Ladies and gentlemen, thank you for standing by. Welcome to the Intuitive Surgical Q4 2018 Earnings Release Call. Now at this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today’s call is being recorded. I will now turn the call over to Senior Director of Finance and Investor Relation, Calvin Darling. Please go ahead, sir.

Thank you. Good afternoon, and welcome to Intuitive Surgical’s fourth quarter earnings conference call. With me today, we have Gary Guthart, our President and CEO; and Marshall Mohr, our Chief Financial Officer. Before we begin, I would like to inform you that comments mentioned on today’s call may be deemed to contain forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in the Company’s Securities and Exchange Commission filings, including our most recent Form 10-K filed on February 2, 2018 and 10-Q filed on October 22, 2018. Our SEC filings can be found through our website or at the SEC’s website. Investors are cautioned not to place undue reliance on such forward-looking statements. Please note that this conference call will be available for audio replay on our website at intuitive.com on the Latest Events 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 fourth quarter results as described in our press release announced earlier today, followed by a question-and-answer session. Gary will present the quarter’s business and operational highlights. Marshall will provide a review of our fourth quarter financial results. Then I will discuss procedures and clinical highlights, and provide our updated financial outlook for 2019. And finally, we will host a question-and-answer session. With that, I will turn it over to Gary.

Thank you, Calvin. Entering 2019, our business is showing strength. In 2018 over 1 million surgeries were performed using da Vinci systems accompanied by approximately 1,500 peer-reviewed clinical journal articles. The total number of procedures performed since first launch exceeded 6 million and the total peer-reviewed clinical database continues over 16,000 articles. While these milestones represent a step forward, I believe that outstanding product design, robotics, advanced imaging and informatics are just starting to take their place in surgery and in acute interventions more broadly. Surgery and acute interventions are sophisticated interactions among highly trained professionals that have a common goal of delivering outstanding care to a patient in need, starting with a careful understanding of operating and interventional environments, engineers and interaction designers collaborate closely with physicians to develop smart connected devices with the goal of the Quadruple Aim. First decreasing complications, second, increasing patient satisfaction, third, increasing care team satisfaction and forth, improved efficiency and lowering of the total cost to treat. Considering our current da Vinci systems and the procedures in countries that are our focus today, we believe applicable procedures exceed 5 million annually. As we consider our new concepts coming to market, including but not limited to our da Vinci single port system, our advanced imaging technologies and our Ion flexible catheter system. The long-term total opportunity for our products to make a positive difference in physicians and their patients lives is greater still. Given the positive response of our customers and in pursuit of the substantial opportunity to improve surgery and intervention that lies ahead, we plan to accelerate some investments over the next several quarters. We’ll review our guidance on spend later in the call. Given our prerelease this month, I’ll be brief in summarizing our 2018 highlights. Global procedure growth was strong…

Good afternoon. I'll describe the highlights of our performance on a non-GAAP to (12:02) pro forma basis. I will also summarize our GAAP performance later in my script. Reconciliation between our pro forma and GAAP results is posted on our website. Consistent with our preliminary press release on January 9, fourth quarter 2018 revenue was $1.047 billion, an increase of 17% compared with $892 million for the fourth quarter of 2017, an increase of 14% compared with third quarter revenue of $921 million. Fourth quarter 2018 procedures increased approximately 19% compared with the fourth quarter of 2017, and increased approximately 11% compared with last quarter. Procedure growth continues to be driven by general surgery in U.S. in neurology worldwide. Calvin will review details of procedure growth later in this call. Instrument and accessory revenue of $539 million increased 18% with last year, which is lower than procedure growth, reflecting approximately $6 million of INA repurchase from distributors in China and Taiwan, in conjunction with transactions to go direct in both geographies and customer buying patterns, partially offset by increased usage of our advanced instruments. Instrument and accessory revenue realized per procedure was approximately $1,890, a decrease of 1% compared with the fourth quarter of 2017, and relatively unchanged compared with last quarter. Excluding the buyback of inventory from China and Taiwan instrument and accessory revenue per procedure was similar to last year. Systems revenue of $341 million increased 20% compared with the fourth quarter of 2017, primarily reflecting higher system placements and higher lease related revenue. We placed 290 systems in the fourth quarter of 2018, compared with 216 systems in the fourth quarter of 2017 and 231 systems last quarter. 84 operating lease transactions representing 29% of total placements were completed in the current quarter, compared with 40 or…

