Intuitive Surgical, Inc. (NASDAQ:ISRG)
Q4 2015 Results Earnings Conference Call
January 21, 2015, 4:30 pm ET
Calvin Darling - Senior Director of Finance, Investor Relations
Gary Guthart - President and Chief Executive Officer
Marshall Mohr - Chief Financial Officer, Senior Vice President
Patrick Clingan - Director of Finance
David Roman - Goldman Sachs
David Lewis - Morgan Stanley
Tao Levy - Wedbush
Ben Andrew - William Blair
J.P. McKim - Piper Jaffray
Bob Hopkins - Bank of America
Brandon Henry - RBC Capital Markets
Richard Newitter - Leerink Partners
Rick Wise - Stifel Nicolaus
Ladies and gentlemen, thank you for standing by. Welcome to the Intuitive Surgical Q4 2015 earnings release conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, today's teleconference is being recorded.
And I would now like to turn the conference over to the Senior Director of Finance, Investor Relations for Intuitive Surgical, Mr. Calvin Darling. Please go ahead, sir
Thank you. Good afternoon and welcome to Intuitive Surgical's fourth quarter earnings conference call. With me today, we have Gary Guthart, our President and CEO, Marshall Mohr, our Chief Financial Officer and Patrick Clingan, Senior Director of Finance.
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, including our most recent Form 10-K filed on February 5, 2015 and 10-Q, filed on October 21, 2015. These filings can be found through our website or at the SEC's EDGAR database. Prospective 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 intuitivesurgical.com, on the Audio Archives section under our Investor Relations page. In addition, today's press release and supplementary financial data tables have been posted to our website.
Today's format will consist of providing you with our 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, Patrick will discuss marketing and clinical highlights, then I will provide our financial outlook for 2016 and finally we will host a question-and-answer session.
With that, I will turn it over to Gary.
Good afternoon and thank you for joining us on the call today. 2015 was a good year for Intuitive with increased use of our products around the globe and solid operational execution. Our focus in 2015 was to drive adoption of our platform in general surgery, expand our da Vinci Xi Surgical System product line, increase our organizational capability and performance in international markets and improve contribution margins for our newly launched products. Themes that emerged at the close of 2014 continued into 2015 with strong performance in general surgery and international procedure growth.
Full-year global procedure growth was approximately 14%, led by growth in general surgery, growth in the use of da Vinci surgical systems outside the United States and strength in urology. U.S. general surgery growth was approximately 31% for the year made up of strong growth in inguinal hernia repair, ventral hernia repair and colorectal surgery, use of single site in cholecystectomy and hysterectomy declined for the year. Outside of the United States, procedure growth was strong, rising approximately 26% over procedures in 2014. Patrick will review procedure trends in greater detail later in the call.
Looking at trends in capital sales for the year, capital placements increased in 2015 to 492 from 431 placements in 2014. Customer interest and acceptance of our latest platform da Vinci Xi has been positive with Xi making up the majority of placements for the year. In 2015, we shipped 298 systems in the United States, 90 in Europe, 77 in Asia and 27 in other global markets. Our operations teams remain focused on optimizing our manufacturing, design and supply chains for our newer products. Progress in the back half of 2015 has been solid with steady improvements in reducing product costs for our new systems and advanced instruments. We expect our product cost to continue to improve in 2016 and 2017 as a result of these efforts.
As we have said before, our offerings make up an ecosystem designed to encompass our customers' needs in building and running outstanding robotic surgery programs. 2015 was a year which we focused on enabling our ecosystem with new product launches globally. We launched our da Vinci Xi system with a core set of instruments, vessel sealer and Firefly Fluorescence Imaging in 2014. We broadened access to our Xi system with international regulatory clearances through the year. We also added our 45 millimeter Xi stapler in Q1 as well as Harmonic Curved Shears and a second set of instruments in Q2 of 2015. We submitted our 510(k) for our 30 millimeter stapler for Xi, single site instrument kit for Xi as well as other Xi accessories in the second half of 2015. I am pleased to report that we obtained FDA clearance for integrated Xi table motion this month.
In addition to products, our surgeon customers can choose from dozens of training courses provided by academic surgeons as well as courses designed for assistance and other operating room staff. Our customers own over 1,400 surgical simulators and over 600 dual consoles to assist them in technology training. In addition, our teams have provided detailed analytic and operational support for customers seeking to optimize and benchmark their programs relative to international norms. We believe the combination of these products and services are important to fully enable our customers.
Looking back at the full year of 2015, our operating performance is summarized as follows. Worldwide procedures grew by approximately 14%. We shipped 492 da Vinci surgical systems in the year, up from 431 in 2014. Total revenue was $2.4 billion, up 12% from 2014 and up 15% on a constant currency basis. Recurring revenue grew to $1.7 billion, up 11% and comprising 70% of total revenue. We generated $946 million in pro forma operating profit, up 16% from last year. Pro forma net income was $731 million, up 20% from 2014 and we repurchased 366,000 shares at an average price of $502 per share during 2015.
Turning to our operating performance for the fourth quarter. Procedures grew approximately 15% over the fourth quarter of last year. We shipped 158 da Vinci surgical systems, up from 137 in the fourth quarter of 2014. Total pro forma revenue for the quarter was $677 million, up 13% from prior year. Instrument and accessory revenue increased to $326 million, up 16%. We generated a pro forma operating profit of $293 million in the quarter, up 28% from the fourth quarter of last year and pro forma net income was $224 million, up 22% from Q4 of 2014.
