Intuitive Surgical CEO Discusses Q4 2010 Earnings Call Transcript

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 |  About: Intuitive Surgical, Inc. (ISRG)
by: SA Transcripts

Intuitive Surgical (NASDAQ:ISRG)

Q4 2010 Earnings Call

January 20, 2011 4:30 pm ET

Executives

Marshall Mohr - Chief Financial Officer, Principal Accounting Office and Senior Vice President

Jerome McNamara - Executive Vice President of Worldwide Sales and Marketing

Aleks Cukic - Vice President of Strategy

Calvin Darling - Director of Financial Planning

Gary Guthart - Chief Executive Officer, President and Director

Analysts

David Roman - Goldman Sachs Group Inc.

Tycho Peterson - JP Morgan Chase & Co

Frederick Wise - Leerink Swann LLC

Ben Andrew - William Blair & Company L.L.C.

James Francescone

Amit Hazan - Gleacher & Company, Inc.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Intuitive Surgical Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Director of Financial Planning and Analysis for Intuitive Surgical, Calvin Darling. Please go ahead.

Calvin Darling

Thank you. Good afternoon, and welcome to Intuitive Surgical's fourth quarter conference call. With me today, we have Gary Guthart, our President and CEO; Marshall Mohr, our Chief Financial Officer; Aleks Cukic, our Vice President of Strategic Planning; and Jerry McNamara, our Executive Vice President of Worldwide Sales and Marketing.

Before we begin, I would like to inform you that comments mentioned on today’s call may be deemed to contain forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in the company’s Securities and Exchange Commission filings. Prospective investors are cautioned not to place undue reliance on such forward-looking statements.

Please note that this conference will be available for audio replay on our website at intuitivesurgical.com on the Audio Archives section under our Investor Relations page. In addition, today’s press release has been posted to our website.

Today’s format will consist of providing you with the highlights of our fourth 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 fourth quarter financial results. Aleks will discuss marketing and clinical highlights, and I will provide our financial forecast for 2011. And finally, we will host a question-and-answer session. With that, I'll turn it over to Gary.

Gary Guthart

Thank you for joining us on the call today. 2010 was a year with some broad challenges and encouraging trends. In the year, our procedure mix shifted in favor of gynecology, as it eclipsed urology as the largest specialty we serve. We are making good progress in responding to the challenges inherent in our expanding business.

In 2010, our focus was in four areas: first, driving the adoption of da Vinci surgery within the gynecology market; second, enabling growth of new procedures within new specialties; third, the expansion of our business internationally; and fourth, rightsizing our various core teams within the company to support our growth, most notably our sales organization.

Looking back at the full year 2010, our operating highlights were as follows. Worldwide procedures grew by 35%, with international procedures growing by 42%. We sold 441 da Vinci Surgical Systems in the year, up from 338. Total revenue grew to $1.413 billion, up 34%. Recurring revenue grew to $753 million, up 34% and comprising 53% of total revenue. We generated $673 million in operating profit before noncash stock compensation expense, up 42% from last year. And GAAP net income grew to $382 million, up 64% year-over-year.

Now turning to operating highlights for the fourth quarter. Procedures grew 35%. We sold 124 da Vinci Surgical Systems. We ended the fourth quarter with 1,752 da Vinci systems installed worldwide. Total revenue for the quarter was $389 million. Instrument and accessory revenue increased to $151 million, up 33%.

Total recurring revenue including service grew to $212 million, comprising 54% of total revenue. We generated an operating profit of $184 million in the quarter before noncash stock compensation expense, up 20% from the fourth quarter of last year. And GAAP net income grew to $121 million, up 56%.

We ended the year with $1.609 billion in cash and investments, down $12 million from last quarter and up $437 million from last year. We received $141 million in cash during the year from the exercise of stock options and invested $79 million in intellectual property, working capital, property plant and equipment and $199 million in stock repurchases for the year. Going forward, we will continue to look for stock repurchase opportunities.

Gross cash from operations for the year were $573 million, or $14.22 per fully diluted share and 150% of our reported GAAP net income for the year. This is a reflection of the significant noncash stock option and statutory tax expenses reflected in our GAAP net income and is the reason that we believe that gross cash generated from operations remains the best measure of our financial performance.

In our adopting procedures in the U.S., da Vinci Hysterectomy continued its strong growth, both in malignant and benign conditions, growing 59% year-over-year. Sacrocolpopexy and Myomectomy also continued to track their adoption curves. Urology also grew for the full year of 2010 through the continued adoption of Partial Nephrectomy and growth in dVP, the latter being focused in Europe.

As benign conditions became a larger part of our procedure base in the U.S., we experienced increased exposure to seasonality and other patient treatment deferrals that are less common with cancer operations. We expect this exposure to be an ongoing part of our business.

2010 was a strong year for emerging procedures. In fact, procedures falling outside the above-mentioned adopting procedures grew by 47% over 2009. Among procedures in new specialties that may emerge as adoptions are da Vinci colorectal procedures, da Vinci thoracic procedures and da Vinci transoral head and neck procedures. Patient value in these specialties appears to be high, and surgeon interest and early growth has been encouraging. I'll leave it to Aleks to provide more detail on our progress later in the call.

We are pleased with our procedure adoption in Europe in 2010, helped by growing depths in our European sales team. European procedures grew 48% year-over-year led by urology. We also saw the emergence of da Vinci surgery for cancer indications and gynecologic surgery in Europe.

2010 has been an investment year for products, with several of them in the mid to late stages of development. We believe these products will optimize existing procedures and enable new ones. In Q4, we launched our da Vinci Si stimulator, which, in combination with our Dual Console, afford surgeons more opportunity to train on da Vinci and track their progress.

Our Single Site product is in the late stages of regulatory review in both the U.S. and Europe. Recall that this product is intended to facilitate da Vinci's single incision surgeries on existing Si systems. Our robotic stapling and vessel sealing products are in development, and our progress with these products is encouraging.

