ISRG - NASDAQ

Thank you everyone for standing by and welcome to the Intuitive Second Quarter 2024 Earnings Release. [Operator Instructions] As a reminder, today's call is being recorded. I will now turn the call over to your host, Head of Investor Relations, Brian King. Please go ahead.

Good afternoon and welcome to Intuitive second quarter earnings conference call. With me today we have Gary Guthart, our CEO; Dave Rosa, our President; and Jamie Samath, our CFO. Before we begin, I would like to inform you that comments mentioned on today's call may be deemed to contain forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in our Securities and Exchange Commission filings, including our most recent Form 10-K for the fiscal year ended December 31, 2023 and subsequent filings. Our SEC filings can be found through our website or at the SEC's website. Investors are cautioned not to place undue reliance on such forward-looking statements. Please note that this conference call will be available for audio replay on our website at intuitive.com, on the Events section under our Investor Relations page. Today's press release and supplementary financial data tables have been posted to our website. Today's format will consist of providing you with highlights of our second quarter results, as described in our press release announced earlier today, followed by a question-and-answer session. Gary will introduce the call and provide an organization update. Dave will present the quarter's business and operational highlights. Jamie will provide a review of our financial results. Then I will discuss procedure and clinical highlights and provide our updated financial outlook for 2024. And finally, we will host a question-and-answer session. With that, I will turn it over to Gary.

Thank you for joining us today. The fundamentals of our business were healthy in the quarter, with solid procedure growth and strong capital placements resulting in healthy financial performance. In the quarter, we made good progress with all three of our system platforms, including taking our measured rollout of da Vinci 5 to our next phase, continuing to stabilize Ion supply in support of customer expansion and expanding da Vinci SP installs in Europe, while supporting SP procedure growth across regions. Some multi-port procedure headwinds continued from last quarter and we will describe these later on the call. Before turning the time over to Dave, I'd like to thank Marshall Mohr, our prior CFO and our outgoing Head of Global Business Services. Marshall will be taking his skills to pursuits outside of Intuitive in September this year, as he approaches his next endeavor. I thank him on behalf of all of us for his outstanding stewardship at Intuitive for the past 18 years. We are pleased to announce that in addition to his role as CFO, Jamie will expand his responsibilities to leading our information technology and global facilities teams. I'll now turn the time over to Dave, who will take you through commercial and operational highlights in greater detail.