Thank you, Marshall. Our overall fourth quarter procedure growth was 19% compared to 17% during the fourth quarter of 2017 and 20% last quarter. Our Q4 procedure growth was driven by 18% growth in U.S. procedures and 24% growth in OUS markets. Overall procedure growth for the full year 2018 was approximately 18% compared to 16% in 2017 comprised of 17% growth in the U.S. and 22% growth in OUS markets. In the U.S, Q4 and full-year procedure results were consistent with recent trends. Q4 growth was again driven by growth in U.S. general surgery and thoracic procedures augmented by continued contributions from growth and mature gynecologic and urologic procedures. For the full year, approximately 753,000 procedures were performed in the U.S. for the full year, 2018 U.S. general surgery procedures increased approximately 32% to 325,000 procedures. Hernia repair, both ventral and inguinal continued to contribute the most incremental cases in the quarter and year with colorectal procedures continuing to show strong growth. Growth and practice based procedures including cholecystectomy and bariatric surgery increased as the year progressed. In U.S. gynecology, full-year 2018 year-over-year growth increased to mid-single digits driven by higher benign hysterectomy volumes. Fourth quarter 2018 U.S. gynecology procedure growth was slightly above the full-year growth rate, likely reflecting increasing seasonality in these benign procedures, partially offset by modest headwinds and hysterectomy for cancer, a mature category, where da Vinci surgery is standard of care. In the fourth quarter, we continued to see favorable surgical consolidation trends as our da Vinci surgery data indicate that practicing da Vinci surgeons performed more da Vinci hysterectomies and an increasing proportion of U.S. gynecology procedures are being performed by higher volume positions. Full-year 2018 U.S. urology procedures grew approximately 8%. Q4 2018 growth was at a rate largely consistent with the…

[Operator Instructions]. Our first question will be from the line of David Lewis, Morgan Stanley. Please go ahead.

Good morning. Maybe I’ll start financial and then work to Gary for strategic. So, just Marshall and maybe a little bit for Gary as well, just sticky about the spending breakdown for 2019, two questions, then I’ll just do one follow-up. on financial pieces, Marshall, any sense of R&D relative to SG&A, we’re sort of assuming you continue to grow R&D at a similar rate of 2018 in the material step up and spending relative to my models more SG&A and maybe just sort of walk us through a couple of the components there in R&D and SG&A that are driving the majority of the spend. And then I had a quick follow-up for Gary.

Yes. I think that the step up and spend is maybe slightly weighted towards SG&A, but pretty even across the categories, the elements of SG&A are as I discussed, the expansion OUS and the investments we’re making in China, India and Taiwan those are commercial organizations and that appears in SG&A. Of course, SG&A will grow a lot of costs that fluctuate with revenue such as sales compensation and incentive compensations flow through SG&A. However, in the R&D area, we will continue to invest in SP, Ion and Vision and advanced instruments. And then as I said, will be accelerating some of our investments in digital capabilities or informatics.

Okay. Very helpful, Marshall. And then Gary, there’s been some media reports about one of your competitors drawing insurance from a much larger company, and I’d say barriers to entry is perhaps the most common incoming question we get from investors. So, I wonder, if you could help us articulate, what is the Intuitive mode as you see it or investors asking the wrong question and they should be more focused on TAM expansion. Thanks so much.

I think a little bit of both that are going on I think in the competitive world. On the first side of our customers going to choose, I think customers appreciate choice and will expect it from us and from others. And in all things they’ll evaluate competitive offerings. For us, we focus a lot on understanding what the workflow environment is, understanding the total cost, not just the constituent cost of price of the system or price of the instruments and accessories is really total cost to use the product, stability, usability, supply chain stability all of those things I think are valued when people are putting a fair amount of their surgical volume onto a platform. And I think it’ll take some time for folks to fully absorb and understand that. And I think also there’s some nice effects about surgeons training surgeons. There’s a large install base of surgeons, they interact with each others through surgical societies. They proctor each other. And I think that that allows our compound cycle of learning that’s been effective. To the question of what does it do, as some of the other larger competitors declared their desire of enter. I do think it validates for the broader market, the things we believed for many years and have been investing towards for many years. So, I think it’s a signal to everybody that these technologies and approaches are going to be important to the future. That said, there are smart people in all these organizations and outside of our company and we’ll see, we have evaluated many of the competitive concepts that we see out there, often making them for ourselves and evaluating them over the years. We really make our decisions based on what we think the customer needs and as a forward look and as a result, I think we may be wrong about some of our decisions, but we’ve tried to be well informed about our decisions.

