Intuitive Surgical (ISRG) Q2 2024 Earnings Name Transcript

Intuitive Surgical (ISRG -2.37%)
Q2 2024 Earnings Name
Jul 18, 2024, 4:30 p.m. ET

Contents:

• Ready Remarks
• Questions and Solutions
• Name Members

Ready Remarks:

Operator

Thanks, everybody, for standing by, and welcome to the Intuitive second quarter 2024 earnings launch. [Operator instructions] As a reminder, as we speak’s name is being recorded. I’ll now flip the decision over to your host, head of investor relations, Brian King. Please go forward.

Brian King — Vice President, Treasurer, and Head of Investor Relations

Good afternoon, and welcome to Intuitive’s second quarter earnings convention name. With me as we speak, we’ve Gary Guthart, our CEO; Dave Rosa, our president; and Jamie Samath, our CFO. Earlier than we start, I wish to inform you that feedback talked about on as we speak’s name could also be deemed to include forward-looking statements. Precise outcomes could differ materially from these expressed or implied because of sure dangers and uncertainties.

These dangers and uncertainties are described intimately in our Securities and Change Fee filings, together with our most up-to-date Type 10-Ok for the fiscal yr ended December thirty first, 2023, and subsequent filings. Our SEC filings might be discovered by way of our web site or on the SEC’s web site. Buyers are cautioned to not place undue reliance on such forward-looking statements. Please notice that this convention name might be obtainable for audio replay on our web site at intuitive.com, on the occasions part underneath our investor relations web page.

In the present day’s press launch and supplementary monetary information tables have been posted to our web site. In the present day’s format will include offering you with highlights of our second quarter outcomes, as described in our press launch introduced earlier as we speak, adopted by a question-and-answer session. Gary will introduce the decision and supply a company replace. Dave will current the quarter’s enterprise and operational highlights.

Jamie will present a evaluate of our monetary outcomes. Then, I’ll talk about process and scientific highlights and supply our up to date monetary outlook for 2024. And at last, we’ll host a question-and-answer session. With that, I’ll flip it over to Gary.

Gary S. Guthart — Chief Govt Officer and Director

Thanks for becoming a member of us as we speak. The basics of our enterprise have been wholesome within the quarter, with stable process progress and robust capital placements leading to wholesome monetary efficiency. Within the quarter, we made good progress with all three of our system platforms, together with taking our measured rollout of da Vinci 5 to our subsequent section, persevering with to stabilize Ion provide in assist of buyer growth, and increasing da Vinci SP installs in Europe, whereas supporting SP process progress throughout areas. Some multi-port process headwinds continued from final quarter, and we’ll describe these in a while the decision.

Earlier than turning the time over to Dave, I would wish to thank Marshall Mohr, our prior CFO and our outgoing head of worldwide enterprise companies. Marshall might be taking his abilities to pursuits outdoors of Intuitive in September this yr. As he approaches his subsequent endeavor, I thank him on behalf of all of us for his excellent stewardship at Intuitive for the previous 18 years. We’re happy to announce that along with his position as CFO, Jamie will broaden his duties to main our info expertise and world services groups.

I will now flip the time over to Dave, who will take you thru industrial and operational highlights in higher element.

Dave Rosa — President

Thanks, Gary. Beginning with procedures, we skilled stable progress within the quarter of almost 17% in contrast with a powerful Q2 2023, which mirrored the return of sufferers put up pandemic. Cholecystectomy, colon resection, lung resection, and foregut procedures led world process progress. Common surgical procedure led U.S.

process progress within the second quarter. And outdoors the U.S., process progress was led by nonurology procedures. Regional efficiency included energy in Europe, led by Germany, the U.Ok., and Italy. And in Asia, we’ve combined market situations largely in step with Q1.

Brian will describe these dynamics later within the name. Turning to capital, we positioned 341 da Vinci programs within the quarter, of which 320 have been multiport programs, together with 70 da Vinci 5 programs. Our groups put in 21 SP programs and 74 Ion programs within the quarter, with stable capital placements within the U.S., Japan, and India, and strain in Europe and China. System utilization, outlined as procedures per put in scientific system per quarter, grew 2% globally yr over yr for our multiport platforms, decrease than our historic development, reflecting process energy a yr in the past as a consequence of affected person backlogs.