As we look to the future, we passionately believe that robotic assisted surgery is in its infancy in application and technology. As we have improved our cost and supply chains for new products, we anticipate increasing our investments in key areas that will enable and drive the future of robotic assisted surgery. These include product investments in advanced imaging, advanced instrumentation and next generation robotics. We will also continue to invest in procedure, product and program analytics, international market development and economic and clinical validation.
Looking to 2016, our priorities are as follows. First, we will focus on the expanded use of da Vinci in general and thoracic surgery, particularly colorectal surgery and hernia repair. Second, we will work to advance our ecosystem, including expanding our Xi line and taking our Sp product line into initial clinical use. Third, we will drive our organizational capabilities in markets in Europe and Asia. And finally, we will continue to assist our customers in their efforts to maximize the comprehensive value of their programs.
I will now turn the call over to Marshall who will review financial highlights.
Thank you, Gary. I will be describing our results on a non-GAAP or pro forma basis which excludes the impact of our prior year Xi trade-in programs, legal settlements and legal claim accruals, stock-based compensation, amortization of purchased IP and investment impairments. We provide pro forma information because we believe that business trends and operating results are easier to understand on a pro forma basis. I will also summarize our GAAP results later in my script. We have posted reconciliations of pro forma results to our GAAP results on our website so that there is no confusion.
Pro forma fourth quarter revenue was $677 million, an increase of 13% compared with $601 million for the fourth quarter of 2014 and an increased to 15% compared with last quarter. Pro forma revenue for the fourth quarter of 2014 excludes $4 million of revenue associated with offers made in 2014 to trade out Si product for Xi product. All trade out offers were either fulfilled or lapsed in 2014. Fourth quarter 2015 procedures of approximately 177,000 increased 15% compared with the fourth quarter of 2014 and increased 9% compared with the third quarter of 2015. Procedure growth was primarily driven by general surgery procedures in the U.S. and urology worldwide.
Revenue highlights are as follows. Pro forma instrument and accessory revenue increased 16% compared with last year. It increased 9% compared with the third quarter of 2015. The increase relative to prior year reflects procedure growth and increased sales of advanced instruments, partially offset by the impact of foreign exchange. The increase over the prior quarter reflects procedure growth and sales of advanced instruments, partially offset by customer buying patterns.
Instrument and accessory revenue realized per procedure including initial stocking orders was approximately $1,840 per procedure. This metric has now been trending in a tight range between $1,830 and $1,840 per procedure over the past year with recent quarters reflecting higher sales of advanced instruments offset by the impact of foreign exchange.
Pro forma system revenue of $231 million increased 9% compared with last year and increased 32% compared with last quarter. The increase relative to the prior year primarily reflects increased unit sales. The increase relative to the third quarter reflects increased unit sales, partially offset by lower ASPs. 158 systems replaced in the fourth quarter compared with 137 systems in the fourth quarter 2014 and 117 systems last quarter. Approximately 72% of the systems shipped in the quarter were Xi which is comparable to prior quarter.
Globally, our average systems price of $1,550,000 is comparable to the fourth quarter 2014, slightly less than $1,600,000 ASP last quarter. Relative to the prior year, increases related to the lower trade-in mix were mostly offset by foreign exchange. The decrease relative to the third quarter reflects geographic mix and a lower proportion of Xi dual consoles. ASPs fluctuate quarter-to-quarter based on geographic and product mix, trade-in volume and changes in foreign exchange rates.
Hospitals financed approximately 17% of the systems placed in the fourth quarter, down from 25% last quarter. We directly financed 20 systems, including placing the most operating leases, 16, since we began our direct leasing program in the second quarter 2014. As of the end of the fourth quarter, 49 of the 3,597 systems out in the field were under operating leases. We exclude the impact of operating leases from our system ASP calculations.
Service revenue of $120 million increased 9% year-over-year and increased 2% compared with the third quarter of 2015. The year-over-year and quarter-over-quarter increases reflect the increase in our installed base of da Vinci systems.
Outside of U.S. results were as follows. Fourth quarter pro forma revenue outside of the U.S. of $219 million increased 11% compared with $198 million for the fourth quarter of 2014 and increased 45% compared with $151 million last quarter. The increase compared with the previous year reflects higher system unit sales and higher recurring revenue driven by procedure growth of 27%. Outside the U.S., we placed 75 systems in the fourth quarter compared with 66 in the fourth quarter of 2014 and 37 systems last quarter. Current quarter system sales included 13 into China, 11 in Japan, eight into Italy and seven into Brazil. System placements outside the U.S. will continue to be lumpy as some of these markets are in the early stages of adoption, some markets are highly seasonal reflecting budget cycles or vacation patterns and sales in to some markets are constrained by government regulations.
The pro forma gross margin for the fourth quarter of 2015 was 69.6% compared with 67.1% for the fourth quarter of 2014 and 69.3% for the third quarter of 2015. Compared with the fourth quarter of 2014, the higher gross margin reflects lower inventory charges, improved efficiencies, partially offset by foreign exchange and a higher mix of our newer products, which carry lower gross margins than our mature products. Gross margin includes the impact of the medical device tax which has been suspended for the next two years. The medical device tax reduced our 2015 gross margin by approximately 70 basis points. Future margins will fluctuate based on the mix of our newer products, on whether we are required to pay the medical device tax and costs associated with manufacturing efficiencies and product charges.
