Intuitive Surgical, Inc. (ISRG) Q2 2008 Earnings Report, Transcript and Summary

Good afternoon and welcome and thank you for standing by. At this time, all participants are in a listen-only mode. [Operator Instructions]. This conference is being recorded. If you have any objections, you may disconnect at this time. I'd now like to introduce you to speaker for today's call Mr. Ben Gong, Vice President of Finance. Sir, you may begin.

Good afternoon and welcome to Intuitive Surgical's second quarter conference call. With me today, we have Lonnie Smith, our Chairman and CEO; Gary Guthart, our President and Chief Operating Officer; Marshall Mohr, our Chief Financial Officer; and Aleks Cukic, our Vice President of Business Development and Strategic Planning. 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. Respective 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 has been posted to our website. Today's format will consist of providing you with highlights of our second quarter, as described in our press release announced earlier today, followed by a question and answer session. First, Lonnie will present the quarter's business highlights. Marshall will follow with a review of our second quarter's financial results. Next, Aleks will discuss sales and marketing highlights, then I'll provide an update to our financial forecast for 2008 and finally, we will host a question-and-answer session. With that, I'd like to introduce Lonnie Smith, our Chairman and CEO.

Thank you for joining us today. This past quarter, we continued to drive and broaden the adoption of robotically-assisted surgery resulting in significant top and bottom line growth. Operating highlights for the second quarter is as follows. We sold 85 da Vinci Surgical Systems, up from 56 sold during the second quarter of last year. 24 of the systems sold were to existing customers. Our international team contributed 19 of 85 systems sold, up from 13 last year. We ended the second quarter with 946 da Vinci Surgical Systems installed worldwide. Procedured adoption, it continues to be procedure specific, patient driven and the primary growth driver of our business. We had a solid quarter-over-quarter procedure growth in all significant specialties again led by GYN. Based upon our numbers, da Vinci Prostatectomy has now become the number one treatment for prostate cancer in the United States. Among our fastest growing procedures in terms of percent, sequential quarter-to-quarter growth were Nephrectomy and partial nephrectomy for kidney cancer, radical cystectomy for bladder cancer, hysterectomy, myomectomy and sacral colpopexy. Total revenue grew to $219 million, up 56% from last year, Instrument and accessory revenue increased to $74 million, up 61%. Total recurring revenue including service grew to $103 million, up 56% from the prior year comprising 47% of total revenue. We generated an operating profit of $98 million, 45% of revenue before non-cash 123R stock option expense, up 80% from the second quarter of last year. GAAP net income grew to $51 million, 23% of revenue, up 67% from last year. We ended the quarter with $740 million in cash and investments, up $40 million from the last quarter and up $292 million in the last 12 months. After subtracting $8 million in cash received for an exercise of stock options, and adding back $54 million invested in fixed assets, purchased intellectual property, and working capital during the quarter, our gross operating cash flow in the second quarter amounted to 168% of our reported GAAP net income. Our new instrument plant in Mexicali, Mexico came on line, where production in Q2 and Q3 and we grew our Intuitive team by 76 members to 935. With that, I will pass the time over to Marshall Mohr, our Chief Financial Officer.

