Ladies and gentlemen, thank you for standing by. And welcome to Intuitive Surgical Q3 2014 Earnings Release. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions) And as a reminder, this conference is being recorded. I’ll now turn the conference over to Calvin Darling, Senior Director of Finance for Intuitive Surgical. Please go ahead, sir.

Thank you. Good afternoon. And welcome to Intuitive Surgical’s third quarter earnings conference call. With me today, we have Gary Guthart, our President and CEO; Marshall Mohr, our Chief Financial Officer; and Patrick Clingan, Director of Finance. Before we begin, I would like to inform you that comments mentioned on today’s call maybe deemed to contain forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in the company’s Securities and Exchange Commission filings, including our most recent Form 10-K filed on February 3, 2014, and 10-Q filed on July 24, 2014. These filings can be found through our website or at the SEC’s EDGAR database. Prospective investors are cautioned not to place undue reliance on such forward-looking statements. Please note that this conference call will be available for audio replay on our website at intuitivesurgical.com on the Audio Archive section under our Investor Relations page. In addition, today’s press release and supplementary financial data tables have been posted to our website. Today’s format will consist of providing you with highlights of our third quarter results as described in our press release announced earlier today, followed by a question-and-answer session. Gary will present the quarter’s business and operational highlights. Marshall will provide a review of our third quarter financial results. Patrick will discuss procedures and clinical highlights. Then I’ll provide our updated financial outlook for 2014. And finally, we will host a question-and-answer session. With that, I’ll turn it over to Gary.

Thank you for joining us on the call today. In this third quarter our customers have continued to advance minimally invasive surgery through the use of their da Vinci surgical systems. Total da Vinci procedures grew nearly 10% over prior year led by multifaceted growth in general surgery and growth in urology in Europe and Asia. Capital placements in the quarter were solid, totaling 111 systems with strong performance outside of the United States. Our newest system da Vinci Xi is receiving favorable reviews and interest from our customers. Looking more closely at the United States, growth in general surgery lead the way with procedure -- with the procedure category, our second largest behind gynecology. General surgery procedure growth was broad-based, including conol resection, rectal resection and hernia repair. Trends present in prior quarters in gynecology continued with stable trends in hysterectomy for malignant conditions combined with the slight decline in benign hysterectomy versus prior year. Urology grew in the U.S. in the quarter, with strength in prostatectomy and partial nephrectomy. Given the large proportion of da Vinci use in prostate cancer surgery, the increase in da Vinci prostatectomy likely reflects broader trends in patient care. Turning to systems in the United States, we placed 61 systems in the quarter, 8% of this systems were our newest product the da Vinci Xi Surgical System. In Europe, procedure growth returned to form, growth in Germany improved materially. Likewise, I'm pleased with our performance in France with multiple segments contributing. Growth in Italy, U.K. and the Nordic countries was also encouraging and broad-based. Capital sales in Europe were strong. We continue to see capital segmentation with interest in both our most featured product the da Vinci Xi System, as well as interest in refurbished systems acquired by price sensitive customers. In Asia,…

Thank you, Gary. I’ll be describing our results on a non-GAAP pro forma basis which excludes the impact of our Xi trade-in programs, legal claim accruals, stock-based compensation, amortization of intangibles and investment impairments. We’re providing pro forma information in addition to GAAP information because we believe the business trends and operating results are easier to understand on a pro forma basis. I will also summarize our GAAP results later. We’ve posted reconciliations of our pro forma results to our GAAP results on our website so that there is no confusion. Pro forma third quarter revenue was $534 million, up 7% compared with $499 million for the third quarter of 2013 and up 5% from last quarter. Procedure growth for the third quarter rounded up to approximately 10%. Compared with the third quarter of 2013, it was seasonally slower by approximately 1% compared with the last quarter. Procedure highlights will be discussed by Patrick. Pro forma revenue excludes the impact of offers made to customers to trade-in their recently purchased SI product for newly introduced Xi product. As discussed last quarter with the introduction of da Vinci Xi surgical system, we offered certain customers in the U.S. and Europe, the ability to trade-in their recently purchased da Vinci SI surgical systems for da Vinci Xi surgical system. These trade-in offers also provided these customers the opportunity to exchange certain da Vinci Si instruments and accessories for da Vinci Xi instruments and accessories. As a result of these offers, we reserved $26 million of U.S. revenue in the first quarter and reserved $6 million of European revenue in the second quarter. As these customers accepted or declined their trade-in offers, we refined our estimates of the revenue reserves. In the third quarter, we recognized $16 million of revenue, reflecting eight trade-outs…