In 2014, we recorded pretax charges of approximately $82 million representing the estimated cost of settling a number of product legal liability claims under a tolling agreement. During 2015, we refined our estimate of the overall cost of settling claims and recorded additional charges of approximately $14 million in the first half of the year. There were no charges in the second half of 2015. Charges made related to this agreement are excluded from our pro forma results and are included in our GAAP results. As of the end of the fourth quarter, $24 million remained accrued on our balance sheet as a significant portion of the estimated cost have been paid.
Pro forma operating expenses which exclude reserves for legal claims, stock compensation expense and amortization of purchased IP, increased 7% compared with the fourth quarter of 2014 and increased 6% compared with last quarter. Year-over-year increase in pro forma operating expenses primarily reflects headcount additions and higher incentive compensation. The increase relative to the third quarter primarily reflects increased incentive compensation.
Our pro forma effective tax rate for the fourth quarter was 24.9% compared with an effective tax rate of 23.5% for the fourth quarter of 2014 and 18.4% last quarter. The effective tax rate for the third quarter of 2015 included tax benefits of $29 million or $0.77 per share related to a recent favorable tax court ruling involving an independent third party.
In late December, Congress renewed the federal research and development credit, resulting in a benefit of $6 million or $0.17 per share. Congress also made the R&D tax credit permanent, so our 2016 rate guidance will reflect this benefit. Our tax rate will fluctuate with changes in the mix of U.S. and oUS income.
Our fourth quarter 2015 pro forma net income was $224 million or $5.89 per share, compared with $184 million or $4.92 per share for the fourth quarter of 2014 and $199 million or $5.24 per share for the third quarter 2015. As I indicated earlier, pro forma income provides an easier comparison of our financial results and business trends.
I will now summarize our GAAP results. GAAP revenue was $677 million for the fourth quarter of 2015, compared with $605 million for the fourth quarter of 2014 and $590 million for the third quarter of 2015. GAAP net income was $190 million or $4.99 per share for the fourth quarter of 2015, compared with $147 million or $3.94 per share for the fourth quarter of 2014 and $167 million or $4.40 per share for the third quarter of 2015.
We ended the year with cash and investments of $3.3 billion, up from $3.1 billion as of September 30, 2015. The increase was primarily driven by cash generated from operations and proceeds from stock option exercises, partially offset by stock buybacks. During the quarter, we repurchased approximately 167,000 shares for $84 million at an average price of $505 per share. This brings our total stock repurchases for 2015 to approximately $184 million.
With that, I would like to turn it over to Patrick who will go over our procedure and clinical highlights.
Thanks, Marshall. So the fourth quarter year-over-year procedures grew approximately 15% with U.S. procedures growing approximately 12% and international procedures growing approximately 27%. Full year 2015 procedure growth was approximately 14% with U.S. procedures growing approximately 11% and international procedures growing approximately 26%.
In the U.S., fourth quarter procedure growth of approximately 12% was driven by continued strength in general surgery procedures with solid contribution coming from mature procedures despite already high levels of market penetration. We do not expect the strong 2015 growth in established U.S. urology and gynecology procedures to continue in 2016.
In U.S. urology, fourth quarter growth in da Vinci prostatectomy and kidney cancer procedures continued at similar rates as earlier in the year. We continue to believe that our U.S. prostatectomy volumes have been tracking to the broader prostate surgery market. In 2015, procedure growth in U.S. urology was approximately 12%, led by an approximate 11% growth in da Vinci prostatectomy. We expect U.S. da Vinci prostatectomy procedure volumes to return to a level more in-line with prostate cancer incidence rate going forward.
In U.S. gynecology, fourth quarter procedures grew modestly year-over-year with growth in malignant and complex hysterectomy partially offset by declines in benign procedures. During 2015, a larger proportion of da Vinci hysterectomy procedures were performed by gynecologic oncologists compared to 2014. For the year, growth in U.S. gynecology procedures was approximately 1%. In 2016, sustaining growth in U.S. gynecology maybe a challenge as we believe the total market for benign hysterectomies will continue to decline at a low single-digit rate.
Fourth quarter growth in U.S. general surgery remains strong with robust growth in hernia repair and continued adoption of colorectal procedures, being partially offset by continued declines in cholecystectomies. U.S. general surgery procedure growth was approximately 31% for the year with broad-based growth across several procedures, led by hernia repair, which generated the largest number of new general surgery procedures. Growth in colorectal resections was also stronger in 2015. In 2016, there remains a large opportunity in hernia repair and colorectal resections and driving adoption these markets remains among our top priorities.
During the quarter a group of general surgeons, led by Dr. Vorst from St. Joseph Mercy Health System and Dr. Carbonell from the University of South Carolina School of Medicine published their perspective on advances in ventral and incisional hernia repair in the World Journal of Gastrointestinal Surgery. Within the paper, data comparing the robotic to open Rives-Stoppa technique for more complex hernias favored the robotic approach with the reduction in blood loss, shorter length of hospital stay, fewer surgical site infections and no difference in operative times or direct costs. The paper states that robotic approach "permits relatively easy access to the interior abdominal wall allowing the surgeon to perform the ideal repair for that patient. It also might allow for standardization of surgical technique in order to develop a reliable approach to hernia repair that can be offered to an increasing number of patients."