Thank you, Lonnie. Total second quarter revenue of $219.2 million increased 56% compared with $140.2 million for the second quarter of 2007, and increased 16% compared with $188.2 million for the first quarter of 2008. Second quarter revenues by product category were as follows. Instrument and accessory revenue increased to $73.6 million, up 61% compared with $45.8 million last year, and 19% compared with $61.9 million last quarter. The growth rate in instruments and accessories is comparable to the direct result of our procedure growth rates. The amount of instrument and accessory revenue we earn per procedure remained relatively unchanged between $1,500 and $2,000 per procedure for established da Vinci accounts, and $2,000 to $2,300 per procedure if you include initial stocking orders. Systems revenue of $116.1 million increased 57% compared with $74.1 million last year and increased 17% compared with $99.1 million last quarter. The increase in systems revenue compared with the first quarter of 2008 reflects increased unit sales as well as an increase in the average revenue per system. Second quarter da Vinci Surgical System revenue reflects the sale of 85 systems compared with 56 systems sold during the second quarter of last year, and 74 systems sold in the first quarter. 70 of the systems sold in the quarter were our latest S model, incorporating high definition vision capability. Seven were four-arm S models incorporating standard vision capabilities, four were three-arm S models and four were refurbished standard systems. 19 of the systems sales were outside of the United States compared with 20 in the first quarter. Six of the systems sales in the quarter included trading. Our second quarter average revenue per system including all da Vinci models but excluding upgrades was $1.35 million, which is $30,000 more than the average revenue per system in the first quarter of 2008. The higher average revenue per system primarily reflects a favorable geographic mix, and to a lesser extent the higher proportions of our sales being direct sales to European customers which are denominated in euros. Upgrades, including fourth arms and HD accounted for $1.5 million of the current quarter systems revenue compared with $1.6 million last quarter. Service revenue increased to $29.4 million, up 44% compared with $20.4 million last year and up 8% compared with $27.2 million last quarter. The growth in service revenue is primarily driven by a larger system installed base. Total second quarter recurring revenue comprise of instrument, accessory and service revenue increased to $103 million, up 56% compared with the second quarter of 2007 and up 16% compared with the first quarter of 2008. Recurring revenue represented 47% of the total revenue in both the second and first quarters of 2008. Revenue outside the United States represented 20% of total second quarter revenue compared with 23% in the first quarter, reflecting higher revenue growth in the U.S. relative to outside the U.S. Our second quarter 2008 gross margin of 71.2% is higher than the 69% realized in the first quarter, reflecting higher average selling prices per system, reduced cost associated with certain system components and increased absorption. Operating costs included initial start-up costs for Mexico, which began production in July. In the current year, these start-up costs will be more than offset by the otherwise lower costs, but will be... will more than offset the otherwise lower cost of production in Mexico. Total operating expenses for the second quarter of 2008 were $77.9 million compared with $64.9 million in the first quarter of 2008. Sequential operating expense increase of $13 million reflects non-cash 123R stock compensation of $4.5 million. Increased commissions on increased revenue, cost associated with increased headcount and cost associated with increased R&D activities. We added 76 employees during the second quarter, ending the period with 935 regular employees. The majority of the additions were to our worldwide manufacturing and sales and support organizations. Second quarter 2008 operating income was $78.2 million or 35.7% of sales compared with $64.9 million or 34.5% of sales for the first quarter of 2008. Second quarter operating income included $19.7 million of 123R stock compensation expense compared with $14.6 million in the first quarter. The increase of $5.1 million reflects the fourth quarter impact of our annual stock grant made on February 15th, compared to a partial impact in the first quarter. Our second quarter 2008 other income was $5.7 million, which is significantly lower than the $8.5 million realized in the first quarter, reflecting lower interest rates on our investment portfolio. Our effective tax rate for the second quarter was 39%, which is consistent with our tax rate in the first quarter. We continue to utilize carry forward tax benefits and employees stock related tax benefits in 2008 and expect our cash outlay for income taxes will be approximately 20% of pre-tax income for 2008. Our net income of $51.2 million or $1.28 per share increased 67% compared with $30.7 million or $0.79 per share for the second quarter of 2007, and increased 14% compared with $44.8 million or $1.12 per share for the first quarter of 2008. Let me quickly summarize our results for the first six months of 2008. Total revenue for the first six months of 2008 was $407.4 million, up 60% compared with $254.5 million last year. Operating income for the first six months of 2008 was $143.1 million, up 80% compared with $79.4 million last year. Operating income included $34.3 million of stock-based compensation charges in the first six months of 2008 compared with $17.5 million in 2007. Net income for the first six months of 2008 was $96 million or $2.40 per share, up 76% compared with $54.5 million or $1.41 per share last year. Now, turning your attention to the balance sheet. We ended the second quarter of 2008 with cash, cash equivalents and investments of $740 million, up $40 million from March 31st, 2008. $8.3 million of the cash generated in the quarter was associated with stock purchase activities. The remaining cash generated is primarily related to operating activities. The $40 million is net of $45.1 million of capital expenditures, which included $17.4 million associated with the purchase of property in Sunnyvale, where we are building a new 154,000 square foot manufacturing and engineering building. $20 million associated with the purchase of intellectual property rights and expenditures associated with facilities improvements and information technology infrastructure to support our growth. Our accounts receivable balance increased to $162.1 million at June 30 compared with $135.7 million at March 31st, 2008. The change in receivables reflects higher revenue in the second quarter and the timing of customer purchases relative to our quarter cut-off. Our net inventory increased to $42.6 million at June 30 compared with $38.8 million at March 31, 2008. Our inventory turns at June 30, 2008 of 5.7 time, was comparable to the 5.8 turns at the end of the previous quarter. And with that, I'd like to turn it over to Aleks who will go over our sales. Aleks?