Thanks Marshall. As mentioned earlier, total Q3 year-over-year procedures grew nearly 10% with U.S. procedures growing 8% and international procedures growing 20%. U.S. procedure results were broadly similar to our commentary after Q2 with the exception of dVP which was better than expected. Given our high-rated penetration in the U.S. prostatectomy market. Our dVP volumes are likely to attract overall U.S. prostatectomy volume. In U.S. gynecology, Q3 results were similar to the first half of 2014 with low-single-digit procedure declines. dVHb volume appears consistent with expected total market benign hysterectomy procedure decline while the myomectomy negative year-over-year trend continued from the second quarter. Single site hysterectomy grew quickly off the small base. And we will monitor the adoption of our wristed single-site needle drivers impact on this procedure. Moving onto U.S. general surgery. Adoption continues to be solid across a broad number of procedures. Colorectal procedure adoption remains a source of strength. It is too early to precisely estimate the impact the stapler-stop shift action may have on our procedure growth. Though initial inspection suggests it may weight on colorectal procedure growth. Single Single-Site cholecystectomy continue to grow in Q3, though at a more modest rate relative to the first half of 2014. Hernia growth remains encouraging in this early phase of adoption. In addition, the robust procedure growth for hernia repair, we are hearing positive feedback from surgeons about the clinical outcomes being generated with their da Vinci Surgical Systems. During the quarter, one of the first studies comparing robotic and laparoscopic ventral hernia was published supporting the feedback we have been receiving. These results when combined with some of their early cost analysis that suggest robotics has a similar level of material operating costs as laparoscopic ventral hernia repair gives us belief that the current adoption is sustainable.…

Thank you, Patrick. I will be providing you with our updated financial outlook for 2014 in pro forma terms. As Marshall mentioned, our GAAP financial results and pro forma reconciliations are available on our website. Starting with procedures, on our last call we estimated full year 2014 procedure growth of between 5% and 8%, above the approximately 523,000 procedures performed in 2013. Now based upon trends described earlier on the call, we are increasing our 2014 procedure growth guidance to a range of between 8% and 9%. Consistent with our recent calls, we will not be providing revenue guidance. Moving on to gross profit margin. Our Q3 2014 gross profit margin was 200 basis points lower than Q2. Certain charges to Q3 2014 cost of sales that Marshall described earlier on the call were non-recurring in nature. We estimate that these non-recurring items accounted for about three quarters of the sequential decline. Our actual gross profit margin will vary quarter-to-quarter depending largely upon product mix and systems production volume. Operating expenses. Last quarter we forecast full year operating expenses to grow between 10% and 13% above 2013 levels. Now based upon the timing of certain expenses, we expect to grow our operating expenses between 9% and 11% above 2013 levels. We expect 2014 non-cash stock compensation to be towards the lower end of the $170 million to $180 million range forecast on our previous call. We expect other income, excluding the impact of the Q2 impairment charge, to total between $12 million and 13 million. With regard to income tax, we expect our pro forma based tax rate for the balance of 2014 to fall within a range of between 27.5% and 29% of pretax income. Our current estimate is directionally lower than our expectations earlier in the year, driven by the geographic mix of our pretax income. Note that the pro forma tax rate tends to run above the GAAP tax rate, driven by the geographic mix of the pro forma items. Our Q3 2014 diluted share count decreased to 36.9 million shares, reflecting the full quarter impact of our accelerated share buyback completed in Q2. We estimate our Q4 diluted share count to range between 36.9 and 37.1 million shares. That concludes our prepared comments. We will now open the call to your questions.

(Operator Instructions) Our first question will come from David Roman with Goldman Sachs. Go ahead, please.

Thanks everybody and then for taking the questions. I want to start on procedure volumes, given Calvin’s outlook that you provided for the balance of the year. And I’m just hoping you could help us understand the balance of the year and the context where you done year-to-date. I guess specifically this guidance now implies 6% to 10% growth for the fourth quarter. Maybe you could just frame for us what’s happening to the assumption at the bottom end, then what’s happening in the assumptions at the high end, and why we would see -- why we wouldn’t see a continued trajectory from what we’re seeing year-to-date?