Utilization for SP and Ion continued to develop within the double-digit vary within the quarter. Turning to our funds, income progress of 14% within the quarter mirror stable process efficiency and robust capital placements. Product margins have been above our expectations, reflecting a mixture of price reductions, fastened overhead leverage, and a few one-time nonrecurring advantages. Working bills mirrored plan leverage in our enabling features.

Jamie will take you thru our funds in higher element later within the name. In Q2, we moved into the subsequent section of our rollout of da Vinci 5. Throughout the quarter, we positioned 70 da Vinci 5 programs. Because the launch continues to progress in step with our plans.

Buyer suggestions factors to enhancements in precision, imaging, ergonomics and integration, the mixture of which, clients point out, has led to total effectivity enhancements. Each Pressure Suggestions and Case Insights carry new capabilities and analytics to surgical procedure. We’re inspired by early insights these capabilities are presenting and are working exhausting to enhance manufacturing and provide for Pressure Suggestions devices and easy our computational pipelines and workflows for Case Insights. We anticipate these capabilities to be highly effective and the maturity and proof of affect to construct over coming quarters.

We launched new merchandise thoughtfully centered round excellent buyer experiences. As our clients pursue operational and scientific excellence, we proceed monitoring a number of key metrics throughout our measured rollout of da Vinci 5 as we ramp our provide and reply to buyer enter. We anticipate our measured rollout to proceed by way of the primary half of 2025. Adoption of our digital services and products grew properly within the quarter, with routine use of My Intuitive App increasing to just about 14,000 surgeons and surgeons utilizing Intuitive Hub greater than doubling versus a yr in the past.

The long-term alternative for computational instruments is each vital and tough. To acknowledge these advantages at scale requires a foundational infrastructure that features strong, curated information; safe information; warehousing; and world privateness compliance. Our digital ecosystem, together with Case Insights, leverages this infrastructure and permits us to collaborate with clients on a worldwide scale to determine significant insights. These insights allow clients to optimize their robotic packages and finally cut back time to proficiency and enhance scientific outcomes.

As we mentioned earlier than, validations take time and are a worthy pursuit. Turning to Ion, our groups have made materials progress resolving provide constraints on catheters and imaginative and prescient probes. Excellence in manufacturing at scale on this house is advanced, and we proceed to bolster our capabilities. Our commercialization in Europe continues in accordance with plan, and our groups are progressing towards commercialization in China.

Turning to SP, final week we obtained FDA clearance for thoracic procedures. We might be measured in our thoracic indication launch as we work to construct a sturdy coaching and proctoring community, in addition to carry stapling to our SP platform. In closing, we’re dedicated to our 2024 priorities, supporting our measured launch of da Vinci 5 and our different new platforms by area, supporting surgeons adoption of focus procedures, persevering with to enhance product high quality and margins, and at last bettering productiveness in these features that profit from world scale. I will now flip the time over to Jamie, who will take you thru our funds in higher element.

Jamie E. Samath — Chief Monetary Officer

Good afternoon. I’ll describe the highlights of our efficiency on a non-GAAP or professional forma foundation, and we’ll additionally summarize our GAAP efficiency later in my ready remarks. A reconciliation between our professional forma and GAAP outcomes is posted on our web site. Q2 da Vinci procedures grew 17%.

The put in base of programs grew 14% to only over 9,200 programs, and common system utilization elevated by 2%, decrease than long-term historic averages, reflecting process energy in Q2 final yr because of affected person backlogs. U.S. procedures grew 14%, pushed by progress basically surgical procedure. Bariatric procedures within the U.S.

declined within the mid single-digit vary. OUS procedures grew 22%, reflecting sturdy progress basically surgical procedure, gynecology, and thoracic procedures. With respect to capital efficiency, we positioned 341 programs within the second quarter in comparison with 331 programs in Q2 of final yr. Within the U.S., we positioned 149 programs in Q2 in comparison with 157 programs positioned final yr, reflecting partially decrease trade-ins.