In imaging, our fluorescence imaging product is also in the late stages of the regulatory review progress in the U.S. and Europe. In 2010, we also connected the majority of our installed da Vinci systems to a da Vinci network that enables remote system, performance monitoring as well as remote proctoring. We continue to invest in technologies that improve and enhance surgical imaging. Likewise, we also continuously invest in robotic technologies that simplify and enhance access to the body.

Finally, as we've discussed on prior calls, we believed at the outset of 2010 that investments were required in our clinical sales force to support the continued expansion of gynecologic and emerging procedures in the U.S. We added 150 members to our clinical team through the year and have largely caught back up to the procedure to sales rep run rate that we believe supports our customers' needs during this period. Across the company, we added nearly 400 employees in 2010, ending the year with 1,660 people on our team.

In closing, our priorities for 2011 are as follows: first, continuing our growth in gynecology and urology through outstanding execution in the field; second, disciplined execution of our product development process through product launch; third, driving deeper within the emerging procedures of colorectal surgery, thoracic surgery and transoral surgery through procedure and product development with leading customers; and fourth, strengthening our team both in the U.S. and in international markets to support the continued growth of the business.

I'll now pass the time over to Marshall Mohr, our Chief Financial Officer, to take us through our financial performance in greater detail.

Marshall Mohr

Thank you, Gary. Our fourth quarter revenue was $389 million, up 21% compared with $323 million for the fourth quarter of 2009 and up 13% compared with $344 million for the third quarter of 2010.

Fourth quarter revenue details were as follows. Fourth quarter Instrument and Accessory revenue was $151 million, up 33% compared with $113 million for the fourth quarter of 2009 and up 19% compared with $128 million in the third quarter of 2010. The increase relative to the fourth quarter of 2009 is primarily driven by procedure growth of 35% year-over-year. The increase relative to the third quarter is primarily driven by procedure growth, as well as an increase in the amount of stocking orders and customer purchases of our new 8.5 millimeters scopes.

Instrument and Accessory revenue realized per procedure, including initial stocking orders, was approximately $1,940 per procedure, which is lower than the fourth quarter of 2009 by approximately $20 and higher than the third quarter of 2010 by approximately $100. The changes in the instrument and accessory revenue per procedure primarily reflect changes in and the impact of stocking orders. We expect instruments and accessories per procedure to decline slowly over time given that initial stocking orders have a lower impact on a larger install base.

Fourth quarter 2010 Systems revenue of $178 million increased 10%, compared with $162 million of Systems revenue for the fourth quarter of 2009 and increased 11% compared with $160 million of Systems revenue for the third quarter. Recently, we began delivering new Si Systems for customers' S Systems versus completing as S to Si field upgrade. In addition, the contract terms and economics for these Si for S trade-ins are now reflective of Si sales. Accordingly, we have begun including S to Si upgrades in our systems counts.

Inclusive of nine S to Si trade-ins, we sold 124 systems in the fourth quarter of 2010. This compares to 110 systems in the fourth quarter of 2009 and 105 systems in the third quarter of 2010. I would note that the prior-period system counts exclude 10 S to Si upgrades for both the fourth quarter of 2009 and the third quarter of 2010.

Our fourth quarter average sales price per system, including all da Vinci models and S to Si trade-ins but excluding upgrades, was $1.41 million equal to the $1.41 million realized in the fourth quarter of 2009 and a decrease from the $1.43 million realized in the third quarter. The decrease in average sales price per system compared with the prior quarter is primarily the result of mix of products including a reduction in the proportion of Si Dual Consoles sold in the fourth quarter of 2010, partially offset by an increase due to a greater number of systems sold to direct customers in Europe.

Service revenue increased to $61 million, up 27% compared with $48 million last year and up 6% compared with $57 million last quarter. The growth in service revenue was primarily driven by a larger system install base and an increase in the mix of Si, which carry a higher annual service fee.

Total fourth quarter recurring revenue comprised of instrument, accessory and service revenue, increased to $212 million, up 31% compared with the fourth quarter of 2009 and up 15% compared with the third quarter of 2010. Recurring revenue represent 54% of total fourth quarter revenue compared with 50% in the fourth quarter last year and 54% last quarter.

Non-U.S. revenue represented 25% of our total revenue in the quarter, compared with 22% of total revenue in the fourth quarter of 2009 and 17% of total revenue in the third quarter of 2010. Non-U.S. procedures grew 42% on a year-to-year basis in a seasonally stronger quarter. dVP in Europe was the greatest driver in non-U.S. procedure growth, although we experienced growth in all procedure categories.

Instrument and accessory revenue grew at a rate similar to the procedure growth. We sold 38 systems outside the U.S. including two S to Si trade-ins, compared with 30 in the fourth quarter of 2009 and 22 last quarter. I would note that there was one S to Si upgrade outside the U.S. in both the fourth quarter of 2009 and the third quarter of 2010.

Despite uncertainties surrounding European economies, we sold 28 systems in Europe this quarter, compared to 16 in the third quarter and 21 last year. Aleks will provide additional details of overseas system sales.

Moving onto the remainder of the P&L. Gross margin in the fourth quarter was 73%, compared with the fourth quarter of 2009 gross margin of 72% and compared with the third quarter of 2010 gross margin of 73%. The increase over the prior year reflects lower manufacturing costs and absorption of fixed costs over a larger revenue base.

Fourth quarter 2010 operating expenses of $128 million were up 23% compared with the fourth quarter of 2009 and up 8% compared with the third quarter. The quarter-over-quarter increase reflects costs associated with employees added during the quarter and increased R&D prototype spending. We added 92 employees in the quarter, including 54 employees in the sales and service organization as we continue to expand our clinical sales force and 28 employees in operations.