Yes. I can help you over there. As you mentioned, we are three quarter off the way through the year. Q3 rounded up to 10% as we described. And on a year-to-date basis, we are also rounding up to 9%. It has a lot to do with the numbers. You are three quarters away through the year, but the fact is in order to get a 10% procedure range, let’s say you would have to do an excess of 12% in the fourth quarter. And based upon the trajectories and the procedures that we’ve seen in our projections, it’s just not we’re expecting at this time.

Okay. And maybe on the topic of total revenue. And maybe Gary you could just sort of comment on the overall operating environment, I mean the data points thus far around the hospital CapEx continuum look to be coming together a little bit more favorably than where we were starting the year. And I think some of the concerns that if Europe don’t look to necessarily play themselves out as expected. So maybe you should help us understand what’s happening in the broader operating environment and what it will take for you to get more confident in the forward view?

Yes. As we look at the systems sales side, as we described before really, we can describe our environment and that is really driven by three things. One is interest in acquiring technologies for existing customers and Xi is being well received and so we are seeing some interesting trade-ins. The second piece has been adding capacity if there are existing, possible existing customer and that will have to do with what their procedure mix and procedure growth looks like. And the last one is starting new programs. And in terms of looking at global capital equipment environments, you are probably in a better position to comment on that than we. In general, we are hospital, finances looks stronger that gives them flexibility. Turning to Europe, what we have talked about before is really true, it’s not a smooth distribution of customers. There are those who are interested in the most highly featured products and there are those who are interested in real price sensitive offerings. And so we see a little bit of both in that marketplace. So one size doesn’t fit all.

And then maybe very specifically to your business, we started the year I think what somebody would call a very turbulent set of events and you are talking about I think your language was intended consequences around the Affordable Care Act and some of the gyration and procedure volumes and what was happening at the hospital, particularly the evolution of your technology, that’s followed last year which was an adjustment period around utilization rates. Like where are we more broadly speaking just in the adoption of your technology and are we close to the point where you think we are back on a positive trajectory, positive sustainable trajectory?

Speaking first to procedures, I think the procedure performance speaks for itself. We are seeing early adoption in several general surgery procedure categories. I think that’s a positive. As that grows and matures, I think, we'll see whether it continues and how fast it accelerates in general reports on things like ventral hernia and colorectal surgery have been really strong and leave us encouraged. I think with regards to the early impact of Affordable Care Act, we saw some uncertainty with regard to hospital finances as to how that would impact them and that uncertainty put them into a pause mode as it related to us. As I think they get better clarity than that that allows them to plan a little bit and looking forward should smooth things out. What will actually be like as time plays out we’ll have to see.

Okay. Thank you very much.

Thank you. Our next question will come from Tycho Peterson with JPMorgan. Go ahead please.

Hey. Thanks. Gary, I’m just wondering if you can elaborate on the Sp delay, just a function have you guys doing more trial work? I’m just kind of wondering what the rationale there was?

Yeah. The biggest reason for us to move it out a little bit was actually some of the positive things we’ve learned from our Xi launch. We are seeing customer feedback on Xi, that is really strong and some things that they particularly appreciate and as we do our customer valuations on Sp and look to integrate those things, there is a few things that we’d like to bring over from one to the other and we made a decision to do so.

Okay. And then, Marshall, can you comment a little bit more on some of the drivers of the gross margin softness? I mean, I know you talked about the stapler stop using some of these other dynamics? Is there anyway to kind of quantify the various costs and I guess, the underline question is, where do we reach a low watermark on margins?

Yeah. So the -- what we commented on with -- there is about a 200 basis point decline in gross margins. I will attribute three quarters of that to unusual items in the quarter a you mentioned that the stepper stop use. The -- we also had a scope recall and then we had some cost associated with our acquisition of Japan, the Japanese distribution business and the accounting around that. So, I guess, I would say that there is a portion of it though that is just part of the normal margin and reflects new product and new product has lower margins to start and we’ll continue to try to drive those down overtime. As far as where we’re going in the future, I think, Calvin gave you the projection for Q4. We’re not going to give you 2015 but you get a sense as to where we were this quarter.