Thank you, Marshall. During the second quarter, we sold 85 da Vinci systems; 66 in the United States, 14 in Europe and five in rest of world markets. A total of 6 systems were part of sales, trading transactions. The net 79 new system installs brings to 946, the cumulative number of da Vinci systems worldwide; 710 in the U.S., 159 in Europe and 77 in rest of world markets. 18 of the 79 net systems installed during the quarter represented repeat systems sales to existing customers, which brings to 110 the total number of customers which own 2 or more da Vinci systems. 70 of the 85 total system sold were da Vinci S HD systems. Internationally, we had another solid quarter, which included 3 more da Vinci placements into Switzerland, 2 into Sweden and our first da Vinci placements into the countries of Argentina, Cyprus and Qatar. Additionally, we were notified by the State Food and Drug Administration in the Peoples Republic of China that da Vinci S has been granted regulatory clearance which allows us to begin marketing the S system throughout China. Clinically, we had an excellent quarter, a quarter in which we experienced strong sequential procedure growth within all of our targeted surgical specialties both in the U.S. and internationally. And for the first time, our overall gynecologic procedure business registered both the largest sequential percentage growth as well as the largest absolute procedure growth for the quarter. This growth was led by da Vinci Hysterectomy and sacral colpopexy. Our urology business showed solid growth, exceptionally so with in our Kidney and Bladder business mainly da Vinci Nephrectomy and partial nephrectomy and da Vinci Cystectomy. We also saw solid growth within our dVP business, particularly so internationally. Our da Vinci cardiac revascularization and Mitral Valve Repair business were also strong. In Q2, there are approximately 100 da Vinci related clinical papers published within various peer reviewed Journals throughout several surgical specialties. In addition, there were multiple scientific abstracts, clinical posters and podium presentations delivered within the various conferences we attended. The annual American Urology Association conference or AUA took place in May and was attended by nearly 13,000 urologists from around the world. da Vinci's imprint on the AUA has grown over the years to the point where dVP is now the most popular treatment for men with Prostate Cancer in the United States, and arguably, it's the most enabling product used within all urologic cancers, prostate, kidney, and bladder. At the AUA conference, 76 da Vinci presentations, abstracts, and posters were featured, 40 of which were focused on dVP alone, the remaining 36 reported on da Vinci Nephrectomy and partial nephrectomy, cystectomy, pyeloplasty as well as sacral colpopexy for Uro/GYN conditions. In parallel with these presentations were five AUA da Vinci post graduate or instructional courses, a pre-AUA advanced robotics course, a da Vinci satellites symposium and an international robotics cystectomy consortium program. Two of our fastest growing procedures are da Vinci Partial Nephrectomy and da Vinci Cystectomy. Though they are relatively new opportunities, multiple presentations focused on these complex cancer procedures. Due to the technical challenges, traditional laparoscopic approaches within these procedures are rarely performed, therefore the gold standard remains open surgery. The group headed by Dr. Raul O. Parra from Coopers Medical Center in New Jersey presented their initial 20 patients comparing da Vinci Partial Nephrectomy to open Nephrectomy. The author's introduction was as follows and Laparoscopic partial nephrectomy requires experience and a lengthy learning curve to successfully accomplish tumor excision. The advent of robotic assisted laparoscopic surgery has proven successful in Prostate Cancer surgery, encouraging a growing number of centers in adapting this technology in complex renal surgery. The study compared blood loss, operating time, pathologic outcomes and length of hospitalization. In their results, they reported that over time was a bit longer in their initial da Vinci cases, but their blood loss was reduced by over 50% and hospitalization was reduced by 43% with similar pathologic results. It's important to note that these were the group's initial cases, learning curve cases, but through their learning curve, they showed strong clinical results. Two of the cystectomy presentations at AUA caught our attention and both were by Dr. Doug Scherr and his group out of Cornell University Hospital in New York. The first study prospectively compared perioperative and pathologic outcomes in 70 consecutive patients undergoing open radical cystectomy and da Vinci Cystectomy. The study compared operating time, blood loss, transfusion rates, length of hospitalization, and cancer outcomes. The authors had this to say about their results. Our initial experience with robotic cystectomy suggests potential advantages compared to standard open approach, although operative duration was greater in the robotic group. Blood loss, transfusion requirement, and hospital stay were all decreased compared to the open cohort. The robotic method also demonstrated comparable early pathologic outcomes. Their second prospective study measured cost differences, both direct and indirect between open cystectomy and da Vinci Cystectomy. Their study compared cost within three distinct urinary diversion procedures. First, a cystectomy with an ileal conduit; second, a cystectomy with an Indiana pouch; and third, a cystectomy ileal neobladder. Despite the increased materials cost, da Vinci Cystectomy was shown to be less expensive than the open cystectomy across all three groups. The da Vinci ileal neobladder procedures registered an 8% cost savings, compared to open. da Vinci Indiana pouch, a 32% savings. And for da Vinci ileal conduits, a 42% cost savings. The largest cost driver in the study was hospital length of stay, where da Vinci patients systematically demonstrated shorter length of stay compared to open patients. The author's conclusion, and I quote Robotics cystectomy appears to be more cost efficient than open cystectomy as a treatment for muscle invasive bladder cancer at a high volume tertiary care referral center despite an increase in materials cost. The cost benefit obtained from reduced length of stay with Robotics cystectomy is significant. On June 26th and 27th, the first worldwide robotic renal symposium was held at Washington University, in St. Louis. 115 surgeons from around the world attended this first ever event exclusively devoted to da Vinci renal surgery. The course was dedicated to offering practical techniques to enable surgeons to incorporate da Vinci renal surgery, into their practice, and included lectures and cases on a wide range of renal applications for robotics in radical nephrectomy, partial nephrectomy, pyeloplasty and adrenalectomy. The course featured four complete live surgery broadcast and during one of them Dr. Sam Biani [ph], the course director performed a da Vinci Partial Nephrectomy with one ischemic time of only 13 minutes. The patient left the hospital in two days and reported to have gone dancing one week later, and also reported to have used no pain medication once sent home. On the advantages of da Vinci renal surgery, Dr. Sam Biani [ph] had this to say, and I quote robotic renal surgery offers so many advantages over open and laparoscopic approaches. We are able to do more complex surgery and with fewer side effects such as shorter ischemic times and quicker return to normal activity. It is a revolution. As many of you know sacral colpopexy is a procedure performed by gynecologists, uro-gynecologist, and urologist to correct vaginal vault prolapse. The condition is very common and the gold standard corrective procedure is an open sacral colpopexy. The group out of the Mayo Clinic Rochester led by Doctors Chow and Siddique [ph] presented data on their first 42 da Vinci patients; 35 patients in their study had a minimum of a 12 month follow up with a mean follow up period of 36 months. All but one of their patients were released on post operative day one and one was released on post op day two. This compares very favorably to the open sacral colpopexy published by Richard which suggest a two to three day hospitalization. More important than hospitalization is procedure durability, which is one of the reasons that traditional laparoscopy is infrequently performed. The Mayo series show that the da Vinci Sacral Colpopexy is not only less invasive, but also highly durable. The author summarized by saying and I quote The robotic assisted laparoscopic sacral colpopexy is a minimally invasive technique for vaginal vault prolapse repair combining advantages of open sacral colpopexy with the decreased morbidity of laparoscopy. We found a decreased hospital stay, low complication rates, and high patient satisfaction with a minimum of one year follow up. But most importantly, the long term results of the robotic repair mirror those of the open repair with significantly less morbidity. In last month's edition of the Journal of Minimally Invasive Gynecology doctors Payne and Daugherty [ph] from the Ochsner Clinic published a study comparing outcomes of total laparoscopic Hysterectomy to da Vinci Hysterectomy or dVH for benign conditions. The construct was a 200 consecutive patient retrospective analysis of their 100 most recent Hysterectomies prior to establishing the robotics program compared to their first 100 hysterectomies following the establishment of their robotics program. I would reference Dr. Payne and Dr. Daugherty's [ph] work in the past, but until now it had not been published within a leading clinical journal. There is seven page paper details of very key findings. For example, the number of patients that required an exploratory laparotomy with a total abdominal hysterectomy was 11 in the pre-robotic cohort and zero in the da Vinci cohort. These 11 were patients that upon initial review could not be treated either laparoscopically or vaginally. This resulted in an exploratory laparotomy and subsequent abdominal hysterectomy. There were zero similar events within the da Vinci cohort. In addition, intra-operative conversation were significantly reduced, 9% laparoscopically, 4% with da Vinci. Worth noting is the size of the uterus within the conversions. In the 20 laparoscopic conversions, the average uterus weighed 359 grams, whereas the four da Vinci conversions had average uterine weights of 1387 grams, a pretty significant difference. The authors offered a number of perspectives in their study that supported the following findings. A significant decreased exists in operative time with surgeons and teams experienced with robotic cases. A two-fold decrease in blood loss exists among robotic hysterectomies compared to laparoscopic hysterectomies. After implementation of a robotics program, hospitals may... hospitals stay may be shortened by half a day. They went on to say and I quote this difference may seem trivial, but when we one looks at the overall exploratory rate combined with intra-operative conversion rate in the pre-robotic cohort, it is five fold higher than the robotic cohort. Also the average hospital stay for an abdominal hysterectomy is two to three days with an associated recovery time of six to eight weeks. When one considers the 600,000 hysterectomies performed in United States, up to 63% of these cases are done as total abdominal hysterectomies. The societal impact of virtually eliminating the abdominal approach translates into an annual reduction of 800,000 inpatient hospital stays. Additional benefits would include a decrease in hospital complications This is certainly a long and large... a long term and a large view, but it is a view driven by the results within their own practice, which speaks to why a da Vinci Hysterectomy adoption is growing at such a rapid rate. This concludes my overview and I'll turn the time over to Ben.