U.S. system placements in Q2 included 70 da Vinci 5 placements. Given a deliberate {hardware} and software program replace to da Vinci 5 within the second half of this yr and continued concentrate on maturing, manufacturing, and increasing capability, we anticipate that da Vinci 5 placements might be constrained by way of the primary half of 2025. Exterior the U.S., we positioned 192 programs in Quarter 2 in contrast with 174 programs final yr.

Present quarter system placements included 71 into Europe, 41 into Japan, and 14 into China, in contrast with 76 into Europe, 33 into Japan, and 16 into China in Q2 of final yr. We additionally noticed comparatively sturdy placements in India, in addition to markets served by our distributors, together with Australia. Placements in Europe mirror well being system funds constraints as a number of European governments are resetting capital spending post-pandemic. Second quarter income was $2.2 billion, a rise of 14% from final yr.

On a continuing foreign money foundation, income progress was 15%. Further income statistics and tendencies are as follows. Leasing represented 51% of Q2 placements, comparatively in step with current tendencies. Nonetheless, given buyer desire for our usage-based fashions within the U.S.

and the launch of da Vinci 5, we proceed to anticipate the proportion of programs positioned underneath lease preparations to develop over time. Q2 system common promoting costs have been $1.44 million as in comparison with $1.39 million final yr. Larger year-over-year system ASPs mirrored the next mixture of da Vinci 5 and decrease trade-ins, partially offset by the next mixture of system placements in Japan with a weaker yen change fee and decrease pricing in China. In Q2 of 2023, trade-ins represented 18% of whole system placements as in comparison with 6% in Q2 of 2024.

We acknowledged $28 million of lease buyout income in Quarter 2 in contrast with $29 million final quarter and $12 million final yr. da Vinci instrument and accent income per process was roughly $1,800, a rise of roughly $20 in comparison with final quarter. The sequential improve in I&A per process is primarily a results of buyer ordering patterns within the U.S. Turning to our Ion platform, procedures grew 82% to roughly 23,200 procedures within the second quarter.

In the course of the quarter, we positioned 74 Ion programs in comparison with 59 final yr and 70 final quarter. Throughout Q2, we caught up with the remaining backlog of system placements as provide of catheters and imaginative and prescient probes continued to enhance. The in-store base of Ion programs elevated 56% yr over yr to 678 programs, of which 275 are underneath working lease preparations. Second quarter SP process progress accelerated to 74% with sturdy progress in Korea and the U.S.

and early stage progress in Japan and Europe. Twenty-one of the programs positioned within the quarter have been SP programs, together with 10 programs positioned in Europe. The SP put in base grew 56% from the year-ago quarter to 222 programs. Transferring on to the remainder of the P&L, professional forma gross margin for the second quarter of 2024 was forward of our expectations at 70% in contrast with 68.5% for the second quarter of 2023 and 67.6% final quarter.

Second quarter professional forma gross margin mirrored sure one-time advantages that we don’t anticipate to recur. Excluding these one-time advantages, professional forma gross margin would have been 69.5%. The sequential enchancment in professional forma gross margin primarily displays decrease stock reserves, price reductions in sure buy elements, decrease freight charges, and leverage of fastened overhead. In accordance with our plans, product margins for our Ion and SP platforms improved within the quarter and can stay a spotlight for our enterprise unit and manufacturing groups over the medium time period.

As a reminder, given current and ongoing capital investments, we anticipate elevated depreciation expense within the second half and a major improve in depreciation expense beginning in Q1 of 2025. Second quarter professional forma working bills elevated 11% in contrast with final yr, reflecting the continued good thing about deliberate leverage in enabling features. We proceed to prioritize investments in R&D to fund innovation and future progress. In the course of the quarter, we added roughly 550 workers, of which roughly half have been in our manufacturing operations to assist progress in buyer demand.