Fourth quarter 2010 operating income was $154 million or 40% of sales, compared with $128 million or 40% of sales for the fourth quarter 2009 and $132 million or 38% of sales for the third quarter of 2010. Fourth quarter 2010 operating income reflected $30 million of noncash stock compensation expense compared with $25 million for the fourth quarter 2009 and $30 million last quarter. The year-over-year growth in noncash compensation reflects our annual grant made February 15 of this year.

Our effective tax rate for the fourth quarter of 23% brought our annual tax rate to 33% compared to our 2009 rate of 41%. The reduction in rates between years reflects the implementation of our international tax structure and a greater portion of our income being generated outside the U.S. Our fourth quarter rate benefited from a greater portion of our income being generated outside the U.S., from the retroactive reinstatement of the federal R&D credit and from a reduction in nondeductible stock option expenses. Our net income was $121 million or $3.02 per share, compared with $78 million or $1.95 per share for the fourth quarter of 2009 and $87 million or $2.14 per share for the third quarter of 2010.

Let me quickly summarize our results for 2010. Procedures grew by 35% to approximately 278,000. Total revenue for 2010 was $1.413 billion, up 34% compared with $1.052 billion last year. This included recurring revenue growth of 34% and an increase in Systems revenue of 35%.

Operating income for 2010 was $555 million, up 47% compared with $377 million last year. Operating income included $118 million of stock-based compensation charges in 2010 compared with $97 million in 2009. Net income for 2010 was $382 million or $9.47 per share, compared with $233 million or $5.93 per share last year.

Now moving to the balance sheet. We ended 2010 with cash and investments of $1.609 billion, down $12 million compared with September 30, 2010. The decrease during the quarter reflects $125 million of cash flows from operations, plus $8 million from the exercise of stock options, more than offset by $140 million of stock buybacks and $9 million of capital and IT purchases.

During the fourth quarter, we bought back 530,000 shares at an average price of $2.64 per share, bringing our total repurchases for the year to 742,000 shares at an average price of $2.68 per share. As of December 31, there was $101 million of the board authorized buybacks remain.

Our accounts receivable balance increased to $247 million at December 31, from $208 million at September 30, reflecting increased revenue. Our net inventory increased to $87 million at December 31 from $85 million at September 30. The increase reflects inventory necessary to support increased revenues.

And with that, I'd like to turn it over to Aleks, who will go over our sales, marketing and clinical highlights.

Aleks Cukic

Thank you, Marshall. During the fourth quarter, we sold 124 da Vinci Systems: 86 in the United States, 28 in Europe and 10 into rest of world markets. As part of the 124 System sales, 24 standard da Vinci Systems were traded in for credit against sales for new da Vinci Si Systems, and nine S Systems were traded in for Si Systems.

We had a net 91 system additions to the installed base during the quarter, which brings to 1,752, the cumulative number of da Vinci Systems worldwide: 1,285 in the U.S., 316 in Europe and 151 in rest of world markets. 50 of the 124 systems installed represented repeat system sales to existing customers. The 38 system sales internationally was our strongest quarter-to-date and included six da Vinci Systems into Italy, five into Germany and three into the countries of France and Korea.

Clinically, we had a strong quarter, with GYN and more specifically, benign dVH contributing the greatest absolute growth. While dVH for malignant conditions showed very good sequential growth, benign dVH growth was stronger both in actual procedure growth and in percentage growth. Additionally, overall benign GYN procedures, which included sacrocolpopexy, myomectomy and endometrial resections, also exhibited strong sequential growth. Within the segment of urology, dVP, Partial Nephrectomy and Cystectomy were all up materially on a sequential basis. And finally, head and neck, colorectal and thoracic resections all displayed strong sequential growth.

Our strong fourth quarter procedure growth was not limited to a specific geography. It was global in structure. On a year-over-year comparison, overall fourth quarter procedures grew by approximately 35%, which is consistent with our overall 2010 procedure growth as well as our 2010 procedure guidance.

On a global basis, we finished 2010 having completed approximately 278,000 total procedures led by dVH, representing approximately 110,000 and dVP, representing approximately 98,000. Benign GYN procedures have become a significant catalyst for growth within our overall business. dVH, da Vinci Sacrocolpopexy, Myomectomy and endometrial resections represent large business opportunities, both U.S. and internationally. And the peer-reviewed data supporting da Vinci's role within these procedures is beginning to expand.

A rapidly emerging benign GYN procedure, one we have not talked a great deal about is da Vinci Myomectomy. Myomectomy is a procedure to remove a uterine fibroid while preserving a patient's uterus. Currently, the gold standard operation for myomectomy includes a lower abdominal incision. Over the past few years, traditional laparoscopic myomectomies have been performed more regularly. However, due to the extensive suturing required for adequate closure, it is considered technically difficult and therefore, limited in its clinical adoption.

At the American Society of Reproductive Medicine Conference, a paper entitled 'Robotic-Assisted, Laparoscopic, and Open Myomectomy: A Comparison of Surgical Outcomes' was presented. The study was authored by a group of physicians representing the Cleveland Clinic Foundation and Case Western Reserve University.

The study examined blood loss, length of stay and operating time for 575 patients within these three distinct cohorts. The three groups were case matched with comparable myomas regarding size, number and location and adjusted for age and body mass index. When comparing da Vinci Myomectomy to open myomectomy, average surgical time did increase. But average blood loss was reduced significantly by 50%, and the average hospitalization was reduced from three days to one day. When comparing da Vinci Myomectomy to traditional laparoscopy, surgical time was reduced by an average of 22 minutes and blood loss was reduced by an average of 33%.

In their conclusion, the authors wrote, and I quote, "robotic-assisted myomectomy is associated with decreased estimated blood loss and length of hospital stay compared to traditional laparoscopy and open myomectomy. Despite that robotic use is associated with longer OR time compared to open procedures, it is shorter than laparoscopic approach. It appears that robotic technology is able to convert more laparotomy cases."