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

Good afternoon. I will describe the highlights of our performance on a non-GAAP or pro forma basis and we'll also summarize our GAAP performance later in my prepared remarks. A reconciliation between our pro forma and GAAP results is posted on our website. Q2 da Vinci procedures grew 17%. The installed base of systems grew 14% to just over 9200 systems and average system utilization increased by 2%, lower than long-term historical averages, reflecting procedure strength in Q2 last year, as a result of patient backlogs U.S. procedures grew 14%, driven by growth in general surgery. Bariatric procedures in the U.S. declined in the mid-single digit range. OUS procedures grew 22%, reflecting strong growth in general surgery, gynecology and thoracic procedures. With respect to capital performance, we placed 341 systems in the second quarter, compared to 331 systems in Q2 of last year. In the U.S., we placed 149 systems in Q2, compared to 157 systems placed last year, reflecting in part lower trade ins. U.S. system placements in Q2 included 70 da Vinci 5 placements. Given a planned hardware and software update to da Vinci 5 in the second half of this year and continued focus on maturing, manufacturing and expanding capacity, we expect that da Vinci 5 placements will be constrained through the first half of 2025. Outside the U.S., we placed 192 systems in quarter two compared with 174 systems last year. Current quarter system placements included 71 into Europe, 41 into Japan and 14 into China, compared with 76 into Europe, 33 into Japan and 16 into China in Q2 of last year. We also saw relatively strong placements in India, as well as markets served by our distributors, including Australia. Placements in Europe reflect health system budget constraints, as several European governments are resetting capital spending post pandemic. Second quarter revenue was $2.2 billion, an increase of 14% from last year. On a constant currency basis, revenue growth was 15%. Additional revenue statistics and trends are as follows. Leasing represented 51% of Q2 placements, relatively consistent with recent trends. However, given customer preference for our usage based models in the U.S. and the launch of da Vinci 5, we continue to expect the proportion of systems placed under lease arrangements to grow over time. Q2 system average selling prices were $1.44 million as compared to $1.39 million last year. Higher year-over-year system ASPs reflected a higher mix of da Vinci 5 and lower trade ins, partially offset by a higher mix of system placements in Japan with a weaker Yen exchange rate and lower pricing in China. In Q2 of 2023, trade-ins represented 18% of total system placements as compared to 6% in Q2 of 2024. We recognized $28 million of lease buyout revenue in quarter two, compared with $29 million last quarter and $12 million last year. da Vinci instrument and accessory revenue per procedure was approximately $1,800, an increase of approximately $20 compared to last quarter. The sequential increase in I&A per procedure is primarily a result of customer ordering patterns in the U.S. Turning to our Ion platform, procedures grew 82% to approximately 23,200 procedures in the second quarter. During the quarter, we placed 74 Ion systems compared to 59 last year and 70 last quarter. During Q2, we caught up with the remaining backlog of system placements as supply of catheters and vision probes continued to improve. The in store base of Ion systems increased 56% year-over-year to 678 systems, of which 275 are under operating lease arrangements. Second quarter SP procedure growth accelerated to 74%, with strong growth in Korea and the U.S. and early stage growth in Japan and Europe. 21 of the systems placed in the quarter were SP systems, including ten systems placed in Europe. The SP installed base grew 56% from the year ago quarter to 222 systems. Moving on to the rest of the P&L. Pro forma gross margin for the second quarter of 2024 was ahead of our expectations at 70%, compared with 68.5% for the second quarter of 2023 and 67.6% last quarter. Second quarter pro forma gross margin reflected certain one-time benefits that we do not expect to recur. Excluding these one-time benefits, pro forma gross margin would have been 69.5%. The sequential improvement in pro forma gross margin primarily reflects lower inventory reserves, cost reductions in certain purchase components, lower freight rates and leverage of fixed overhead. In accordance with our plans, product margins for our Ion and SP platforms improved in the quarter and will remain a focus for our business unit and manufacturing teams over the medium term. As a reminder, given recent and ongoing capital investments, we expect increased depreciation expense in the second half and a significant increase in depreciation expense starting in Q1 of 2025. Second quarter pro forma operating expenses increased 11% compared with last year, reflecting the ongoing benefit of planned leverage in enabling functions. We continue to prioritize investments in R&D to fund innovation and future growth. During the quarter, we added approximately 550 employees, of which roughly half were in our manufacturing operations to support growth in customer demand. Pro forma other income was $79.4 million for Q2, higher than $72.5 million in the prior quarter, primarily due to higher interest income. Our pro forma effective tax rate for the second quarter was 22.5%, consistent with our expectations. Second quarter 2024 pro forma net income was $641 million or $1.78 per share, compared with $507 million or $1.42 per share for the second quarter of last year. I will now summarize our GAAP results. GAAP net income was $527 million or $1.46 per share for the second quarter of 2024, compared with GAAP net income of $421 million or $1.18 per share for the second quarter of 2023. The adjustments between pro forma and GAAP net income are outlined and quantified on our website and include excess tax benefits associated with employee equity plans, employee stock based compensation, amortization of intangibles, litigation charges and gains and losses on strategic investments. We ended the quarter with cash and investments of $7.7 billion, higher than the $7.3 billion we ended last quarter. The sequential increase in cash and investments reflected cash generated from operating activities, partially offset by capital expenditures of $309 million. And with that, I would like to turn it over to Brian.

Thank you, Jamie. Overall, second quarter procedure growth was 17% compared to 22% for the second quarter of 2023 and 16% last quarter. In the U.S., second quarter 2024 procedure growth was 14% compared to 19% for the second quarter of 2023 and 14% last quarter. Second quarter growth was led by procedures within general surgery, with strength in cholecystectomy and foregut procedures and also thoracic procedures. Bariatric procedure growth declined in the mid-single digit range. Outside of the U.S., second quarter procedure volume grew 22%, compared with 28% for the second quarter of 2023 and 20% last quarter. Growth was led by non-urology procedures with strength in colon resection, hysterectomy and lung resection procedures. In Europe, second quarter growth continued to be led by procedures beyond urology, primarily from general surgery and gynecology procedure categories. Germany, the U.K. and Italy procedure performance led the region with each experiencing strong growth in colon and rectal resection, hysterectomy and other general surgery procedures. In Asia, growth in the second quarter was led by Japan and India, while growth in China was stressed and Korea procedure growth continued to be impacted by physician strikes. In Japan, overall procedure growth was solid with continued strength in colon and rectal resection, gynecology and lung resection procedures. In India, while still in the early stage of adoption, we saw strength in gynecology and general surgery procedures, particularly with growth in hysterectomy, cholecystectomy, and hernia repair. China procedure growth was lower than prior period averages when compared to the same quarter a year ago, which experienced a recovery in procedures impacted by COVID. System utilization remained strong, while capital placements continue to be impacted by delayed tenders and emerging domestic robotic systems. Now turning to the clinical side of our business. Each quarter on these calls, we highlight certain recently published studies that we deem to be notable. However, to gain a more complete understanding of the body of evidence, we encourage all stakeholders to thoroughly review the extensive detail of scientific studies that have been published over the years. Earlier this year, Dr.