Okay. And then last one China, nice number there. Can you maybe just talk about the sustainability of the trend there, are we are at kind of an inflection point? I think, up till now you had only 26 systems or so in China? So just maybe talk about some of the drivers?

I think, we’re in our first phase. Long-term, we think there is real opportunity in China but in the near-term, I think, there are a lot of steps to building a sustainable business there. It’s -- in terms of feel and approach. We feel little bit like our conversations around Japan. I think there is an element of having a deeper presence in China of both direct and potentially with others and requiring a build out to have sustained growth. So I think it’s a goods first step. Certainly a positive, but I don’t think it is signaling us strong inflection point, I would not assume that.

And that brought our total systems in China ending the quarter up to 36 systems.

Great. Thank you.

Thank you. Our next question is from Rick Wise with Stifel. Go ahead please.

Good afternoon, everybody. Starting with the Xi, Gary, on last quarter, it felt like you all were pleased and maybe a bit surprised by the strong trend system placement trend? Is Xi now this quarter the same kind of surprise there, is the rollout where you expected at this point or again are you -- is it a little better you might have thought?

I think we’re pleased with where we’re on the Xi rollout. I think that we are getting feedback that I think is what we expected in some parts of the market in terms of multi-port access and multi-quadrant access and we’re surprised and pleased by, I think, the broad-based nature of commentary in terms of urologist and GY oncologists, who are find value in it, perhaps, more than we had anticipated. So, I think, we’re continuing the feeling and the trend that we saw in the second quarter.

Okay. And back to the stapler, it just maybe one by two quickly. So you hope to resolve the stapler issues this year? I think you said, you weren’t going to be specific, but is it in 2014 and when we reflect on fourth quarter procedure trends, does that -- does the recall or have any impact on those procedures or a meaningful impact, how do we think about that?

We haven’t given you a date that will put it back on the market. We think we have root cause well-identified and are in the midst of validating solutions. When those are validated when we have them in our hands and they are done, the validation is done, we’ll report to our customers and to you. I don’t have a timeframe for you. Yet, having said that, I think that the teams are making good progress, both understanding where we are and what the possible solutions are. In terms of modeling procedure impact, a little hard to say, I think, that it's certainly some drag, very hard to know how big the drag is.

Okay. And just last for me on the da Vinci prostatectomy side. It sounds like things are stabilizing. Can you just give us little more color there, Gary, just I mean what’s happening? Do you think the market is sort of set to remain stable or actually grow? How are you thinking about and how would you have us think about it? Thank you.

It’s a little bit hard to know based on one quarter of return to growth here, so what happens in the next quarter and the next one after that, hard to predict. It’s -- we have seen in past quarters that when there is an increase and things like watchful waiting. At some period of time after that you see a bolus of patients come out of watchful waiting and into definitive treatment of one type or another as some subset of that watchful waiting cohort has their cancer progress and maybe that we’ll have to wait a couple of quarters to see if that indeed is the case.

Thank you.

Thank you. We’ll go now to Ben Andrew with William Blair. Please go ahead.

Good afternoon. Can you talk a little about what you’re seeing in terms of the expenses because you talked about trimming that back a little based on timing. Are those things are likely to drop in 2015 so we could actually see operating margin go down a bit because I think most of us have modeled it flat, kind of through the end of ’15?

Yeah. We’ve been talking about investments we’re making this year and we clearly believe strongly in our opportunities and have been investing. We did take the guidance range down a bit on expenses this year. It has mostly to do with the timing of some of the hiring activities. As we move forward into next year, obviously we will be providing that guidance commentary on the next call. But that being said, in the longer-term we really wouldn't expect to make the types of operating expense investments in future years that we made in 2014 relative to revenue growth trends.

Okay. Great. That’s helpful. Thank you. Gary, is there any comments relative to the approval we saw a few weeks ago for base of tongue resections. Is that for combination used with UPPP for like our sleep apnea case or is that sort of an entrée to the ENT space broadly?

It’s the next step in clearances for ENT surgeons. It is not a sleep apnea claim and the company does not take that position. It really is as it has been published which is a clearance to allow surgeons to do resection of benign tongue-based issue as they deem appropriate. Where they take it from there, I think we’ll have to see in future quarters?