Total GYN procedures represent nearly half of our overall procedure volume, with the overwhelming majority being comprised of procedures to treat benign conditions. We are pleased by the fact that our customers and patients are experiencing an enhanced clinical value within these large mainstream procedure categories.

However, we do recognize that it makes procedure volumes more susceptible to general seasonality and macroeconomic pressures. This is due in large part to a patient's ability to postpone some treatments to a future date when it becomes more economically convenient for them.

On the other end of the spectrum, we have experienced strong growth trajectories within the category that I will term very complex procedures, procedures where volumes are less seasonally affected, namely, head and neck surgery, colon and rectal surgery, renal cancer, cervical and endometrial cancer and lung cancer procedures. While some of these procedure categories are potentially large with steep growth trajectories, they are also fairly young with respect to their adoption. And therefore, individually, their contribution is currently less impactful to our overall procedure number.

The fastest growing segment in 2010 was head and neck surgery. The category more than tripled in size during the year and showed exceptional sequential growth in Q4. We are seeing more and more peer-reviewed literature describing da Vinci's role within this category.

In a recent edition of the journal Oncology, three surgeons from the Department of Head and Neck Surgery at the University of Texas' MD Anderson Cancer Center authored a comprehensive perspective paper entitled 'A Shifting Paradigm for Patients with Head and Neck Cancer: Transoral Robotic Surgery' or TORS.

The paper reviewed the functional outcomes from various studies published by leading head and neck cancer centers such as the Mayo Clinic Rochester, University of Pennsylvania, the University of Alabama Birmingham and MD Anderson. The authors highlighted the initial study out of Penn, which reported that 25 out of their first 27 patients undergoing a da Vinci procedure for tonsillar squamous cell carcinoma attained negative margins, and the two patients with positive margins were later cleared. Local control was achieved in all 27 at six months' follow up.

Next, the University of Alabama Birmingham evaluated 54 patients undergoing TORS and found that only five required a temporary tracheostomy with decannulation or removal occurring at a mean of eight days. Similar functional data was reported in a series by Moore, et al. at the Mayo Clinic. His group reported an average time to decannulation of seven days. This is a significant improvement for decannulation over conventional surgery, where it is usually reported in weeks or months rather than days.

These early evaluations of oncologic and functional outcomes of TORS illustrate a minimally invasive technique that permits resection of a tumor en bloc while preserving patient swallowing ability. The MD Anderson group concluded their paper by stating, and I quote, "robotic surgery in head and neck oncology is an exciting innovation that provides significant advantages. Patients have an en bloc removal of their tumors via a minimally invasive surgery without a cervical incision, while preserving function and potentially avoiding adjuvant radiation and its long-term sequelae. While long-term oncologic functional data are needed to fully validate its use, early results are promising."

That concludes my remarks, and I'll now turn the time over to Calvin.

Calvin Darling

Thank you, Aleks. I will be providing you with our financial forecast for 2011, including procedures, revenues and other elements of the income statement on a GAAP basis. I will also provide estimates of significant noncash expenses to provide you with visibility into our expected future cash flows.

Starting with procedures. We continue to see strong growth in da Vinci hysterectomies in the U.S., dVPs in Europe and general growth across a broadening range of procedures at earlier stages of market adoption. We expect our 2011 total procedures to grow between 25% and 28% from a base of approximately 278,000 procedures performed in 2010. Based on an increasing percentage of benign hysterectomies and other short-term elective procedures in our procedure mix, we anticipate a more pronounced quarterly seasonality impact in 2011 as compared to 2010.

Moving to revenues. We expect to achieve annual revenue growth of between 16% and 20%. As a reminder, our revenues can fluctuate quarter-to-quarter as system placements may vary. We expect typical capital sales seasonality in 2011, with Q1 being a relatively lighter quarter and Q4 being the seasonally strongest.

With regards to gross margin, we reported fourth quarter 2010 gross profit of 72.5% of sales. Looking forward into 2011, we anticipate maintaining our margins near the current level at a rate of between 72% and 73% of sales for the year. Gross margin can fluctuate quarter-to-quarter due to product and geographical mix.

Moving to operating expense. We expect our GAAP operating expense to grow by approximately 16% to 20% in 2011, which is in line with our expected top line growth. Our 2011 operating expense growth will be driven by clinical sales resource additions in the field to support newly installed systems and drive procedure growth. Investments in new and existing R&D projects to drive growth in our long-term business, and noncash stock compensation expense growth of approximately 22%.

We expect our noncash stock compensation charges to increase from $118 million recorded in 2010 to approximately $140 million to $145 million in 2011. Amortization of purchased intellectual property, which is mostly recorded as R&D expense, is expected to increase from $16 million in 2010 to $17 million to $20 million in 2011.

Other income, which is mainly comprised of interest income, has been decreasing due to lower interest rates earned on our cash investments. We expect other income to come in between $17 million and $18 million in 2011, which is down slightly from approximately $19 million earned in 2010.

With regard to income tax. In 2010, we reported income taxes at a rate of 33.3% of pretax income. As some of the items that benefited 2010 will not carry forward, we anticipate recording 2011 income taxes at about 34% of pretax income. We estimate that our share count for calculating EPS in Q1 2011 will be approximately 40.3 million shares.

Cash. Our cash balance has remained in the $1.6 billion range throughout the second half of 2010 as we have largely returned operating cash flows to shareholders in the form of stock repurchases, including $140 million used to repurchase shares in Q4. Our repurchase program remains active, and entering Q1 2011, we have approximately $101 million remaining authorized by the board to buyback additional shares. We will communicate any future repurchase authorizations as they become effective.

That concludes my comments. Now I'll open the floor for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll first go to the line of Ben Andrew with William Blair.

Ben Andrew - William Blair & Company L.L.C.