Regarding our U.S. single site business, cholecystectomy volumes continued to decline during the fourth quarter, though mostly offset by a growth in multiport cholecystectomies. In addition, our single site gynecology procedure volumes declined in the fourth quarter. Taken together, single site procedures represented less than 5% of our fourth quarter U.S. procedure volume.
Looking abroad during the fourth quarter, the approximate 27% international procedure growth was led by the global adoption of da Vinci prostatectomy with solid contributions from kidney procedures, malignant hysterectomies and colorectal resections. For the full year, procedure growth was approximately 26%. Procedure growth in Europe remained steady throughout 2015. In Asia, procedure growth was led by broad-based adoption in China and South Korea and da Vinci prostatectomy adoption in Japan. During 2016, we expect several external factors to impact international procedure growth. In Japan, the Surgical Society has submitted for reimbursement of partial nephrectomies to the MHLW. Pending the MHLW's decision, this may serve as a tailwind to Japanese procedure growth. In China, we have placed 32 of the 38 da Vinci systems under the current authorization and sustaining strong procedure growth throughout 2016 may require additional authorizations from the government.
During the quarter, the global evidence for the cost-effectiveness for the use of da Vinci surgery in gynecologic oncology continued to build. A new study from Copenhagen University Hospital by Dr. Hurley and colleagues modeled the clinical and economic impact of the adoption of da Vinci for malignant hysterectomies capturing the comprehensive cost of care associated with these interventions. The study compared 158 open hysterectomies to 202 da Vinci hysterectomies and found that da Vinci hysterectomies were 17% less expensive than open hysterectomies based on operating cost and 7% less expensive than open hysterectomies when the da Vinci system cost was included. The study found the cost savings associated with fewer complications and shorter hospitalization more than offset the incremental costs associated with the use of da Vinci technology in the operating room. 2015 was a robust year for clinical publications featuring da Vinci surgery with over 1,600 papers published during the year, bringing total clinical publications to over 10,000.
This concludes my remarks. I thank you for your time. I will now turn the call over to Calvin.
Thank you, Patrick. I will be providing you with our financial outlook for 2016. Starting with procedures, as described in our announcement last week, 2015 total da Vinci procedures grew approximately 14% to roughly 652,000 procedures performed worldwide. During 2016, we anticipate full year procedure growth within a range of 9% to 12%. We expect similar seasonal timing of procedures in 2016 as we have experienced in previous years with Q1 being the seasonally weakest quarter as patient deductibles are reset.
With respect to revenue, we expect 2016 capital sales to follow historical seasonal patterns, which we anticipate will become more pronounced with Q1 being sequentially lower than the recently completed Q4. System placements will likely continue to be lumpy, particularly in markets outside of the U.S. as some of these markets are in early stages of adoption. Some markets are highly seasonal reflecting budget cycles or vacation patterns and sales in to some markets are constrained by government regulations.
Turning to gross profit. We expect our 2016 pro forma gross profit margin to be within a range of between 68% and 69.5% of net revenue. Our actual gross profit margin will vary quarter-to-quarter depending largely on product and regional mix.
Turning to operating expenses. As Gary mentioned, we will be increasing our investments in key areas that will enable and drive the future of robotic assisted surgery. We expect to grow 2016 operating expenses between 9% and 13% above 2015 levels. We expect our non-cash stock compensation expense to range between $170 million and $180 million in 2016, compared to $168 million in 2015. We expect other income, which is comprised mostly of interest income, to total between $20 million and $25 million in 2016.
With regard to income tax, we expect our 2016 pro forma income tax rate to be between 26.5% and 28.5% of pretax income depending primarily on the mix of U.S. and oUS profits. This forecast does reflect the reinstatement of the R&D tax credit in 2016.
That concludes our prepared remarks. We will now open the call to your questions.
[Operator Instructions]. The first question today comes from the line of David Roman with Goldman Sachs. Please go ahead.
Thank you and good evening everybody. I wanted to start with just one strategic question and one follow up on the financial guidance that Calvin just provided. Maybe on the strategic side, I was hoping Gary you could go into your thoughts as it relates to the competitive landscape in robotics? We have heard over the past several months announcement from a couple of emerging competitors and there is an expected announcement from another competitor later in 2016. Can you maybe talk about how you envision the competitive landscape unfolding and some of the activities you maybe undertaking to prepare Intuitive for moving from a monopoly type market to one that has multiple players?
Sure. As we look at value and competition, at the end of the day, value is going to be driven by the ability of these products and services to drive great outcomes and compared or weighed against the price of those things. So we think about it as an ecosystem. We think the ecosystem is really important. So it's easy to think just about the robotic system because that's the most visible part, but there is the systems, the instruments and accessories, advanced instrumentation like stapling, imaging systems, fluorescence imaging, training technologies like stimulators and dual console, clinical validation training courses offered by academic surgeons that number in the dozens, that whole set of products and ecosystem, we think, is important.
And so as competitors enter, they have to choose. Can they show that value in terms of outcomes and price and can they offer the set of ecosystem elements that they are going to be a useful? We have known for years and have anticipated for years. We didn't wake up yesterday and think competitors are coming, we better do something. So we have been thoughtful about what we need to do to create value for our customers. We have a range of products in the system side that has different price points for different feature content. We have different options that are available in terms of instrumentation price points. And so we think we are really well positioned.