Thank you, Aleks. I will be providing our updated 2008 financial forecast on a GAAP reporting basis including non-cash FAS 123R stock compensation expenses. I will also provide an estimate of our stock compensation charges separately, so you can calculate meaningful comparisons and exclude these non-cash expenses. Based on our second quarter results, we are increasing our previous guidance for revenue and profits for 2008. Starting with procedures, we are seeing higher growth rates across number and different procedures, and we expect our total procedures to grow 57% to 58% this year, up from our pervious forecast of 55% growth. da Vinci Hysterectomy continues to be one of our fastest growing procedures and we continue to expect this procedure to grow at least 150% this year from a base of approximately 13,000 procedures perform last year. da Vinci Prostatectomy has continued to grow strong, but it has been growing less than our previous forecast of 40%. We now expect our dVP procedures to grow between 35% and 39% this year from a base of approximately 55,000 procedures performed last year. At the same time, our newer emerging procedures such as nephrectomies, cystectomies and sacral colpopexies are growing much faster than we previously expected. And therefore, we have increased our overall procedure growth estimate for the year to 57% to 58% from a base of approximately 85,000 total procedures performed in 2007. We are increasing our top line revenue guidance for 2008, we now expect revenues to grow 45% to 47% over 2007, which is up from our previous estimate of 42%. We had strong sequential growth in instrument and accessory revenues during Q2 and we are increasing our estimate for annual growth. Instrument and accessory revenue is expected to grow 57% to 58% this year. This is up from our previous estimate of 55% growth. System revenues in Q2 were also strong as was previously expected, driven primarily by our overall procedure growth. We are now forecasting system revenue to grow 38% to 40% over 2007, which is up from our previous forecast of 33% to 35% growth. We expect this growth to come from an increase in unit shipments. Our system ASP was approximately $1.35 million in Q2, compared to $1.32 million in Q1. As we have mentioned in previous calls, our system ASP fluctuates quarter-to-quarter as a result of geographic and product mix. We continue to expect our average ASP to be approximately $1.33 million for the remainder of the year. We expect service revenues to grow approximately 45% to 46% of our 2007 level. Our previous estimate was 45%. Our average annual service revenue per installed system is approximately $135,000 per year. With regard to gross profit margin, our Q2 margins were sequentially higher than Q1, due in large part to the higher average selling price on systems for the quarter. Gross margins have varied between 69% and 71% over the past few quarters and we expect our total gross margin to be approximately 70% for the reminder of the year. This is up slightly from our previous forecast of 69% to 70%. Moving to operating expense, starting with R&D, we expect total R&D expense to come in between $81 million and $82 million for the year, up approximately 67% from $49 million spent in R&D expense last year. This is higher than our previous forecast by approximately $4 million. The increase stems from additional internal development projects we have planned, purchases of an intellectual property, and co-development arrangements with industry partners. With regard to SG&A expense, we expect total SG&A expense to grow 48% to 49%, which is up from our previous forecast of 47% growth, due to higher variable cost associated with our higher revenue forecast. We expect total operating expense to grow 52% to 53 % and operating income to grow 42% to 44% for the year. Last quarter, we were forecasting operating income to grow at 37%. The improvement in our operating income has been driven by our higher revenue forecast coupled with only a modest increase in SG&A expense. These forecast include the impact of FAS 123R stock compensation expense. We continue to forecast approximately $75 million in stock compensation charges for the year, broken down as follows. $11 million in cost of goods sold, $17 million in R&D expense, and $47 million in SG&A expense. We are lowering our estimate on other income for 2008, due to the significant drop in interest rates. We expect other income for the year to be approximately $26 million. Our previous estimate was $33 million to $35 million. With regard to income tax, as mentioned in the past, we expect to report a GAAP tax rate of approximately 39% for the year. However, we expect our effective cash tax expense to be approximately 20% for 2008. We expect to start reporting the benefits of our international tax strategy in the form of a lower GAAP tax rate in 2009. Regarding shares outstanding, we currently have 38.8 million common shares outstanding. We also have approximately 3.9 million option shares outstanding. Depending upon our average stock price during the year, a portion of 3.9 million option shares will be added to the fully diluted shares calculation. Calculating our EPS for the year, we expect the share count to be between 40 million and 40.5 million shares. Before closing, I would like to remind you that our third quarter results are typically impacted by seasonally slower growth in revenues due to vacation schedules. This may result in lower sequential revenue growth and likewise lower sequential profits in the third quarter. However, we typically have strong sequential growth in revenue and profits in the fourth quarter. That concludes our prepared remarks. We will now open the call to your questions. Question And Answer

[Operator Instructions]. Our first question comes from Eli Kammerman. Sir your line is open. Eli Kammerman - Cowen & Co.: Thanks very much. My first question is related to one of the procedures that you didn't talk about and that's head and neck surgery. The ones notable training course at the international surgeons meeting this past week, is that on the radar as contributing significantly to procedure increases this year?