Maybe start talking about the kind of change in your outlook for procedure growth, and you did go through quite of few of the factors. But 35% performance in the quarter for the full year in '10, and you're guiding 25% to 28% for next year. Would you characterize that as conservative? Is that something that as you've added so many sales reps, you're waiting to see if that productivity is coming through and there's a fair bit of upside to that? Or what led to that guidance?

Gary Guthart

Yes, Ben. Before we jump in and answer the questions, just one correction on the call.

Marshall Mohr

Yes, in I guess my script, I mentioned that we had bought back shares and I gave prices of $2.64 to $2.68. Obviously, that wasn't the price. I missed it by a couple of digits. It's $264 and $268.

Gary Guthart

Anyway, to the question on kind of what's underlying the growth in the growth guidance. The major drivers of growth looking forward will be a continued adoption of gynecology in the U.S. In the U.S., the malignant side of hysterectomy, so hysterectomy for cancer conditions are going to the upper part of the curve and really the growth will be coming out of benign hysterectomy. Benign hysterectomy is diffused, so it's a little bit harder to consolidate. That's one. A second source of growth in the procedure domain will be urology in Europe, which is coming along nicely but a little lower on the curve. And then emerging procedures, while they were growing really nicely, they're at a little bit smaller base. So a little bit of it is just the timing of these different adoptions as they progress.

Ben Andrew - William Blair & Company L.L.C.

Is it reasonable, Gary, to think as you go through the year that in fact it could be accelerating as some of those curves are moving further out and higher to the top right? Because again, you're just kind of at the front edge of many of the new emerging procedure codes you've been discussing.

Gary Guthart

I think we'll have to see where the emerging procedures go as they come up. I think we call them emerging because they're promising, and they're going quickly but on small basis. And really, the challenge and the question for us is how quickly can they move up. And I think we're just going to have to report on it as the year progresses.

Ben Andrew - William Blair & Company L.L.C.

And last question for me is the hiring plans for the field organization. You've been increasing that quite steadily over the course of '10. How would you think about the quarters progressing over the course of '11?

Gary Guthart

Yes, we kind of felt like 2010 was a catch-up year for some slow hiring in 2009. And I think we've done a pretty good job of catching up and getting close. We'll continue to hire, but I think the rate of hire will start to temper a little bit as we move into the back part of '11. I'll let Jerry add little color to that.

Jerome McNamara

Yes, I think that, as Gary mentioned, we caught up. We're just about where we want to be. We do use pretty careful metrics to add sales force accordingly as the procedures grow. And I think that we'll be in the sweet spot in the next quarter or two, and then we'll manage it as procedure growth dictates.

Operator

And next, we'll go to the line of Tycho Peterson with JPMorgan.

Tycho Peterson - JP Morgan Chase & Co

On the Q from last quarter, you talked about the new Si-e model. And this looks, I guess, more kind of a de-featured system. Can you just talk about the opportunity there and how we think about maybe that blending into ASPs? Is there some risk, I guess, you move down the ASP curve as you push this out?

Gary Guthart

We think there is an opportunity, kind of an economic opportunity there for the Si-e. It is a de-featured version of the Si. It has a lot of the feature-forward compatibility that the Si line has. And we think that as we move into more benign procedures -- and frankly, head and neck is fundamentally a three-hour procedure -- that there is an opportunity there both for customers who are little more price sensitive as well as second system sales that go into sites that are having more diverse procedure lines. So that's kind of the frame up of the Si-e.

Tycho Peterson - JP Morgan Chase & Co

Can you, I guess, just comment on what the ASP is, and did that impact this quarter at all yet? You talked about fewer Dual Consoles as this impacting ASPs?

Gary Guthart

Yes, I'll let Marshall talk about that.

Marshall Mohr

So the list price for an Si-e is below that of an Si, obviously, because it's de-featured. I believe it's $1.3 million.

Tycho Peterson - JP Morgan Chase & Co

Second question on colorectal. You called that out obviously as one of the emerging growth areas. How do we think about -- you talked about the stapler obviously in process here. How do we think about it, maybe how much pent-up demand there is post the stapler coming out? I mean, you've, again, seen some nice traction before it's been launched. But how do we think about how important getting the stapler out will be to really driving uptake of colorectal?

Aleks Cukic

Yes. It's really hard to say at this stage, Tycho. I think we'll know when we get there. But what we've learned in the past is often one or two instruments can make a great deal of difference in optimizing a procedure. We saw it in prostatectomy with bipolar energy and the appropriate grasper to manage the tumor or the prostate, I should say. And you start to see procedure times come down, and you start to see case reports improving and so on and so forth. So we know the process of trying to optimize a procedure. And I think stapling becomes directionally a pretty important product, not just in colorectal, but perhaps in lung surgery and some of the other large sort of very complex procedures. So in terms of pent-up demand, I don't know that we even know how to call that. I would just say that it's a product launch, or I should say, a product development that should add value in a number of targets for us going forward.

Tycho Peterson - JP Morgan Chase & Co

And can you provide any more color on timing? I mean, should we think about that this year or...

Aleks Cukic

Well, I think the way you want to think about it, we've talked about products that are either in FDA or in development. This one is still in the development phase, which means it's not in front of the FDA. The pace of development and the quality of the prototyping is excellent, but it's a very complex procedure, there's no question about it. So there's really not a lot more we probably will go into other than just think of it in development at this stage.

Tycho Peterson - JP Morgan Chase & Co

And then just one last one on prostate. As we think about where we are in the adoption curve, obviously more of a focus here on hysterectomy in the U.S. and some of these emerging procedures. But is your view that dVP can stay kind of flat in 2011 in the U.S? Or is there a risk, I guess, that could go negative as we think about?