There are some other companies out there that will be capable. We expect that customers will explore what they are offering. We think we are well positioned when that exploration occurs.
Okay. That's helpful. And then maybe just to go into the financial side for a second. Just trying to understand what you are saying on the margins for 2016. The gross margin range seems to imply that on an underlying basis, when you take of the benefit of the medical device tax you are seeing a deterioration from where you sort of exited the second half of 2015? What are the factors influencing that math? And then on the OpEx side, the 9% to 13% represents a pretty decent acceleration from what we saw this year. Can you maybe help put some of those investments into context? Where those dollars are going? And whether 2016 represents a new normal year of investment spending? Or there is something particular that you are after this year?
Sure, David. I will take you through some of the gross profit commentary and let Gary take you through some of the investments on the OpEx side. Like Gary said on the call, we are focused on reducing our cost of the new products and we have been managing our fixed cost very carefully. We are pleased with the progress we have been making throughout 2015. Our second half 2015 gross profit benefited from favorable product mix, essentially zero product charges and other favorable outcomes.
In 2016, we do expect to deliver continued cost reductions on the newer products, including the Xi, stapler, vessel sealer and Xi endoscopes. At the same time, as compared to the second half of 2015, we would expect a higher proportion of 2016 sales to be of the newer products. We would expect a lower proportion of dual console systems sales, probably higher proportion of system sales involving trade-ins and probably some product charges.
At some point, we would be more line with historical norms from the past. And while FX is not likely to be as strong a headwind as it was in 2015, it does appears as though it will have some negative impact on revenue and margins. And then lastly, I would say, from a competitive side, any pressure there or the impacts of that are unknown at this stage.
On the ultimately investment side, as I mentioned in the script, we think that there is significant opportunity to improve what surgeons can see during cases improving imaging through a variety of means technologically and we have been working on that for years and we will continue to do so. I think there is great potential there.
On the instrumentation side, we are expanding our stapling line and our advanced energy lines. The reception has been quite good. Those are not single instruments. They are really families of instruments and we are filling out those families as we go. We feel good about it and think it's important we will continue to invest there and we think that there are opportunities in robotics in terms of both structure, things like SP and other things that can change different segments of the market that can allow us to enter other procedures that we are not currently in today or access other regions of the world that may have different needs.
And so we will continue investing in those things.
Okay. I appreciate all the detail. Thank you.
And we do have a question for the line of David Lewis with Morgan Stanley. Please go ahead.
Good afternoon. Sorry, I want to come back to margins here for a second. The spread on margins and maybe Marshall or Calvin, so it's 68% to 69.50%, it's a wider spread of how you gave us the spread last year. So what defines the upper end and lower end of those ranges? And I guess secondarily, when I think about these product manufacturing improvements you are making, we seem to have a substantial impact on gross margins in the second half of the year. I guess I would presume those advantages or those costs would be a bigger tailwind in 2016 over 2015. Is that kind of a correct statement? Those two questions and I have a quick follow-up.
To characterize the cost reductions, they had some impact in the second half of 2015. They will have a more significant impacted in 2016 and 2017. As Calvin had said, we will continue to focus on reducing the costs. I think the bigger improvement during 2015 had to do with the lack of product charges that we mentioned in Q1. And as we move forward, the range has really, the breadth of the range is really reflective of the items that Calvin gave you, which is that we expected to see a higher proportion of newer products, the extent of that we will see. We expect to see a lower proportion of dual consoles and a higher proportion of trade-ins. The mix of systems is always difficult to predict. And frankly geographic mix also has an implication here. And as I said in my script, there is a quite a bit of lumpiness to some of those geographic markets.
Okay. And then Gary just a quick strategic and margin question for you as well. So the expense to saw a couple years ago, you made a selective decision just to reinvest, This is a 50% increase in OpEx spending relative to 15%, 400 to 500 basis points above. Do you see this similarly as the opportunity to reinvest? And is the investments spend heavier on SG&A or R&D? And the follow-up is, on Sp as you mentioned, in light of what's happening with single site procedures, has that changes your thinking of the opportunity around Sp? Sorry for the couple of couple questions there. Thank you.
Sure. Yes. In terms of the balance of investment, it really is targeted in a couple of areas. R&D is clearly one area that will get investment and then support for international markets and some of those things are more structural, not necessarily just sales folks but clinical trials and other things. So that's where the balance or the bulk of that increase is going to lay in. And we think we have technologies that are important and we think we have process that we can bring that's important and that will serve us well in the long-term and in the future.
With regard to Sp, vis-à-vis single site, we think that Sp really enters and adds value in a different place than single site does. Single site tended to work on a little bit more limited workspace, a little bit more constrained set of procedures. Sp is both broader and more capable. Price points are a little bit different. So we think about Sp when we think transoral, transanal, colorectal, places where there is specimen removal. So we look at those things. We think about it.
Sp is less oriented towards cosmetic benefits and more aimed towards being able to reach complex structures where you need to.
Okay. Thank you very much.
And we question for the line of Tao Levy with Wedbush. Please go ahead.