It is not on the radar to be a significant contributor this year. It is as you called out, it is definitely on the radar of our customers and there has been some work that has been done on the procedure but as a remainder, we do not have FDA clearance for that indication. But what we hear from people that have their IDEs in place is that there are some potentially high value adds for the patient value in that application. So, we are definitely watching it. But, it is not going to be a significant contributor this year. Eli Kammerman - Cowen & Co.: Okay. And my other question is there was the higher than usual number trade-ins this quarter at 6 units. Did you run a special promotion, which encouraged trade-ins or how do you account for this sudden spike in trade-ins?

There wasn't a special promotion, there are certainly were more this quarter than in previous quarters. Over the past four quarters, it's ranged somewhere between 0 and 2 and so six this quarter was probably a high watermark. We think it's going to vary and it really depends on which customers out there are looking to have a kind of transaction. We think we'll have some in the future, but it's hard to say how many quarter-to-quarter.

Well, and if you all look at the standard, I mean the standard's been out there since 1990 in Europe and when a hospital decides to buy second system often, they are thinking about also standardizing and so we will... this is part of our long-term plan is that we will have more trade-ins and people will move to the more capable and later versions of the system. Eli Kammerman - Cowen & Co.: Okay. Then on a related note, what's your average revenue capture per trade-in?

If we do sell in that transaction the new system will net a little bit less than we would if we didn't the trade-in. But all-in-all, it's not significantly different and as you can tell from our average selling price for the quarter, it didn't have a significant impact. Eli Kammerman - Cowen & Co.: All right. Thanks very much.

Tao Levy, your line is open.

Good afternoon. So maybe you could comment a little bit on Mexico now that that manufacturing facility is up and running. What's going to be made there and what type of impact do you expect to occur on the P&L going forward?

I'll answer the demand side, we'll start off making instruments for us and it will be needle drivers and energy instruments and things like that as we go forward. Marshall, I'll let you take any of the financials.

Yes, from a financial statement impact perspective, as I said earlier, there are some start-up costs associated with brining the facility up. Those costs will more than offset the labor savings and labors really will... where we will achieve some savings, but frankly when you look at the total cost of an instrument, labor is not a large portion of it. So we are not talking about a huge impact on a financial in the future.

Okay. And on the R&D that obviously increased a lot and you commented about that in the prepared remarks. But the reality is over the last call it year, year and a half, we have seen R&D go up. We're seen a couple incremental new product disposables come out, which obviously are important. Where is all the extra R&D going into and are there future systems that are being developed which are expected longer term?

So, we take our R&D expense and we put it in really four buckets. And the first bucket is really instruments and accessories and improvements for existing products and those are coming out all the time every quarter. We also put it in imaging systems, optical imaging and other things that will increase our ability to see in the da Vinci system. We work on software improvements and patches for ease of use and those continue and now we work on different architectures, things that are a little bit further out. And then when we look at that we look at that, we also do internal funding as well as work with external partners and there has really been an increase in all four of those areas, as we go forward.

Imaging the longer term.

And we do research looking further out.

And just a last question, on the guidance front, Ben you talked about sequentially being down in Q3 because of seasonality and then up in Q4. Historically, that hasn't been the case with the number here [Technical Difficulty] second quarter, do you think seasonality will become more felt and that's kind how we should be thinking in our model?

Well, we have seasonality in previous third quarters in that the growth and procedures has been lower. So we would anticipate the same kind of lower procedure growth and it was a pretty strong quarter for system placements in Q2. We are forecasting that Q3 system placements might be relatively flat for Q3 from Q2 and then again higher in Q4. So there is always going to be variability in that. We just want to caution you that there is typically seasonality in Q3.

But systems you said sequentially flattish. Is that right way to think about it?

That's what we are forecasting.

Okay, great. Thanks a lot. Great quarter.

Our next question comes from Mr. David Lewis. Your line is open.

Good afternoon. Few quick questions. I guess first off, one to you Ben, we felt a different mix of box contribution this quarter, similar to international, relatively similar on VP systems, but obviously an acceleration in new systems on virgin placement. Can we draw any conclusions about these mix shifts quarter-to-quarter or are they going to remain erratic throughout the remainder of year?

Well, I guess my comments is I don't draw lot of conclusions on anything quarter-to-quarter, other than my trend, are we trending properly in terms of procedure growth and that sort of thing. I think that in terms of the mix from Greenfield to second, third, fourth, fifth systems. I think that's just a matter of timing and of course, anybody we sell the first system to over the longer term, we are certainly hopeful they will have such an experience that they will ought to buy second, third systems. So longer term, in the long term, I would expect that the repeat system sales will grow to a larger and larger percentage of total system sales. Now, in the mean time, we've got lots of lot land and lots of places to conquer in terms of Greenfield yet. So that's not an eminent thing, but it is something that in the time horizon that we look at, and I am talking about five to 10 years and longer that it will shift as we get larger and larger installed base.