Aleks Cukic

There's always risk. But I would say that if you looked at it in 2010, it was actually up in the United States. Not materially so, but we've described it pretty much each quarter as flattish and it's actually up a little bit in the United States. The majority of the growth came from outside. Almost overwhelming amount of the growth came from outside the United States, which we believe will be the case. I think there will be a sort of a give-and-take between other therapies that go on with prostatectomy indefinitely, I think. We are picking up some procedures that may have been sort of headed toward radiation or other therapies, and they will probably pick up a case that was headed for surgery. So we think of it as flattish in the near term, and that's probably as accurate as we can be.

Tycho Peterson - JP Morgan Chase & Co

Actually, just one last one on Japan. Can you comment on whether you placed any systems there, and anything new to highlight?

Aleks Cukic

I think we placed one system in Japan. And as far as anything new to highlight, we continue to work, as we've talked about in the past, with various stakeholders in Japan about looking at ways to get reimbursement approved on a global basis, if you will, as opposed to a manual basis. It isn't anything that we are expecting for 2011. I think through 2011, we'll continue to move the process on a manual basis. And yes, we'd expect some systems to be sold, but we are not at a point where we would classify it as fully optimized and nor would we expect it in 2011.

Operator

And next, we'll go to the line of David Lewis with Morgan Stanley.

James Francescone

This is actually James in for David. First question on the international business. I mean, obviously, very strong results overseas this quarter, kind of been hovering between 20 and 30 boxes for the past maybe even two or three years and 38 this quarter. Any insight into what's changing those markets? Is that kind of macro recovery theme, or is that a better execution on your end?

Jerome McNamara

We can't control any of the macro conditions over in Europe, but we can control our execution on development of our procedure business. And I think we had a pretty good year. As we moved through the year, we also caught up on our headcount and expanded our sales force. And at the end of the year our dVP number started to grow in all affected countries, and our penetration and growth is getting to a critical point where it's impacting the demand for additional systems. So by focusing on the procedure, the capital systems continue to come. So we expect to just continue to drive the procedures and there will be seasonality in Europe just as there has been over the years, but we did see a pretty good uptick at the end of the year.

Aleks Cukic

One of the things we've said in the past is we knew there would be a stagger between dVP outside the United States compared to dVP in the U.S., and that is structural. We believe there is a lag. There will be a lag in GYN. There will be a lag in other procedures. So what you saw in 2010 was really a nice uptick in the dVP business, specifically in Europe. Overall European numbers were up about 48%. And you started to see, let's say -- I don't want to oversell and say some critical mass, but you saw some strength, early strength in gynecologic cancer operation, dVH malignant, which is what we would have expected because we've got sort of a history, if you will, of starting in the most complex areas, showing value and then moving on beyond that. And I think it's starting to feel like we're getting some traction in various European countries. So that I would say en bloc is really the difference in European 2010 business.

James Francescone

As you characterize this more as just a strong quarter or do you think you're reaching more of an inflection point there?

Gary Guthart

I think with hearing both those answers is that we're starting to see some nice procedure momentum. And I think over time, the capital side maybe lumpy, and I'd expect it to continue to be lumpy. But as long as we can keep driving the procedure business up the curve the way we think we can, ultimately, I think it will pull systems.

James Francescone

And then on Single Site. Last quarter, you sounded a little bit cautious for launch timing, but it seems like you made a lot of progress in the 4Q. Any more firm commitment as to when we can expect to see the launch there?

Gary Guthart

We're still in conversation with the regulatory bodies. I think we're in the question-and-answer period, and we understand the questions and they have answers. And I can't tell you exactly when that process will conclude, but just that we're working through it.

James Francescone

And one last one on buybacks. Given the cash accumulation over the past year, have you started to consider something that's a more substantial buyback program as opposed to primarily opportunistic? Or just more broadly, how are you thinking about capital deployment going forward?

Marshall Mohr

You know the numbers. I mean, we bought back 742,000 shares at $268 per share for the year. We do think about ways to return capital to shareholders, and we still have another $101 million authorized and it's up to the board to decide whether or not we proceed with a greater program.

Gary Guthart

Directionally, we've been happy with the buybacks.

We think it's been a good mechanism for us, and we'll look for opportunities when the time is right to continue that pathway.

Operator

We'll go to the line of David Roman with Goldman Sachs.

David Roman - Goldman Sachs Group Inc.

In your prepared remarks, you talked a little bit about an increasing number of procedures being exposed to some of the cyclicality we've seen elsewhere in healthcare. But if you look at this, it's pretty significant acceleration in procedure growth in the fourth quarter. Can you maybe help us characterize or maybe parse out what part of that acceleration do you think came from the rebound of some of those procedures that might have been deferred versus an acceleration in some of the underlying and sort of the more legacy procedures like dVH associated with new sales force hires?

Aleks Cukic

It's really difficult to tease it out exactly. But what I can tell you directionally is even -- in the fourth quarter, for example, in the United States, we saw a nice increase in dVP. So we also saw a nice increase in the GYN procedures both U.S. and o U.S. Looking at it and some of that was directionally driven by new hires and new commitments, if you will, to the field organization. So it's hard to say how much of that is pent-up, how much of that is driven because of seasonality. What we do know and what we learned last year really for the first time in, let's say, Q1, the issue of fully paid deductibles versus unpaid deductibles had an impact on some of the more elective procedures. And so that is something we'll call out as that becomes a bigger part of our business.

David Roman - Goldman Sachs Group Inc.

Switching over to P&L. You talked obviously about adding some sales reps and expanding your selling organization. If we look at SG&A over the course of 2010, it grew slower than revenue in the first half of the year and then accelerated to slightly faster than revenue in the back half of the year. And you're guiding just sort of OpEx growth in line with top line growth for next year, sorry, for 2011. So is essentially most of that build-out complete with respect to the selling organization, or are there any sort of significant investments that we should look for over the course of 2011? And if we look at the boxing and on the pacing of the year, should we start to see more leverage as we get to the second half on the SG&A line?