Our next question is from the line of Bob Hopkins, Bank of America. Please go ahead.

Thanks very much for taking the questions. And I have sort of two similar lines of questioning here. First, just to follow up a little bit on the comments on spend in 2019. For 2018, there was a 17% increase; for 2019, you’re talking about at the midpoint of 24% increase. I mean that’s roughly $75 million, I was wondering if you could kind of lay out how much of that is the investment in China and Taiwan and going direct. And then also how would you just sort of characterize that incremental $75 million in the growth rate you’re experiencing this year. Is this more of kind of one-time increase in the growth of expenses or could this be sort of a growth rate that we would experience for another couple of years? Thank you.

Yes. So I think, Bob, these are multi-year investments and as Gary referred to it in his script, if you go back and you look at sort of what we said, we did in Japan, the investments were made early on in it, but you continue to make those investments overtime to get to a point of where you might see a real return from them. And in the case of Japan, we’ve been investing in Japan for 10 years and we’re now seeing the fruits of that investment in terms of a 12 procedure reimbursement. So, I wouldn’t characterize these as a one-time event. I think we’ll continue to invest in some of those things for quite some time. As far as how this – you came up with $75 million, how the – how you would proportion the pieces, I think I pretty much laid it out for David, there’s a chunk of spending associated with the expansion OUS in China, India and Taiwan, that will – you’ll see that primarily in the SG&A line, but there’s an equal set of investments being made in terms of informatics as well as investments to scale the business investments in expansion in automation of the manufacturing group, so…

Okay, I appreciate that. And then one for Gary. Just a question on competition, frame it just a little bit differently. J&J and Medtronic both continue to suggest that sometime late in 2020, they'll bring some sort of technology to the market in robotic form. That both suggest that they're going to have lower cost systems, they haven't given as much details. But in my view, both sort of implied that their systems will be geared towards converting lap focus surgeons to robotic platform. So my question to you is, I realize you don't comment much on your pipeline. But I was just curious if you could comment, do you see potential value in advancing lap through robotics? And is this a priority for Intuitive today?

I do believe that some advanced MIS surgeons are becoming increasingly open to the use of robotic surgery and intelligent surgery. And we see it today in the market. We see bariatric surgeons interested in our technologies, and that's a domain that is high laparoscopic penetration. So I believe there's an opportunity there. I would separate the idea of capital being the only thing to think about as an opportunity to pursue that that growing idea in advanced laparoscopy. And what I say is that I think physicians are going to balance multiple criteria. They’re going to look at total cost to treat. So the capital, the cost to service that capital, instruments and accessories, the outcomes that they get from it, efficiencies and human capital time or human labor time in the OR and they're going to balance that. And I think all of those are up for discussion when you think about trade-offs between advanced laparoscopy and intelligent surgery. We think there's an opportunity there. We will pursue that opportunity. When I hear folks kind of over rotate to just capital cost on systems, I kind of think about how excited are people to jump aboard, just good enough commercial airliner. For sure, if you're flying commercial airline, you want the lowest total cost per passenger mile, but you can get that a lot of different ways and cheapening the capital, maybe not the best way. We evaluate all of those elements, we have thought about them deeply and we've made investments to pursue what we think is the right leadership position there.

Terrific. Thank you.

Our next question is from the line of Tyco Pete, JPMorgan. Please go ahead.

Thanks. I want to maybe just pick up where you left off on some of these new initiatives. You talked about the first clinical use case for augmented reality this year. Can you talk a little bit about how you think about commercializing that, where you see the key application areas? And then similarly on the informatics investments, can you talk a little bit about what you're hoping to accomplish there?