Okay. And can you characterize as best you can given the confounding nature of the Stapler pullback. How the general surgeon procedure growth trajectory as compared to prior procedure growth trajectory? They have tended to parallel each other except some of the recent ones are faster? Are those more encouraging than you would've expected?

In terms of stepping back, I think as you look at the segments of growth and general surgery, the hernia growth is still early in its life cycle. But it’s been on the faster side. In terms of hernia growth, if you look at separate rectal and colon, rectal so deep in the pelvis has been the one that is most utilizing the stapler and is the one that for which I think the surgeons are most wanting it back quickly. That has been -- growth is been consistent with what we've seen in past adoptions and that’s one we watch pretty closely for any changes with regard to the Stapler. The solution to the Stapler problem is really straightforward, which is identify the issues, get the solutions validated and bring it back to market, we will do that scientifically and carefully but that’s the path forward. As you look at colon resection, that growth has been positive for us also. It’s a multifaceted procedure. It’s not just one thing. We do see Stapler use in colon resection but not in all segments. And so it’s kind of a mixed story in that one.

Okay. And then finally from me, when might we see the first of some of the clinical work being done in Japan for expanded indications?

The beginning in terms of reimbursement, those trials have initiated already. I think first enrollments have already occurred this month.

When might we see results of those? Is that 2015…

That will play out over multiple quarters in terms of when they start to publish, we’ll have to talk about that as we get greater clarity on their timelines.

Thank you.

Thank you. Our next question comes from Tao Levy with Wedbush Securities. Go ahead please.

Hi, good afternoon.

Hi Tao.

Hi. So couples of quick question under the single-site, the wristed device, that you recently got approval. The uptake in that market, is it possible that you can start to see benign hysterectomy sort of go flat to positive as a result of that technology and basically what I’m getting at is -- is that going to go after the laparoscopic patient population or still the open patient population that you normally talked about?

Hey, Tao, it’s Patrick. First off, we were excited about the level of enthusiasm and interest that gynecologists probably have shown towards adopting single incision surgery. The initial case series that have been done since the product was approved have been seamlessly integrated and surgeons have reported positive feedback to us about what they are able to achieve with the device. Relative to what happens in the overall market, this has been a market that has been in decline for a while now as payers have looked for alternative treatments rather than surgery, putting pressure on the overall number of benign hysterectomies performed. But we’ll see where we go from here. But we’ll definitely try to use the device to restore our rate of growth. But it’s just too earlier to comment on the trajectory at this stage.

Is there any difference between the gall bladder sort of approach or experience, obviously different types of surgeon and what you could see in gynecology?

:

Great. And then just lastly, the approval in Korea, that’s one of your larger markets and now you are direct there, I think maybe a year or two ago. How -- any expectations to how quickly that market get start to purchase excise of sums?

I believe given the clearance that they can start to purchase product as soon as we start shipping it. And I think we have intentions to ship it before the end of the quarter.

Okay. But the interest is there, I guess is kind of with us?

Yes. We have customers who have an interest.

Okay.

Thank you, Tao.

Thank you. And next we have Bob Hopkins with Bank of America. Go ahead please.

Hi thanks. Can you hear me okay?

We can.

Great. Good afternoon. And just a couple of quick things. First off, I noticed in your quarter I think you guys have confirmed that there has been a change in your Head of Sales in the U.S. And I was just wondering if there is any color you are willing to provide on that change. I’m sure folks in this call -- it will be interesting to hear if there is any commentary from you guys.

We’ve had a couple of changes in our leadership team over the last couple of quarters. I think just standing back as the marketplace changes out in the United States as well as the company needs a change. I think, for both the company and for individuals, people look at what they want to do and what their skills are and what’s the match? We have been the beneficiaries of a really strong team and we also have a strong bench. So for those who moved on we wish them well and expect them to do great things in their next engagement. Having said that, I think we also have a really good team here. And so it’s natural in evolution of any company, you will look out at what the needs of the organization are and what peoples’ long-term needs are, what they do and we do and so these transitions occur. I think we have a great team. We are confident in our opportunity and we are confident in their ability.