Great. Thanks. Good afternoon. So maybe we can start with U.S. system utilization. When you do the math, you are reaching peak levels here in the U.S. in terms of averages. And so what's the dynamic currently in the marketplace whereby hospitals could potentially accelerate the addition of new systems in order to meet your procedure growth expectations that you have laid out?
Yes. To make sure I understand the question right, I think as we look at utilization patterns, one thing is important to remember around the world, but in the U.S. as well, is there is not a single customer profile that fits them all. So the average does not cover all the endpoints. And so we definitely see some integrated delivery networks who are very interested in optimizing procedures per system per year and just trying to drive that up to get better capital utilization and we will help them do that. We see other health systems that maybe in the exact same market, who were really interested in driving convenience for patients and for their surgeons and are willing to invest in capital once they get the minimum hurdle rate for procedure use or utilization.
And so we see both. Predicting which of those strategies is going to dominate into the year is always a little bit hard. And at the end of the day, we really focus the organization on great utilization and great support, whichever strategy our customer wants to take us down.
Okay. And just my follow-up, you have talked a couple of times about investing more and more into imaging and aside from Firefly, we haven't seen anything very significant come out of other companies. So maybe you could highlight a couple of the interesting projects within imaging that we should be paying attention to? Thanks.
Sure. I think, the first statement is, I beg to differ, but I look at the imaging platform that we brought out with Xi and it's a fundamentally different technology basis, distal chip imaging. That gives us room to do some things from usability, reach and workflow point of view that were very hard to do otherwise. And so we continue down that pathway.
So for example, in Xi, you can move the scope arm-to-arm, There is not a dedicated robot to hold one endoscope. So that gives you the idea of port hopping, the ability to look around the abdomen differently. The other thing that distal chip imaging gets you is the ability to articulate your endoscope which is a part of the Sp product line is endoscopic articulation.
We continue to invest in that technology and expand our leadership position there because I think that both you can get better image quality and more flexibility and better price points by doing that technology. So that's one set of investments.
The other set is, as you mentioned with Firefly, the ability to look and see things that you can't see easily with a white light. So the ability to look and see beneath tissue or to highlight tissue structure and there are a set of technologies there that are useful and we are investing in, but those are longer term. They take a while to develop and as we get further down the pipeline we will share with you where we are.
Great. Thank you.
And we have a question from the line of Ben Andrew with William Blair. Please go ahead.
Good afternoon. Thanks for taking the questions, guys. On the initial Sp use, Gary, that you talked about and you listed a few applications there, should we assume that's where we will see some initial clinical work? And when might we see results from those, either published or discussed? Is that later this year, next year that maybe leads to next steps of commercializing the product?
Right. Yes. In terms of first question, those are places where we are intended to explore. So colorectal and in transoral. We will also explore other places in time but those are our initial experience. We expect to have our initial experiences. In terms of timelines, I am not ready yet to tell you when in the year it will happen. We are still in conversations with regulatory bodies about pathway and so as we get some clarity there, then we will describe to you later in the year.
Okay. And on that same main, if you look out three or four years, can the Sp platform be a material percentage of the company's volumes? Or is this something that probably remains a niche given the price point and we shouldn't really think differently about the distribution of 5% or 10%, if you will?
I think that it offers surgeons a different way to think about getting into the body and a different approach. It can deliver a lot of capability in a small package parallel into the body and it can move about the body quite easily in terms of multi-quadrant access. So I think it's hard to predict long-term. I think, for sure, near-term there are initiatives that I think it matters. Whether those initiatives grow into bigger opportunities, I think remains to be seen.
Having said that, the history of Intuitive and the history of technology is that as you bring raw technology into the hands of experts and they start to use and then develop it a way leads to way and I believe that. I think that we will see things that develop as surgeons get deep with it. How big that gets, impossible to predict right now.
Okay. And then lastly for me. Thank you for taking the question, by the way. The range of procedure guidance is a little wide to start the year obviously. And let's just try to isolate one effect if we can, China. So if we don't see another authorization for system sales, is that a material impact within the range? Is that a percentage point or two in terms of a potential swing? Or how should we look at, for example China specifically?
Yes. Thanks for the question, Ben. When it comes to procedure guidance, our focus is going to continue to be on driving growth in general surgery in our international markets, including China. When you look at the breadth of the range to your question, there is far bigger impact than just the system authorization in China when it comes to the mature procedures in the U.S. and the rates of growth that we may see there that benefited us in 2015 and certainly across a much wider range of markets.
Okay. Great. Thank you.
And we do have a question from the line of Matt O'Brien with Piper Jaffray. Please go ahead.
Hi everyone. This is actually J.P., in for Matt. Thanks for taking my questions. I just wanted to get back to the margin profile for next year and ask it in a more simple way. So if you exclude the 70 basis points that you gain through the med tax credit, given the guidance you gave for OpEx next year, would we be expecting the adjusted EBIT margins to actually be down year-over-year?
Yes. I think there are a lot of layered assumptions that go into the model and we don't have specific guidance as it relates to that. Revenue would be one of factors certainly underlying the overall assumptions. So I think what we tried to do is lay out a lot of factors that would be impacting the gross margin as well as the investments we are making on the expense side.
Got it. And if I could ask one on the recent clearance to the integrated table motion. How is that sale going to be? And how are guys going to get revenue from that? Is that going to be sales from Trumpf Medical and you guys would get a piece of the revenue? Or how will that work?