Sure. Those two are related, but we'll start with augmented reality or mixed reality and that's something we have been working on for some time. And the world has been interested in. The idea here is to use multiple sources of information preoperative CT scans or MRI scans, intraoperative other imaging like ultrasound or florescence imaging, molecular imaging. And combine them in ways that allow the surgeon or physician to see things differently. It is embedded in inherent in Ion already that some of that core capability is required. We're also bringing some of that core capability to our da Vinci systems. In the beginning it will be around preoperative imaging and some intraoperative imaging mixed together for the surgeon in real time. First, I'd expect first clinical uses this year and the beginnings of the study that go around that. I don't think it will be a meaningful revenue contributor in the near-term. But I think it's one of the things that can really change outcomes, efficiency and the procedure and outcomes now it remains to be proven. But, we're excited about it. That's one leg of our thoughts around informatics and you've heard us talk about this over the years from strengthening our cloud computing capabilities. Internet connected our systems a decade ago to a partnership and then an increased and closer investment with InTouch Health around routing of data quickly and low latency in real time to internal capabilities around managing data legs and providing for customers, offline processing that allows them to compare their programs and take advantage of some advances in machine learning. Those are the types of elements that we're bringing to bear. It's nice. We have a foothold, we have some brilliant scientists who are advancing and leading that cause. And we think we have discrete deliverable steps that we can do and then validate that will start bringing real value to the market.

And then I guess a follow-up on Ion, a couple of questions here. Any risk of timeline slipping with the government shutdown. I mean, now that you've submitted the 510(k)? And then should we expect additional clinical data to come out this year? And it sounds like for the gross margin commentary you're not expecting any real impact on negative impact on gross margins with the rollout. Can you confirm that?

Let me speak to the first two and I'll let Mark will speak to the last one on margins. There's always a risk that things slow down. We are in engaged contact with FDA and so far we're feeling pretty good about it. But I can't speak to what the long-term implications will be in terms of shutdown dynamics. In terms of clinical data, there'll be – if things proceed the way we hope, we’ll start collecting additional data as it comes out. In terms of ones that gets published, I think it will depend on the timing of the clearance and the speed with which some of the installs happened. We think that the demand pipeline for Ion looks really good. The scientific response to FDA's questions, we feel good about and the engineering team and supply chain team, bringing those early systems out looks really good too. So I'm really pleased with the internal teams’ performance and the setup of activities. With regard to margin impact, Marshall.

Yes. Ion will be rolled out in a measured fashion to create a good foundation. And so the consequences of both on the revenue and the gross margin line will be very small.

Okay. And If I could just ask one last one on the cadence of placements in China. You're expecting – now that you've had a little bit of time to digest the quota, anything to think about in the first half of the year here?

Yes. So the quota, just to recap for everybody, 154 systems, keep in mind that 154 systems is for surgical robots. If there were to be competitors that got their product approved in China. They would share in that quota. So it's not just quota for us. The quota has been released. However, there are tendering processes that the hospitals have to go through. Let me remind you, the last time we got a quota in 2013. Most of the systems were shipped near the end of 2015. So it took awhile. When I would say – and then finally, the other implication is that there is a 25% tariff on the robots that the Chinese have imposed. We think that there's high interest in robotics in China, so I don't know, what that 25% – how that 25% will affect to their desire to buy. What I would say is that the pattern of placements will be few in the first half and more near the end of quarter period, which is 2020.

Okay. Thank you.

Our next question is from the line of Larry Biegelsen, Wells Fargo. Please go ahead.

Well, good afternoon. Thanks for taking the question. One on SP and one strategic question for you Gary, so on SP, I heard the commentary upfront about a few hundred procedures. Any themes you would highlight and remind us again of when we can expect the full launch?