Okay, that's very helpful. And out of some procedures, I wonder your dVH obviously is growing as well as it was last quarter. As you penetrate more into the gynec [ph] procedure and the complex benign procedures across these different procedures or different physicians that are you learning anything more about the 250,000 complex benign procedures or the 50,000 [ph] and then 200,0000 complex benign. Given the amount that it is growing, you are dealing with these physicians more often, are you still as confident in this 50 and 200 number as you were let's say, six months ago?

We haven't learned anything that would cause us to be less optimistic than we have been in the past and if anything, I think just probably more evidence of more optimism and that is that the patient value as we have always talked about it on either improving the invasiveness, reducing invasiveness or improving efficacy of the procedure is really proving out in both of those cohorts and from the GY and Onc, I mean again that you are starting to see it now published. You are staring to hear more about it at the different society meetings and you are starting to hear about from authors of manuscripts that are being sent in for publication. There is just more and more of that which is always a good sign, but most importantly, you are hearing it from patients. We are having these experiences in helping to lead to proliferation of more patients. So we are as encouraged as we've ever been, if not more so. I think from the specialty itself, there is reason to be more encouraged on sacral colpopexy for the same reason. You are showing improved at least as efficacious as a gold standard, where invasive open procedure being done minimally and basically and those are on early cases, so all of that is very positive for us.

Alright. And just one last question here. It sounds like new procedure is doing much better than you thought and dVP obviously given it's so yet to give you some success there, but maybe those three procedures nephrectomy, cystectomy and maybe its myomectomy but can you just give us an update of the new procedures, what do you think the total market opportunity is number one? And number two, the ability to penetrate those new procedures, would you say it is faster in the trend line on prostatectomy or slower?

I would say this, I don't know about the velocity, it's hard for us to the velocity. But I would look at the... let's start with the nephrectomies and partial nephrectomy. So in the U.S., you're looking at roughly 54,000 new renal cancers per year. Now not all of them are line up for this application, but a good portion of it and those are U.S. numbers alone. In the... I would go to sacral colpopexy because the condition effects many more women than the actual sacral colpopexy. In other words, there are other procedures that are less invasive for less severe cases. But we are... we believe in the numbers that we see and what we hear is that that opportunity might be 50 to 60 in this highest 70,000 in the United States. And if you look at myomectomy, again that number is probably around 50,000 to 60,000 in United States. Those are U.S. numbers and those are big numbers. As far as our ability to penetrate it, that will really depend on the patient value and the early indications are very, very positive.

And Aleks, across all these procedures you are seeing positive length of stay data. And you have timed post in the stay together either in a registry form or a true trial and try to pursue that as a claim in [indiscernible] reimbursement? Thank you.

We haven't done that and now again we leave a lot of that up to our customers and I think the data that we are expecting to see in the number of people who are doing this procedure will positively be impacted in the future, so we will revisit certain publication strategies from time-to-time, but at this point it's growing pretty rapidly.

Thank you.

Our next question comes from Ben Andrew [ph]. Ben Andrew - William Blair & Company: With William Blair. Thank you for taking the question. Can you talk a little bit about the efforts in the field with the sales organization, because you had added... that was 57 people in Q1 and 76 in Q2. How is the productivity of the new hires in Q1 coming along and then are any of those new hires in Q2 going into the field sales?

Ben, let me just do one quick clarification that there are 57 field people added in Q1. There were 76 total people added to the company in Q2, about 17 of those 76 in Q2 were in the field. So, we do hire a lot of people... tend to hire lot of field people in the first quarter as we basically resize territories, and fill them up. So the second part of your question in terms of productivity of the new hires, there is... you see a ramp up period. With that said, we are seeing, we believe the effects of some of the recent hiring and some of the growth in our procedures this quarter and we're encouraged by that. Ben Andrew - William Blair & Company: Then just coming back to the question on prostatectomy, was there any change in sort of physician behavior update that led to that very small change in guidance and again it a victim of your own success sort of thing, but was there was anything of note there?

Not really. I think if you look at where you are... draw line between the U.S. and OUS. I mean OUS is growing at a rate obviously significantly higher than the rate that we've given for our guidance. But, if you look at the U.S., you're now in the early... you're in the majority, the late majority and so that by definition is going to be just a little slower goal in picking up those incremental cases. Our push now in the U.S. is certainly expanding throughout the indications of prostate cancer. In other words, trying to convert brachytherapy patients and some of the radiation patients and perhaps even watch for waiting. But, we are still very bullish on dVP as you can tell, it was just a modest change in the mix of our procedure. Ben Andrew - William Blair & Company: Sure. And I... we certainly have seen at the recent robotic conference, there is a lot of interest in nephrectomy generally. Is that something that can be tens of thousands of procedures in a couple of years or is that... do you think it's going to be slower than that, Aleks?

Well again, I don't think we're going to give any forward-looking projections on that. Could it be in the tens of thousands, well, the indication is again 54,000 new renal cancers in the United States, globally at significantly higher than that. So it is a very large market and we are very encouraged by the patient value and some of their early reports that is taking place. In addition, the macro view on nephron sparing surgery is also very positive and that is used to be you just take out the kidney and leave the health kidney, but now there is plenty of data that suggest that saving the health kidney is going to lead to kidney function for that patient. All of this is happening at the same time, and we're... we think it's very positive. Ben Andrew - William Blair & Company: Alright. Just turning to international markets for a second, you got the approval in China. Is there anything else you need there to be effective on the sales side. Do you need reimbursement approval separately, and what's the next kind one or two international markets that may be you're looking at?

So far China there is not a required, let's say, second approval needed for reimbursement. So now just starting earlier this month, we are able to market the da Vinci S in China. And just as a remainder for some folks who have been asking there, we could not market that product until after we got that clearance. So with the sale cycle in place, you wouldn't expect that you're going to have a sudden boost of sales in China. But we do believe it's an attractive market and we will see sales coming out of China going forward, because of that.