Yes. I would say, Trumpf will sell the table in an independent transaction to the hospital. What we get out of it is, we sell a software upgrade package for the table that allows it to operate it in an integrated fashion.
Yes. I think for us the key here is we are working to make the operation more efficient, right. This will make the ability for surgeons to reposition the patient without having to withdraw the robot arms, redock during a procedure, make it more efficient and therefore it benefits certain groups of procedures and hopefully drive adoption. I think that's really the key benefit from our perspective.
Great. Thank you.
We do question the line of Bob Hopkins from Bank of America. Please go ahead.
Thanks and good afternoon. So I wanted to ask a question about 2016 revenue growth to start. Can you give us a sense as to where you see incremental opportunities for acceleration? So what are the areas where you see or product categories where you see the potential for accelerating revenue growth or entirely new growth drivers in 2016 versus what you experienced in 2015? Obviously we are well aware what the major growth drivers are, I am curious about the things that potentially are available to you in 2016 that weren't available in 2015.
Yes. As you know, we look at 2016 in a couple places. I think that we have opportunities in oUS markets in various places that are important to us. Now there are some structural things that we have to overcome in and invest in and sometimes they are reimbursement and sometimes there are other parts of market access and we will do that. But I think the opportunity there is quite good. I think in terms of other verticals we are working on a 30 millimeter stapler, the 30-millimeter stapler is really targeted at thoracic procedures. Xi system design, part of it's design intent was to facilitate thoracic procedures and we are in early days there. So as time goes on, I don't think that's something that's going to leap out of the gate in the beginning part of the year, but things we are investing in from a product and support point of view that should build momentum over the next multiple quarters.
And then Marshall, to follow-up on two quick things. On the revenue per procedure number and you highlighted, that's been very stable within a range but it feels like the cadence of new products will pickup as we move forward there. Can we expect that line item to start moving back up towards the old highs as we go forward here? And then the other quick thing I wanted to ask of you is, I appreciate the comment that 70% of revenues now come from disposables. Can you give us a rough sense as to what the relative profitability of that disposable stream is versus the capital side of the business?
Yes. So first, talking about the range of I&A revenue per procedure, we would hope that we would be able to add to that number through increases in the advanced instrumentation including stabling and vessel sealing. As I said, that's been somewhat muted or offset by the effects of foreign-exchange over the last few quarters but there are other factors that could change that. I don't know what the historical high you are speaking about was, but I do think that there is room for it to grow going forward.
It was about $2,000, I think.
Yes. And then remember, that number has in it stocking orders and timing of other things. So longer-term, as you have a bigger and bigger install base, the relative value of stocking orders is going to go down and that has nothing to do with sort of the pure economics of the exchange. The other question was around recurring revenue and remember it's not just instruments, it is also service.
Yes. That's about 50% is instruments and accessories of revenue and 20% would be the service element to get to the 70% total recurring.
And the margins on instruments and accessories are better than systems. And so as we get a quarter where we have a higher systems, then the margins are going to be lower.
And that trend is likely to be durable, the I&A and service will be higher margin than systems.
Great. Thank you very much.
And we do have a question from the line of Brandon Henry with RBC Capital Markets. Please go ahead.
Yes. Thanks for taking my question. So Intuitive has now shown two years of strong U.S. urology growth. Can you discuss the reason for this outperformance in urology and how sustainable you think this strong performance is in 2016?
Yes. Brandon, thanks for the question. A year ago, you saw a turnaround in the volumes of da Vinci prostatectomy in the U.S. kind of at the midpoint of the year and the back half of the year started to see some growth and that's sustained throughout 2015. And the rate of growth has been certainly above what we believe the incidence rates of prostrate cancer to be in the country. And also within U.S. urology is growth in partial nephrectomy as well which has been pretty consistent and sustained given the profile of what da Vinci technology brings to that procedure from both clinical outcomes and cost effectiveness perspective. As we look at 2016, our baseline assumption is that the high levels of growth that we have seen over the last six quarters are likely to begin returning more towards the incidence rates of the disease.
Okay. And then one quick question on Sp. Can you talk about why you decided to develop Sp as essentially an add-on to Xi platform and not as it's own standalone platform? And then maybe also talk about your expectations for Sp instrumentation and launch? Do you anticipate having a vessel sealer and a stapler at launch that will work with Sp? Thanks.
Yes. On the reason to make it compatible with Xi, I think is really a straightforward thing which is, a lot of the components are shared in terms of surgeon's console and imaging systems. We want customer experience to be seamless for our customers. We think there are surgeons who will go back and forth between Sp and Xi and what that means is that you want the user experience to be common. We also make it easier for hospital departments to acquire capital. If they already have a dual console or an Xi and they want to just add Sp card capability that makes the capital hurdle for them lower. And so it strengthens the Xi ecosystem and I think that is a good idea and it is well received. So that has made sense for us. We haven't yet announced what our instrument kit will be for Sp and when we get to that point, we will let you know.
Okay. Thank you.
And we do have a question from the line of Richard Newitter with Leerink Partners. Please go ahead.
Hi. Thanks for taking the questions. Maybe just one on Sp and then I had one on the rotating bed. On Sp, Gary did you say that you are moving into clinical testing or some sort of limited launch by the end of this year? Does that mean that's your official launch at the end of 2016?
We don't expect material revenues in 2016. We are planning on clinical experiences in 2016.