With regard to early themes, the feedback has been that usability on the new platform is got a little – slightly different set of operating principles has been a positive surprise. Also the physician excitement about its ability to reach into small places and some of the flexibility at exhibits relative to setup and access has been a really positive surprise for us, which has been great. So that's been good. I think pacing demand looks really good. We are for sure supply constrained relative to demand and the pacing there will really be around a couple of things. One is we want to get our supply chain partners ready for real volumes. So we knocked down some of the issues that make it, take them awhile to produce things and we want to solve some of the manufacturing bottlenecks. The second thing is we want some of the additional indications that give our customers a little more flexibility with how they can use the product. So that'll pace it. We don't have a timeline yet for you on those two things. Both of them have a little bit of uncertainty in them. The FDA review of submissions being one and working down some of the technical bottlenecks is the other. I don't see any insurmountable technical challenges. I think it's just work. But so far so good and we're feeling like they're meeting the plan, we said.

That’s helpful. And Gary, as you know, we're seeing procedures in the U.S. moving to the outpatient in ASC settings. Do you believe your current Gen-4 offering and leasing option provide adequate terms for expansion into this environment? Thanks for taking the questions.

Yes. Thank you. You think about freestanding centers. There's kind of two dimensions on which you think about freestanding surgery centers. One of them are hospital owned outpatient departments. We are already well used and appreciated in those settings. So that's the physical structure is kind of the same and it's just how the ownership and operations are organized. Freestanding centers that are owned by group practices not hospital owned of a little bit different reimbursement in economics. We actually do see some of them starting to express interest and adopt robotics. I think that as we were saying earlier in the call, which procedures go there, depends both on the reimbursement of the procedure and the efficiencies with which products get used. And I think that for the right settings, Gen-4 can be quite strong.

Thank you.

Our next question is from the line of Amit Hazan, Citigroup. Please go ahead.

Well, thanks. Hey, good afternoon. Let me just start with a system or a unit growth question first, totally understanding the macro comments you made about that. But if I look at the data, look at the numbers, second year of accelerating growth, lots of drivers kind of seeming to be accelerating at the same time, trade-ins, operating leases, new products, procedure growth accelerating. So a lot's happening that's accelerating and have that very little, really nothing to tell me that growth trends are going to change that much. So help me out and tell me, outside of the macro issues, why would unit growth trends change much in 2019?

Yes, I mean regarding procedures, like we said in the prepared comments, it's really the procedure growth that drives demand for capital placement. So you mentioned a number of other factors, things like trade-ins, leasing programs, new product introductions. Things like that then can have an effect on the results either. But we talk about these things possibly fluctuating quarter-to-quarter and it comes down to just laying out your model and your frame of thought and working backwards from the install base and working at the installations. But there's a lot of the factors that you described are what's in the world. And mature procedures will a moderate growth for sure. We also know that in some cases, for example, there was a publication of couple of articles about the cervical cancer in New England Journal, and that can change procedure growth rates too, so and create a headwind. So there's a little bit of puts and takes here. In general, we are feeling like the business is strong and there’s strong momentum. But there are some things that will moderate as well.

And I have follow-up on the operating lease side and in the U.S. in particular, where obviously, I think it's up above 30% of units sold in 2018, I think it was 20% of unit sold for 2017. So we're starting to see kind of a trend line. And I do get what you're saying with volatility, but the question I think for us, especially, we start to model or try to model your system revenue number accurately for the year is how to think about that trend for 2019 and even 2020. It seems like you're focusing more on it, you're offering more programs and that trend line could continue. So we could kind of be towards the mid 30% to 40% range in the U.S in 2019. Are there other things that I should be considering for that why that wouldn't happen?

Well, it's been a successful program. I mean, it's been a way for us to offer hospitals an opportunity to expand their capacities without the initial capital investment. So it's been very successful. I'm not sure the numbers completely jive with what you said. We were 25% of placements in Q3 and 29% in Q4. We're under operating leases. So you saw that step-up quite a bit in the last couple of quarters. And so our comments are like, okay, we're here now, slightly to fluctuate quarter-to-quarter from where we ended the year. And then over the long-term, it could increase.

We believed that the operating leases are a good thing. We would, if having the choice place a system under an operating lease rather than sell the system, it reduces this fluctuation, like you said, it stabilizes sort of the revenue stream, if you will. It also in terms of if there were an upgrade cycle, what we've seen in studies is that the upgrade cycle is quicker when there's leases versus purchase product. So we think it's positive in a number of ways. However, it's up to customers. We really leave it to customers to decide what is best for them and we will fulfill that. And so it’s hard for us to predict exactly, where the customer will go and to what level will wind up with leases versus purchase.