Gary Guthart

I'll answer the first two subparts, and I'll have Marshall answer the last one. I think on the sales side, you ought to think of it in rates. We accelerated the rate of sales hiring in '10. We'll continue to hire into the sales force in '11, but the rate of hire we'll temper a little bit. And so a couple of things happened. One is we did some sales hiring throughout the year, but we do a little bit more in Q4 in anticipation of the beginning part of the year of 2011 to get them on board and effective sooner into the year rather than later. So you see a little bit of that surge. The other thing that happened is, as Marshall mentioned in the script, we had some timing of R&D prototype expenses that shifted around in the back half of the year, and that's just lumpy. The nature of R&D expense can be lumpy. So on those two sides, I think that we'll see a little tempering of headcount hiring in 2011 in terms of a rate, continued investments in R&D. And in terms of front and back half of 2011, I'll turn that to Marshall.

Marshall Mohr

We typically have a little bit -- when you look at ratio to revenue, because of seasonality in the quarters, you typically will see a higher rate of expenditure relative to revenue in Q1 and a slightly higher rate in Q3 as well, and then the other two quarters look better. But it really has to do with seasonality of revenue.

Aleks Cukic

Right. A kind of linear growth as it relates to the operating expenses.

David Roman - Goldman Sachs Group Inc.

And then lastly, on the tax rate, the 34% number for 2011. I'm assuming that does not include an assumption on the reinstatement of the R&D tax credit but is more a reflection of a structural move down on your tax rate, which we should expect to continue over time?

Marshall Mohr

It's actually reflective of both. The reinstatement of the R&D tax credit, it was reinstated through 2011. So we will get an R&D tax credit in 2011. Having said that, the bigger impact in 2010, and overall the bigger impact is the change in the mix of revenue on a global basis. So as you earn more money overseas, you're being taxed a lower rate and that brings your tax rate down. So 34% is reflective of what we think the mix will be next year.

Operator

Go to the line of Rick Wise with Leerink Swann.

Frederick Wise - Leerink Swann LLC

First, a bigger picture and maybe, Gary, I'll just ask you. I mean, clearly, you had a really strong fourth quarter. Maybe you could comment or reflect on to what extent do we attribute the fourth quarter strength that's specific to Intuitive as opposed to possibly reflecting sort of more optimism on the hospital side or capital spending, that sort of environmental stabilizing to improving versus your own excellent business trends?

Gary Guthart

It's a good question. It's a hard one to answer. I guess, I'll just speak directionally. I think the piece we feel good about on is really on the procedure side. I think procedure growth there is, I think the mix of both excellent execution by the sales force, strong patient value and the procedures that we offer and a little bit of seasonality in terms of patients' willingness and access to care into Q4. I think you saw some of all three of those things. I think on the capital side, I think it feels in the middle to us. I don't think we feel like there's a strong environmental trend one way or the other, broadly speaking. And so when we think about the capital business, we think it's driven by a few things. We think it's driven, first, by procedures and capacity, by access to capital, of course, and by the availability of new products and the desirability of those products. So just to come back to the original question, the biggest thing we feel good about, I think, is that demand for da Vinci procedures seem pretty strong and we were able to go out and service that demand.

Frederick Wise - Leerink Swann LLC

And if I could, and maybe, Aleks, this is directed to you. But obviously, another solid quarter of da Vinci placements. But can you comment on why the trade-ins seemed unusually high? Couple of aspects to this question. Just that extraordinarily high number, is there any particular reason? Maybe give us a little color if you can on how much more upgrades there are to go at this point. Another question. Just as I look at our model and look at the -- if I'm looking at it correctly, the net new adds have sort of been 87 to now 91 net new adds for the last five quarters now, so about 360 annualized run rate. Should we think about net placements going forward? Is that the right annual rate going forward, or will we see net adds actually increase in 2011 or 2012? How do we think about that trend?

Aleks Cukic

I think there are a couple of questions in there, so I'll give you a numerical answer to one of them, and I believe you asked how many more systems can be upgraded. And I believe the number, for example, in the United States pertaining to Standard systems is 162 or so, somewhere thereabout. Let's call it 150, north of 150 slightly. And outside the United States, it is probably not all that dissimilar to that number. Now it doesn't mean that all of them are going to come back in time. I think we've got a fairly predictable trend over -- if you were just to plot it out over the last several quarters. It will be up, down, but I don't think there's anything material in the way we're behaving that would suggest that it's going to increase or decrease at a rapid rate quickly. So the answer really becomes, what does the customer want to do when we will work with the customer. We're doing this as a customer accommodation. We're giving them value back for a product that they paid for and used and now want a more advanced product. And we'll continue to be focused on the customers' needs. In terms of a go-forward projection, Rick, it's really hard to say. Eventually, you're going to get into your modeling, and I can't recall if you're actually modeling units. But if you do, I think you've got some data points that suggest kind of directionally where the trade-ins are going. So I don't know that there's a lot more color I can give you on that.

Frederick Wise - Leerink Swann LLC

And just to draw from this, the business about, your running about a 360 unit net add in the last four quarters. Are we going to see absolute units grow net of trade-ins from here? I mean, is that the way to think it as we look out over the next two, three, four years? Or will net adds on an annual basis continue to grow, do you think?

Aleks Cukic

Again, Rick, I think if you look at it, you take the most recent data point, you have 50 of the 124 systems went to existing owners, which means that 74 went to new owners. So that's a pretty large number. So I think it's suggestive of the fact that there's a lot of new owners that are out there that will be buying for the first time. In terms of how the ratios might fall out, I'm not sure. But I would say that, yes, we're planning to sell systems.

Gary Guthart

Another way to look at it, Rick, really is you're talking about net adds to the installed base. That's going to drive that up or down. It all comes back to procedure adoption in the end and how big your installed base needs to be serve the number of procedures that you're going to do.