Okay. Got it. And then on Sp, on the approval process, I know you said that it's in discussion with the FDA right now. There is a competitor of yours that has a device that they are saying that they think they can get approval for their device based on larger buckets or broader definitions of categories like urological procedures or general abdominal procedures. Can you help us understand if this is something that you have heard the FDA say to you as well? Or is it more nuanced than that and you need to go much more specific by individual procedures?
Yes. So the issue of broad claim language versus narrower claim language actually was a part of the discussion at the FDA workshop and I can refer you to those minutes and you will see pretty much what the exchange has been. The issue I would not view that as something that's architecture dependent or only offered to a certain company. That has to do -- and FDA is going to respond to these kind of products in like manner as far as I can tell and so that comes down to -- FDA asked for a certain amount of data based on the kind of things you want to talk to your customer about. And if you just want to talk about broad things and not specific things, then they asked for one set of data and the more specific you get, the more data they ask for around that set of specifics. So in general, it's a matching of data requirements with claims. And so they are describing to you a strategy around what they think they can do from a data requirement point of view. I think the playing field will be leveled here and to the extent that customers need a certain amount of information, then it's just going to be for all of us to go create that data and deliver it.
Got it. And just lastly on the bed. Can you help us understand what procedures, if any or certain types of surgeons that might have been on the sidelines for whom this product might push them over the fence and really drive adoption into procedures that otherwise might have been slower to adopt? Is there any specific procedures that could really open up? Thanks.
Yes. General surgeons routinely use that motion to do two things, to use gravity as a retractor. So it's an extra hand using gravity and for the anesthesiologist who manage the patient in terms of positioning with regard to other vital signs and things like that. So in procedures where you are trying to manage bowel for example, it is really helpful to have table motion and that is clearly something that jumps out. However once we have had it, we have now been CE marked in Europe and we have had a trial in different specialties, I think it's appeal is broad. So we thought about it upfront initially around general surgery. I think its appeal will be broader than that.
And we do have a question from the line of Rick Wise with Stifel Nicolaus. Please go ahead.
Rick, you will be our last questioner.
Okay. Thank you. I appreciate it, Gary. Maybe just to start with you Gary, you said several times in the course of your prepared remarks and then the Q&A that robotics is in its infancy. Just a big picture for a second, are you emphasizing it because perhaps this next wave of pipeline products that you have talked about and maybe some you haven't talked about are getting you more confident or excited about the potential for another growth reacceleration or an inflection point in the adoption of robotic surgery. I appreciate the number of systems placed relative to hospitals is small but just wondered if there was anything more there.
Sure. I think a couple of things that excites me and leads me to believe there is a lot of opportunity, couple. One of them is that I think in the architectures we are in today in the markets for which we have clearances, there is still a lot of procedures that are being done open and have opportunity to be done minimally invasively with our products. And I think that comes down to execution and delivery of some of things we have in the pipeline.
Having said that, I think that as you just stand back and look out over the next decade and ask, do we think that robotic assisted surgery can impact more procedures or more types of procedures than they are being impacted today, I think the answer to that is, absolutely yes. Some things are things like Sp, products that look different. Sp won't be the last set of products that look different. We think there are opportunities for other products and technologies that can really make a difference in surgeons delivering great care.
And so we are excited about it. And we are investing in it and I think ask just about any surgeon, do you think that the use of computation analytics and robotics is going to improve your practice over time or become less important, the answered is pretty uniform that those kinds of technologies should help them if they are well delivered and well executed.
Got you. Two last quick ones I will ask at the same time. Estimating accessories growth, I think for the first time in at least five quarters, maybe longer, certainty since 2012 annually did grow faster than procedures. Is there something that we should read into that with implications on next couple of years? Or is it just stocking, given the flattish revenues per procedure? And the second one I will throw at you at the same time, the bed approval. You launched it in Europe in 2015. Just maybe get your early experience there. Did it drive utilization or procedures or Xi or capital sales? Any color there would be welcome. Thanks. I appreciate it.
Yes. On the revenue per procedure, I don't think that's much more than what we said. There is a lot of factors that impact that particular metric. It has been running at a pretty tight range, $1,830 to $1,840. It did tick over to a growth this last quarter as we saw utilization of advanced instruments kind of more than offset some of the headwinds mostly from exchange. But again, I think a lot of those factors could vary in the future in terms of procedure mix, customer efficiency, buying pattern, foreign exchange. So it's really a lot of factors there.
On Xi, the surgeon feedback has been outstanding. Too soon to tell in terms of number of sites and duration as to what the changes in trends are, but we will be watching. Thanks, Rick.
That was our last question. As we have said previously, while we focus on financial metrics such as revenues, profits and cash flow during the conference call, our organizational focus remains on increasing value by enabling surgeons to improve surgical outcomes and reduce surgical trauma.
I hope the following comments from Dr. Solomon, a general surgeon from Orlando, Florida gives you some sense of the impact our products have in surgery. "The advanced technologies and improved dexterity of the da Vinci Xi system have allowed me to perform complex minimally invasive operations with a statistically measurable improvement in outcomes. Our patients are clearly and reproducibly benefiting from less pain, a shorter length of hospital stay, less time off work and lower short and long-term complications."
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. Thank you for your participation and we look forward to talking to you again in three months.
And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using the AT&T Executive TeleConference Service. You may now disconnect.
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