Fair enough, guys. Thank you.

Our next question is from the line of Rick Wise of Stifel. Please go ahead.

Hi, good afternoon, Gary. Maybe turning back to the acquisition of your da Vinci business in India and Taiwan again. I heard you clearly; these are long-term investments that will take a long time to play out. I’d be curious to hear more about your thoughts about the relative size of the opportunities in India and Taiwan. Is this sort of, you mentioned Japan as a proxy a little bit, but Indian and Taiwan match up with China and Japan is in terms of magnitude, I mean, I assume you must think the opportunity there is significant. Just maybe help us think about that and frame it for us?

Clearly, the strategic motivation behind India and Taiwan are a little bit different. With regard to Taiwan, in terms of actual size, not going to be a huge part of the business. However, it’s an influential market, we – the distributor there that we were working with was, well built, and we think that it, it’s a group that does good surgery and has a good influence in the region. I think it’s important to serve that customer base well, but it’s not a massive financial impact by any means nor do we expect it to be. India has, I think, a fair amount of runway where it is today, and where it might be in a decade can be quite different. And so here, the idea is, it will take some time to build our capabilities in India, but we also think it’s an economy that’s been growing. There’s a strength in the surgical community in India both there and globally. And so it’s an important long-term market for us. We think that financially, of course, it can become a significant part of Intuitive’s business over the years. And the point of illustrating some of the Japanese example is that building a real presence and building the organization and the trust within the healthcare community in those markets takes time. So, if you want to get there in a decade and you better start, and that’s really what’s driven us in those two markets.

Okay. Just as a follow-up and a different topic. You’ve highlighted, obviously some puts and takes in terms of growth, procedure growth, and you mentioned specifically slowing mature procedure growth in some countries. Maybe just expand on that is this just you’ve penetrated the market, and its flowing or is this something else going on? Maybe just give us a little more color there. Thanks so much.

In several countries, we are a substantial share of the surgical market, think of the United States prostatectomy or partial nephrectomy in the United States or hysterectomies for certain conditions. And as a result, we see that part really growing at the demographic trends rather than changing share of approach trends. And that’s true in the U.S., it’s true in some countries in Europe with regard to prostatectomy and some of the urologic procedures. In Japan, we’re already quite highly penetrated in prostatectomy and increasingly so in nephrectomy. So that that was the – what’s some of the detail or examples of what underlies the more general comment.

Thank you.

Just one more questioner please.

And that question is from the line of Richard Newitter [Leerink Partners]. Please go ahead sir.

Hi, thank you. Wanted to start off on the percentage of operating leases and flexible financing arrangements, that’s clearly increasing as a percent of the total placements. Can you characterize for us what the utilization rate differences are on the systems that are getting placed into those types of contracts versus the rest of the installed base? I would imagine it’s higher, but can you quantify it at all?

We do quantify it. We monitor it closely. And there is not a market difference between what the utilization rates are on leases versus purchased product.

Okay. Thanks. And then just on the follow-up to the last question, Rick’s question. As we think about the low-end and the high-end of your 2019 procedure growth range, is there – is the slowing mature procedure growth commentary kind of meant to be throughout the entire range or is that contemplated at the low end instead of the high end?

Yes. Some level of moderation, particularly in the U.S. is a part of the trend and obviously, more moderation at the lower end and less moderation at the higher end. But the range will be largely, the range itself is largely effective. The biggest factor is going to be the breadth and pace of growth in U.S. general surgery, largest category now. Then the mature procedures and some other factors regarding growth in China, timing of placements of new systems and the pace of adoption of reimbursed procedures in Japan.

Thank you.

Well, thank you. Thank you for the questions. That was our last one. As we’ve 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 value by enabling surgeons to improve surgical outcomes and reduce surgical trauma. We’ve built our company to take surgery beyond the limits of the human hand, and I assure you that we remain committed to driving the vital few things that truly make a difference. This concludes today’s call. We thank you for your participation and support on this extraordinary journey to improve surgery and we look forward to talking to you again, in three months.

Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining. You may now disconnect. Have a good day.