Professional forma different revenue was $79.4 million for Q2, increased than $72.5 million within the prior quarter, primarily as a consequence of increased curiosity revenue. Our professional forma efficient tax fee for the second quarter was 22.5%, in step with our expectations. Second quarter 2024 professional forma internet revenue was $641 million or $1.78 per share, in contrast with $507 million or $1.42 per share for the second quarter of final yr. I’ll now summarize our GAAP outcomes.

GAAP internet revenue was $527 million or $1.46 per share for the second quarter of 2024, in contrast with GAAP internet revenue of $421 million or $1.18 per share for the second quarter of 2023. The changes between professional forma and GAAP internet revenue are outlined and quantified on our web site and embrace extra tax advantages related to worker fairness plans, worker stock-based compensation, amortization of intangibles, litigation costs, and features and losses on strategic investments. We ended the quarter with money and investments of $7.7 billion, increased than the $7.3 billion we ended final quarter. The sequential improve in money and investments mirrored money generated from working actions, partially offset by capital expenditures of $309 million.

And with that, I wish to flip it over to Brian.

Brian King — Vice President, Treasurer, and Head of Investor Relations

Thanks, Jamie. Total, second quarter process progress was 17% in comparison with 22% for the second quarter of 2023 and 16% final quarter. Within the U.S., second quarter 2024 process progress was 14% in comparison with 19% for the second quarter of 2023 and 14% final quarter. Second quarter progress was led by procedures inside normal surgical procedure, with energy in cholecystectomy and foregut procedures and likewise thoracic procedures.

Bariatric process progress declined within the mid single-digit vary. Exterior of the U.S., second quarter process quantity grew 22%, in contrast with 28% for the second quarter of 2023 and 20% final quarter. Development was led by nonurology procedures with energy in colon resection, hysterectomy, and lung resection procedures. In Europe, second quarter progress continued to be led by procedures past urology, primarily from normal surgical procedure and gynecology process classes.

Germany, the U.Ok., and Italy process efficiency led the area with every experiencing sturdy progress in colon and rectal resection, hysterectomy, and different normal surgical procedure procedures. In Asia, progress within the second quarter was led by Japan and India, whereas progress in China was careworn. And Korea process progress continued to be impacted by doctor strikes. In Japan, total process progress was stable with continued energy in colon and rectal resection, gynecology and lung resection procedures.

In India, whereas nonetheless within the early stage of adoption, we noticed energy in gynecology and normal surgical procedure procedures, significantly with progress in hysterectomy, cholecystectomy, and hernia restore. China process progress was decrease than prior-period averages when in comparison with the identical quarter a yr in the past, which skilled a restoration in procedures impacted by COVID. System utilization remained sturdy, whereas capital placements proceed to be impacted by delayed tenders and rising home robotic programs. Now, turning to the scientific facet of our enterprise.

Every quarter on these calls, we spotlight sure just lately revealed research that we deem to be notable. Nonetheless, to achieve a extra full understanding of the physique of proof, we encourage all stakeholders to totally evaluate the in depth element of scientific research which have been revealed over time. Earlier this yr, Dr. Zhang and group from the Guangzhou College of Chinese language Drugs revealed a scientific evaluate and meta-analysis within the Worldwide Journal of Surgical procedure that checked out open, laparoscopic, and robotic-assisted surgical procedure approaches to rectal most cancers administration.

This meta-analysis coated 56 research and included over 25,000 sufferers, of which roughly 11,000 sufferers obtained robotic-assisted surgical procedure, over 13,000 sufferers laparoscopic surgical procedure, and over 390 sufferers obtained open surgical procedure. When in comparison with the management group of each laparoscopic and open procedures, sufferers present process a robotic-assisted strategy had an roughly two day shorter size of keep. Particularly, when in comparison with lap, the robotic-assisted group was related to a 1.7 day shorter size of keep. Relative to open surgical procedure, the size of keep was 5.5 days shorter.

