and faster. I know you have some manufacturing transition going on for ion disposables. That's a big initiative. Is it possible we're moving towards that goal a little faster, sooner? You know, I'd love to hear any thoughts there.

Specifically 70% gross margin, that's not sustainable in the shorter term. It continues to be our aspiration to have gross margin at 70% in the medium term. There's work for us to do over that period with respect to obviously DaVinci 5 costs. We have to continue to progress on ion and SP costs. And as we've said, we have incremental depreciation in the second half and more significant incremental depreciation next year. And so that will also require us to then, that's manufacturing capacity related, which you build in chunks. We'll have to revenue leverage that incremental depreciation over a period of time. Certainly in terms of the baseline of where we are at, the cost reductions we described on component costs and logistic costs have come in a little earlier. And that's why we've raised the guidance for gross margin for this year. But the aspiration for 70% gross margin is still a medium term aspiration.

Thanks. In fact, maybe just... Okay. I'll

wrap it there. Thank you. That was our last question. In closing, we believe that there's a substantial and durable opportunity to fundamentally improve surgery and acute interventions. Our teams continue to work closely with hospitals, physicians, and care teams in pursuit of what our customers have now termed the quintuple lane. Better, more predictable patient outcomes, better experiences for patients, better experiences for their care team, better access to great care and ultimately a lower total cost of care. 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. At Intuitive, we envision a future of care that is less invasive and profoundly better, where diseases are identified earlier and treated quickly so patients can get back to what matters most. Thank you for your support on this extraordinary journey. We look forward to talking to you again in three months.

Now, thank you everyone for joining today's conference call. You may now disconnect at this time. Have a good day.