Great. So the other two things I want to ask you about really quickly is one for you, Gary and one on the finance side. And Gary, I was just wondering if you could just give us your thoughts on, how your thoughts on SP have changed since you first announced the technology? I’m not asking about the timing because you’ve already addressed that. I’m just asking about your thoughts on the, kind of long-term market opportunity for that technology. Things like, could this system ultimately be competitive with traditional laproscopic surgery in addition to some of the other things that you’ve talked about. So that’s a question for you. And then on the finance side just to get it out of the way, I just wanted to be clear on the comments on operating expense growth as we look forward. Were you suggesting that relative to the double-digit growth in OpEx that we might see this year that you wouldn’t expect double-digit growth going forward or was that the message I just wanted to be clear?

Okay. Let me take them in order and I think I got them both. With regard to SP, I think there is -- just standing back on the introduction of new technology, there tends to be a trend for folks to overestimate what they do in near term and underestimate what they do in the long-term. And so I look at SP and I think it has a lot of long-term potential. It is fundamentally a technology that enters the body through a small entry point, brings in instruments in a parallel way and works with high precision in tight spots. And as you sit down and talk to surgeons and I’ve spoken with many, many, I have personally as well as our team. I think there are lot of possibility as to where there can go and take it. What that looks like and whether it displaces one alternative or another depends entirely on what part of the body it’s applied to. There are some places that are really straightforward areas to explore that are just set up well for this type of technology. And so things like Transoral surgery or transrectal or transvaginal, these are areas that hold a lot of promise. Having said that, bring a new technology market, you want to make sure you do it in a way that brings value early and establishes value for your customer, gives high value patient outcomes and value to the surgeons and hospitals who adopted and so how we evolve that is something that we work through in the next several quarters. And as we get closer, we will describe it too. With regard to OpEx growth, speaking after ’15, we will give your thoughts on ‘15 in the next call. But longer term, we don’t expect that we will ramp expenses highly out of sync with the growth and revenue. We think longer term working out a few years that we have an opportunity for both stabilization and then later leverage, so that’s how we are thinking about it.

Great. Very helpful. Thanks.

Thank you. Our next question will come from Ross Muken with ISI Group. Go ahead, please.

Hey guys. Thanks for taking my question. This is Vijay and I had a question. I guess last quarter, Gary, lot of questions on instrument accessories and I guess you guys were pretty sort of, I guess had this view that procedures for up and you expected that number to come back up right. And I guess then going forward when you look at that, you had this dynamic of a general surgery, which had higher pull through but then you also have hernia and coli is sort of growing. How should we think about the normalized, I guess longer term I&A revenues for procedure?

Let me give you a kind of a directional pointer and then, I think Calvin, maybe a little help on the modeling side. I think directionally, remember the general surgery is a cluster of different procedures and doesn’t out model as one thing. And just the few that you mentioned have really strong differences in I&A per procedures. So you think about rectal case, cancer case uses staplers will be on the high end of I&A per procedure, hernia somewhere in the middle. Hernia is also in itself a cluster of procedure. It’s not one thing. So ventral hernia is different than inguinal hernia and there are different techniques in each of those, so that the cost basis for each one of those subsets maybe a little bit different. And than Single-Site cholecystectomy is at the lower end of our revenue per procedure and so then you start modeling this out. It all has to do with mix in growth rate and that’s when it gets turned over to Calvin.

Yeah. I mean, I think you laid it out pretty well. This is an average, right. The average I&A revenue per procedure and our message is really just be aware of the average. You have got a widening and widening gap in the actual per procedure on the complex side and the less complex side. So, I don’t think we have any specific commentary whether it should be increasing or decreasing. It really depends on really, which factors win the day on this thing and you can be successful in any scenario as far as that goes.

Yeah, I will make a last comment on that point. We feel comfortable with pricing in those procedures. We think it’s appropriate for us and for the customer, and we think the margin structure is right in those things. So it’s really looking out at what the mix is going to be rather than whether the company has to make a change.

Great. And I guess, I had a one follow-up on procedure side and I think you guys have been pretty consistent when you were talking about this changing healthcare dynamic and increased seasonality and back half pick up. And when you look at that guidance of 8% to 9%, I guess at the high end you’re sort of getting in flattish Q-on-Q. Is that a reasonable assumption? Or is there a belief that given this exacerbated seasonality, Q4 should be better than Q3?

The simple way I think to answer that is, we are all together experiencing what seasonality is going to be like after the implementation of the Affordable Care Act. And I think nobody has been through it yet. So we are -- have our estimates. We have given the guidance based on those estimates, but I think we are all just going to have to see and gain some experience together.