As far as the other markets, as we've said in the past, we are in the process of trying to secure approval in Japan and there is no new update there. Ben Andrew - William Blair & Company: Okay, thank you.

our next question comes from Mr. Rick Wise. Sir, your line is open.

Good afternoon, everybody. It's Rick Wise, Leerink Swann. Your per procedure growth seems exceptionally strong to me against I think the fastest growth quarter of year ago and if our calculation is correct, it suggest something like weekly utilization of 2.9 per week versus 2.7 in the first quarter. Again, is that sum directionally correct and are we likely to see that accelerate from here sort of been stuck in a little bit range for a while?

Rick, this is Ben. You are directionally correct. We had certainly growth in utilization from Q1 to Q2 due to the strong procedure growth that we had. I think on average we are somewhere a little bit north of three procedures per week on the installed systems and again sometimes it depends on what you choose as your denominator. We typically choose the ending installed base from the previous quarter. So, you have that right and quarter-to-quarter you're going to definitely have certain fluctuations, but year-over-year is how we take a look at it and year-over-year, we have significant improvement on system utilization.

Somewhat something we can expect to see a gradual increasing going forward likely? The 18 of the 79 systems to current accounts, may be just give us a little color on why that second, third or fourth system was bought. Was it for the new procedures or is it higher volume in da Vinci Prostatectomy and any clear trend there Aleks?

I think the answer is probably yes in some instance to all of those questions. And I think to what had Lonnie had said earlier, our model is pretty clear and that is to drive da Vinci surgery through a market, through a hospital et cetera to the point where the demand for more than one system becomes pretty obvious. And so at the core of those purchases or most certainly most of those purchases is that the hospital sees that they cannot satisfy the needs of the patients with one system, Rick, or two or three or whatever it is that their denominator was before they brought the additional system. In other words you are running low in capacity and you have supply that's growing the patients. So, those procedures, GYN procedures, specifically if you go back to the GYN approval that we received back in '05 and you sort of map this out over that period, you will see that the addition of those procedures is required, lot of hospitals to get second, third and fourth systems, and they are continuing.

Sounds good. Obviously it was a great quarter, but just help us Aleks if you would on the da Vinci Prostatectomy sort of slightly lower guidance, obviously these are small numbers. But just wanted to understand that how you are looking at, does this suggest in kind of way that you've hit a market penetration ceiling if you will in da Vinci Prostatectomy or that... but clearly offset by all the emerging procedures, how are you thinking about it?

Well, one, we don't think we have penetration ceiling. Two, as Aleks mentioned, in adoption curve you go through that early majority to the majority and now in surgery in the U.S., we are in the late majority. And so that by nature, there in surgery those going to slow and then the other challenge that we got to pick up the rest of the surgery and then we would like to add other alternative treatments, take market share from those. Now internationally, we are growing much faster because we are low on curve, we are their either at the end of early majority and so it's a faster growth rate, but it's off a smaller base. And so the dynamics of this always will cause until that larger base gets more penetrated, you will have some dynamics in growth. But though we are... this is the nature of adoption and so there is nothing, no surprises here. It's just a matter of moving through adoption curve and doing it in different markets in different times, so.

The other thing worth mentioning Rick is if you look at it from a sales organization, our sales organization certainly are very incented to get new business. And if you look at just the new procedures that we talked about, we talk about da Vinci Hysterectomy it's a market of 250,000 or more procedures in the United States alone, potentially renal cancers is another 50,000, sacral colpopexy, the number just really grows. So you are really struggling to get full attention in every one of our opportunities, which is a nice high class problem. But they are making trade-offs as well. So, do we think that the remaining procedures are going to come our way, we do. So we are going to go out and we are going to plant some new seeds in other parts of... or are they going to plant seeds in other parts of their territory and we think it's natural.

There is just lot of just natural demand.

Yes. Two quick last ones, I think you said whatever it was, 77 people added in the quarter whatever the right number is, when you are adding these people last quarter this quarter probably the next couple of quarters, any particular areas that you are focused on expanding, is it sales you still expanding, is it R&D, manufacturing, any perspective there?

All of above and it's been consistent and more than half have been in the sales organization and manufacturing organizations.

It's not that's mean like I think you still emphasized international growth and expansion, it's not... just wondered if you particularly adding there or anything?

I mean literally are growing everywhere and it that's... I mean the answer really is all above we've got... we've and I've explained this before. First place we allocate resources are into our sales organizations, because that drives revenue and since we found a fixed cost based upon revenue growth that makes... creates a larger umbrella to fund all of the other activities. And so, we have a process that's used to drive revenue growth and then to support the engineering and the development of new products and manufacturing disparity [ph] etcetera, etcetera. So it does it docks down to the whole organization and we've... the support organizations are the ones that we fund at a rate necessary to support and be as efficient as possible.

Rick,we're going to have take another question.

Thank you very much.

Operator next question please. Amit Hazan. Sir, your line is open. Amit Hazan - Oppenheimer & Co.: Thanks very much good afternoon guys. Just another follow up on the procedure side this time on dVH. Again may be a little bit a victim of your own success. But we're all used to you guys increasing your guidance pretty regularly and here we are with dVH. Even though you talked about it optimistically, you have not increased your guidance. Again I think about this relative to the systems that you are installing which you're installing at greater pace than many of us are estimating here, at least for the last three or four quarters. And so I am wondering with an increase level of installations based on what you are guiding to, why aren't we seeing that drive hysterectomy beyond what you're guiding to?