Marshall Mohr

Procedure adoption and utilization.

Frederick Wise - Leerink Swann LLC

You all understandably never talk in depth about the product pipeline. Should we expect -- should we think that there might be some major new systems introduced this year as opposed to some other year versus the constant steady flow of procedure-specific incremental instruments? Could this be a year where we see something more dramatic?

Aleks Cukic

I would say this, Rick. I think the products that we've been coloring up now for a few quarters, by our definition, are big products. They're not easy products, when we talk about Single Site, when we talk about stapling, when we talk about a cut and seal or ligation systems. These are not insignificant developments. So by any definition, I think they are considered big deals. But again, that's not to promise any timelines or anything else. It's just to say directionally, we're focusing on some pretty complex stuff.

Operator

And that would come from Amit Hazan with Gleacher.

Amit Hazan - Gleacher & Company, Inc.

Just the first one, just to kind of circle back on your procedure guidance. I think as we think about your performance in past years, there's been a really good correlation between the growth in the installed base and then the growth in procedures you end up putting up. Growth in the installed base has been about 26% in the last 12 months, and your guidance for procedure growth is now 25% to 28%. And obviously, you get some utilization improvement every year as well. So I'm trying to understand if I'm missing something or thinking about it the right way, but you're being conservative. But just in thinking about that, the relationship between unit placements and the growth that we're going to see in procedures, what else we should be considering maybe in terms of utilization or other to get to your guidance?

Marshall Mohr

Utilization continues to increase slowly year-to-year. And the relationship between them, procedure growth and systems growth, it's really hard to correlate those in a small time frame just because the capital purchasing cycle is unpredictable. On a long-term basis that they should be closer or match up better as procedures do drive system sales.

Gary Guthart

Just to color that up a little bit. I think that if you can integrate over a many year period, the number of procedures you do will tell you how many systems you need to do that number of procedures. A couple of things that are interesting. Greenfields have a lag effect to bring those programs up to full capability. And then the one that's really hard to model is as robotic programs become multi-specialty, how many procedures they can get on a system while sharing it across multi-specialty is highly variable. And so as these emerging procedures come on, utilization trends start to move around a little bit. And so it's a very tough thing to model.

I think that was our last question. Thank you. As we've discussed with you over the years, while we spend time on these calls reviewing our financial performance, our teams remain sharply focused on the creation of patient value, improving the efficacy of surgery while reducing its invasiveness. I would like to share with you two brief examples of what this means in the lives of our patients.

The first patient is Sandra, who had her da Vinci procedure in Miami. Sandra reports, "on November 29, 2010, I received a diagnosis of adenocarcinoma of the lung. I have always been an extremely healthy person and a nonsmoker, so you can imagine how shocking this diagnosis was for me. Being a nurse practitioner and a former OR nurse, I thought I knew what I was in for.

I have a friend who underwent a traditional lobectomy for the same diagnosis ten years previously. She spent two weeks in the hospital, five days in the ICU and was subjected to a broken rib and scapula in order to provide access to the lung. It was three months before she was able to return to work, and she still has pain to this day.

Fortunately, I was wrong. I have a friend who works for Intuitive Surgical. He was adamant that I meet with Dr. Mark Dylewski at South Miami Hospital. I did my research and learned that Dr. Dylewski is very experienced with the da Vinci robot, having done over 300 robotic-assisted surgeries. I met Dr. Dylewski on November 30, and knew immediately that he was my surgeon. His confidence was just the reassurance that I needed.

On December 9, I was admitted to South Miami Hospital for robotic-assisted right lower lobectomy. My surgery took an hour and a half. I had minimal postoperative pain and was up and walking the next day. I was discharged to home on day two and stopped pain medication on day six.

I returned to work two weeks after surgery and was back to the gym for a light workout three weeks after surgery. I have to say I feel blessed. My tumor was found early. My nodes are negative, and I have an excellent prognosis. I am blessed to have caring friends. I'm blessed to have found this brilliant surgeon. I am blessed that this amazing technology is available.

I would encourage anyone who receives a diagnosis of lung cancer to find a surgeon and a hospital that offers the da Vinci robotic surgery. It saved me from agonizing postoperative pain and a long debilitating recovery. I traveled 125 miles south to Miami, and I am so glad that I did it."

Our second patient is Linda, who had sacrocolpopexy completed in Reno, Nevada. She says, "I had a hysterectomy 30 years ago. So when I was told I needed a sacrocolpopexy, all I can think about was the pain and long recovery. Needless to say, I was dreading this procedure.

Dr. Macaskill [ph] assured to me that the da Vinci procedure would be less invasive, less painful and I would feel better in less time. Thanks to this very talented surgeon and the da Vinci robot, the procedure and the recovery have exceeded all of my expectations. There was really no pain, only discomfort around one of the five incisions. I felt the need to use pain medication for the first three days. And after that, Aleve worked great at night to help me sleep.

I was up and about shortly after the surgery and was totally amazed by the fact that I could stand up straight and walk without any pain or feeling like my stitches were pulling apart. I had to remind myself before overdoing things that I just had major surgery.

Wow, what a difference between the surgery I had 30 years ago, when I was unable to stand up straight and barely able to shuffle around for the first couple of weeks than the one I just experienced with the da Vinci robot. Anyone who has the option to have this da Vinci procedure should take advantage of it. Compared to the other options, it is truly amazing."

Patients like these are the strongest advocates for da Vinci surgery and form the very foundation of our operating performance. We have built our company to take surgery beyond the limits of the human hand, and I assure you that we remain committed to driving the vital few things that truly make a difference.

This concludes today's call. We thank you for your participation and support on this extraordinary journey to improve surgery, and we look forward to talking with you again in three months time.

Operator

Ladies and gentlemen, that does concludes your call for today. Thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.

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