Thanks, guys. I’ll step back in the queue. Congrats on the queue.

Thank you.

Thank you. Our next question is from Richard Newitter with Leerink Partners. Go ahead, please.

Hi. Thank you for taking the questions. I just want to turn back to the stapler stop use for a movement. Can you just characterize whether or not or the feedback that you’ve gotten in the field? Is it a matter of an issue for the moment not using the Stapler, obviously it’s not available, but the second it comes back, it gets reused? Or is there an actual hesitation in your customer base amongst rectal resection users that they are concerned about the safety issues from an ongoing basis? Or is it just a very transient issue?

First characterize where we are, we have asked customers to stop using it until we have identified and given them further instructions about what and how to handle it. We have taken a reserve with regards to inventory should we want to send them replacements depending on what the conclusions of the cause and validations are. I think that the customer sentiment around it has been, they understand our request. It is quite a conservative request, three malfunctions over greater than 10,000 fires. They have viewed this as an understandable. And so I think that we have not seen -- I have not seen any deep confidence been shaken. We have many requests to hurry up and bring it back. I think they want to use it. I think it’s differentiated relative to other products that they use. And so that’s what we are working on.

Okay. And can you maybe just describe what they are doing in the mean time? Does it actually decrease the utilization? I mean, it sounds like you are more hesitant there. How are they managing to not having access to the stapler?

Yeah. It depends on what the case is. If it’s a low rectal case and they can do it with the manual stapler, they will try that. If it’s very deep, they may have to use a laparotomy rather than doing it only basically. So there is a real variety depending on what the patient characteristics are.

Great. And then if I could just ask one more on, just as we look out into your new product initiatives, obviously Sp is getting delayed. I didn’t catch whether you provided a timeline for when that might be delayed until. And then also are there other new products that we can potentially expect to hear about making progress on? I am thinking about things in that brochure that we saw at stages like the rotating bed and where are you on some of those additional features? Thank you.

With regard to commercialization timing with Sp, we are not giving you updated timing. We do expect clinical use of Xi compatible Sp in '15. With regards to other things that we have been working on, there is another set of Xi instrumentation, Phase 2 instrumentation that we will describe as it goes through the process. We are making progress on an Xi integrated bed. We don’t have the timeline to describe to you at this time, but in future quarters we will. The pipeline is quite robust and we continue to walk down it.

Thank you.

Thank you. We have a question now from David Lewis with Morgan Stanley. Go ahead, please.

Well, thank you, excuse me and Gary just two quick ones here. On Japan, you talked about the clinical development program, are you still -- is it still the company’s thinking that 2016, is it good estimate for reimbursement in Japan?

We are working towards 2016 on a couple of fronts. It is as yet uncertain. We don’t have of course final approval from anybody on that timeline, but we are working toward that end.

Okay. And nothing has changed in that front. It sounds like the clinical development program is on track.

Well, it’s a dynamic conversation. So I wouldn’t characterize it as everything is solid and locked in stone. I think that’s a set of conversations that has been going on and we will continue to do so, but that’s the nature of these kind of conversations in Japan.

I think Gary just if you think about the last several quarters adjusting for the second quarter, where obviously Xi was going to be stronger in the U.S. It does look like O-U.S. net system placements were stronger than the U.S. Do you think these three quarters justifies the trend and on a go forward, it’s likely that O-U.S. net placements are higher than U.S placements?

Hard to say. I think a couple of things. I’d say that on the one hand, we are earlier in total market adoption in some of our U.S countries and we think that those are real markets and we are the pursuit. And so if they go where we hope they go, then we will see increased spending there. In the U.S. of course, we have a bigger install base so the conversation tends to be somewhat around new technologies and other things they want to do. I think as you look over years and not quarters I’d expect that the O-U.S. represents a strong growth time for us.

Great. Thank you very much.

Thank you. That was our last question. As we have said previously, while we focus on financial metrics such as revenues, profits, and cash flow during these conference calls, our organizational focus remains on increasing patient benefit by providing surgical outcomes, by improving surgical outcomes and reducing surgical trauma. This concludes today’s call. We thank you for your participation and support on this extraordinary journey to improve surgery and we look forward to talking with you again in three months’ time.