Thank you. [Operator Instructions] First question is from the line of Larry Biegelsen, Wells Fargo. Please go ahead.

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

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

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

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

Thanks for taking the questions, guys.

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

Hi, congrats on the good quarter. I wanted to maybe if there's any way you can help us understand the kind of the demand side of the dV 5 equation? I know we're in a constrained rollout, but 47% of the placements in the U.S. were dV 5 this quarter. And I don't know if there's any way to kind of rank order some of the factors you need to mark off and check off the list to kind of get the full launch, had the software hardware upgrade, but assume there's some other variables to consider as well.

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

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

That's helpful. And Jamie, maybe on the gross margin side, very strong and only one time was 50 basis points, it was kind of under the pressure, maybe initially, gross margins would be a little lighter with dV 5. Just can you elaborate on the strength and margin this quarter?

Yes, I would just say that, we kind of describe from a sequential basis what drove the improvement quarter-on-quarter. It was lower inventory reserves. Our teams did an outstanding job with respect to component cost performance with our suppliers and in the logistics area. And that kind of came in earlier than we expected. Those are a set of teams that for a couple of years had been working on supply because of COVID and the pandemic. And what happened in terms of supply constraints and those teams in more recent periods have refocused on cost reductions. And we saw that come in early and so we were really pleased to see that. And so great performance in the quarter. You saw us improve the guidance for the year. I would say if we -- as we look at the second half, you will see increased depreciation, as I described. You will see a high proportion of the revenue be new products, da Vinci 5 and Ion and SP. In Q2, all of the 70 da Vinci 5 placements, only 11 of them were purchase arrangement. So kind of a muted effect in terms of gross margin in the quarter. The other placements are operating leases, where you see the economics play out over time.

Great. Thanks a lot.

Okay, we'll go to the next line Robbie Marcus, JPMorgan. Please go ahead.

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

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

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

Yes. So, Gary, in all of my discussions and with the team, surgeons prefer the use of da Vinci 5 for the reasons we talked about.

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

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

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

Thank you very much.

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

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

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

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

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

Great. Thank you very much.

And we'll go to the next line. And that will be the line of Rick Wise, Stifel. Please go ahead.

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

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

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

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

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

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

Yes. Gary, if I could just one follow-up. The question I have gotten, I think, most frequently post the launch of DV5 is what new procedure - what new incremental TAM will da Vinci 5 unlock? I had the privilege of interviewing Dave, who might be near at hand today, that question at SRS. And I said the way da Vinci 5 unlock the general surgery TAM, what will da Vinci 5 unlock and Dave very eloquently said it's going to unlock the routine use of robotic surgery every day. Do you agree with Dave? And is that are your customers understanding that vision, or getting that that's what you're aiming at just any reaction to those thoughts, I'd appreciate it? Thank you, Dave.

You're welcome, Rick.

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

Thank you.

Okay. We'll go to next line. Drew Ranieri, Morgan Stanley. Please go ahead.

Hi, thanks for taking the questions. Maybe just something that we also heard from SRS was that the DV - da Vinci Xi is still very well considered in the field and there are surgeons that still want to get their hands on it. So just can you talk a little bit more about some of the underlying demand for Xi in the U.S.? And Jamie, I think you pointed out too, that you kind of expect DV5 to sequentially improve throughout the year. So maybe just talk to us about what that means for Xi, given that you're having broader conversations with hospital administrators and surgeons as they're thinking about building capacity for robotic surgery?

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

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

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

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

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

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

Highly good color, Dave. Thank you for that and for the follow-up. Wanted to ask about SP. Congrats on the thoracic indication. I'm curious how much you think that expands the opportunity for SP here in the states. I know you're also working on cold erectile, so curious if you have timelines there? And then together, does that kind of give you the indication base to push SP more aggressively in the U.S.? Thanks for taking the questions.

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

Yes, happy to. I was just asking about colorectal timing. I think you have the IDE study that's ongoing. And I think that will be your fourth indication once the colorectal indication is in hand. So does that kind of give you critical mass from an indication standpoint to kind of push more aggressively with SP in the U.S?

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

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

Okay. That will be from the line Richard Newitter, Truist Securities. Please go ahead.

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

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

Thanks. In fact, if I could just maybe -- okay...

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