Amit, this is Ben. So philosophically, we believe that procedures drive everything. Once you're in a territory placing an additional system doesn't necessarily drive, let's say a higher number of procedures. You have a number of procedures out there that are growing and we use the same that these are procedures looking for a system and it's going to find a system that is existing or a new system that's going to be placed. So just because, we placed 85 system versus you modeling 80 doesn't necessarily mean that you're going to ratchet up your to procedures. The dVH is growing incredibly strong. A 150% growth we are certainly not complaining. Is it growing at least as strong as we got it with the beginning of the year? Yes it is and we are very pleased with it. Amit Hazan - Oppenheimer & Co.: But maybe you could just follow-up; I understand but are you seeing any challenges that you can point to or some of the bigger challenges with dVH, because and just kind of following up on what you said, if you increase your number of systems you should be generating revenue off of those systems that comes off of procedures. So your procedure growth should be faster. Am I not correct?

We are not to answer the question. We are not seeing anything that is any hurdle that we haven't expected or I mean just DDH is growing very, very well and as faster, faster than we thought. Amit Hazan - Oppenheimer & Co.: Okay great. And just a second question from me, just on the system side, it does look like the second half of the year is going to grow slower in terms of system sales in the first half. I know you had tough comps in the second half of last year. I'm just wondering because we get the question all the time. If you can answer again the question about changes in hospital spending patterns on capital equipment. If you've seen any of that or if your guidance at all implied any slowdown that you have seen?

Certainly not. We have actually not seen any impact on let's say credit crunch on the buying patterns of our customers. So we get that question often. We've had it for the past six months and the answer is still the same. We have not seen any impact on the buying patterns. I think you've hit on the right thing there in terms of there are higher comps in the second half of the year in terms of revenue growth and even though we are taking up our overall guidance for the year from 42% top line growth to 45% to 47% growth, we do believe that the growth rate in the second half will not be quite as high as growth rate that we saw in the first half.

I think we will take one more question, one more and move on.

Mimi Pham, you may ask your question.

Hi, good afternoon. So far your new centers added so far this year, are you getting broad interest from urology, gynecology, cardiology, and training or is it coming from one dominant specialty. Are there any capacity issues with doctors or anything else that might increase the timeline to get the centers --

I would say Mimi that all of the above. I mean we are seeing mostly... we are seeing new systems that are being brought in certainly with the support of urology. Gynecology is weighing in pretty heavily and cardiac is actually... we haven't spent much time on cardiac on this call, because we just don't have enough time. But that is actually helping drive a lot of systems as well. So I would say in general all of those things are happening. As far as training, as we've talked about in the past, we have very developed dVP proctorship network because it's a little more mature. We are always... we have got a nice model. We know how to add proctors and we can do that I think pretty efficiently through our training organization and there is a lot of people that would like to be proctors for us. So we will continue to develop those other areas. GYN, we are certainly getting more proctors, there are more courses, there is more demand... both supply and demand. So I would say, all and all that's all happening.

What's the normal timeline? You haven't seen any changes in the timeline to get new centers up and running. Have you?

Not that I can point out materially, no.

And then on the international system sales, you got few placements in some new countries. Can you just remind us when you first entered those countries?

Well, again these are... all three of those were through distributors. They are non-direct sales. And these are the first placements. So when we entered those, I can't really be specific, because I don't know when the first sales call was made in those countries, but those are brand new initial placements.

And then lastly, just have a ballpark number for big the potential for China systems market is?

We really don't. I mean China is a pretty complex market, as you might imagine, as most developing nations are. But there are a lot of large tier-1 hospitals and there are just a lot of tier-2, a lot of tier-3 hospitals. How big do we think it is, when is robotic surgery going to really penetrate it? we really don't know. Give us a couple of... give us some time to sort of understand that market. We just got clearance this month and we will see.

Okay. Thank you.

That was our last question. As I have said in prior calls, we believe the adoption is driven by a significant shift in patient value, which is a function of improved surgical outcomes and reduced surgical trauma. Dr. Robert Poston and his colleagues at the University of Maryland confirmed the value for patients suffering with coronary artery disease. When he presented the results for 100 consecutive da Vinci off pub [ph] Mini-CABG hyper procedures performed using internal mammary artery grafting plus coronary studies, compared with a mass group of a 100 steronotomy CABG patients using a internal mammary artery grafts and saphenous veins. And he presented that at the American Surgical Association Meeting this last April and it's been accepted for publication in October issue of Annals of Surgery and their findings were as follows: The da Vinci Mini-CABG patients had 99% patency at one year, versus 80% with open surgery. Three to seven fewer days in the hospital and an 85% reduction in MACE, which is Major Cardiac or Cerebrovascular Events one-year post surgery and a 83% reduction intubation time and found no increase in cost and a cost savings with patients with major core morbidities. As we said also in the past that da Vinci patients are the strongest advocates of surgery with the da Vinci Surgical System. Patient Liz McGregor, a patient of audio-vinculus at the University of Michigan. Liz could not conceive, so the doctors put her on fertility drugs. And when she was diagnosed with uterine fibroid tumors, she was told that they were not the cause of her infertility. Liz began to research fibroid tumors on the Internet and read about the Robotic GYN program, a surgery program at the University of Michigan. She had a da Vinci myomectomy to remove the fibroid tumors and made the following comments, I was in and out of the hospital in one day. My recovery was very quick and within a week I felt like myself again. Following surgery I can conceived in three months. I now have two children; Ian, who is just two and Sarah who just turned one. I look at them knowing that they might not be here, if it weren't for the University of Michigan. I guess the question is what greater motivation than stories of patients like these, could anyone ask for. It's certainly a motivation here for us to drive the technology and our capabilities even further. In closing, we remain committed to delivering exceptional value in terms of improved surgical outcomes and reduced surgical trauma for our patients, an exceptional operating performance for our shareholders. We are committed to focusing on the vital few things that will truly make a difference, as we strive to take surgery beyond the limits of the human hand. That concludes today's call. We thank you for your participation and support on this extraordinary journey. We look forward to talking to you again in three months.