The robotic-assisted strategy was additionally demonstrated a protecting impact for changing to an open process, with 61% decrease odds of conversion related to robotics relative to the laparoscopic strategy. Lastly, when in comparison with the laparoscopic and open management group, the robotic-assisted strategy confirmed much less estimated blood loss, roughly 40% decrease odds of urinary retention, and, when in comparison with open, the next variety of harvested lymph nodes. The authors concluded, “The robotic strategy emerges as probably the most favorable possibility for managing rectal most cancers when in comparison with open, laparoscopic, and transanal strategies, because it delivers the best mix of oncological, purposeful, and affected person restoration outcomes. The digital interface of surgical robots permits a shift within the paradigm of surgical coaching, facilitating shorter studying curves which can be extra complete and notably decreasing the morbidity and mortality related to them.” I’ll now flip to our monetary outlook for 2024.

Beginning with procedures. On our final name, we forecasted full yr 2024 process progress inside a spread of 14% and 17%. We are actually narrowing our forecast and anticipate full yr 2024 process progress of 15.5% to 17%. The low finish of the vary assumes additional softening in bariatric procedures, together with growing headwinds in Asia from extended doctor strikes in Korea and in China, from delayed tenders and rising home robotic programs, impacting capital placements and, due to this fact, process progress.

On the excessive finish of the vary, we assume bariatric stabilizes at present quarter charges and headwinds in Korea and China don’t worsen. Turning to gross revenue, we’re growing our professional forma gross revenue margin to be inside 68.5% and 69% of internet income. Our precise gross revenue margin will fluctuate quarter to quarter, relying largely on product, regional, and trade-in combine, and the affect of recent product introductions. Turning to working bills, we’re reducing our steering for professional forma working expense progress to be between 10% and 13%.

We’re refining our noncash inventory compensation expense to vary between 680 million to 700 million in 2024. We’re narrowing our steering for different revenue, which is comprised principally of curiosity revenue to whole between $300 million and $320 million in 2024. With regard to capital expenditures, we proceed to estimate a spread of 1 billion to 1.2 billion, primarily for deliberate facility development actions. With regard to revenue tax, there isn’t a change to our steering of 2024 professional forma revenue tax fee to be between 22% and 24% of pre-tax revenue.

That concludes our ready feedback. We’ll now open the decision to your questions.

Questions & Solutions:

Operator

[Operator instructions] First query is from the road of Larry Biegelsen, Wells Fargo. Please go forward.

Larry Biegelsen — Analyst

Good afternoon. Thanks for taking the query, and congratulations on a very nice quarter right here. After all, I’ve to begin with da Vinci 5, actually sturdy begin right here, 70 placements. I heard the feedback about being constrained by way of the second half of 2025, however da Vinci 5 was nearly half of your U.S.

placement, so it seems to be like a powerful launch. So, how ought to we take into consideration the ramp in da Vinci 5 placements within the second half? And the way ought to we take into consideration trade-ins going ahead, which have been most likely a bit decrease than I anticipated this quarter within the U.S.? And I had one follow-up.

Jamie E. Samath — Chief Monetary Officer

Hello, Larry. It is Jamie. I’d say for the second half of 2024, you must anticipate dV5 placements within the U.S. to extend modestly quarter to quarter.

And that, partially, displays the truth that we do have this {hardware}/software program replace that we described. And so, it’s important to manage the way you try this construct plan by way of the manufacturing unit fastidiously for that replace. And we mentioned we might be in a measured rollout by way of then the primary half of 2025. With respect to how we have organized the measured rollout of dV5, we have actually centered the gross sales pressure on trying to place da Vinci 5 for incremental capability for our clients versus the trade-in cycle.

I feel we might somewhat get to a broad launch the place we primarily have unconstrained provide relative to demand earlier than we have a look at the trade-in cycle. Simply a few feedback on the trade-in cycle. I feel — I would not anticipate the trade-in cycle to instantly emerge and take off shortly. I feel what we have seen prior to now is that that is progressive and over multiples of years.

And, partially, that may mirror the truth that many purchasers will need to consider da Vinci 5. They need to see proof develop over time by way of its functionality and have set. And, in fact, their want for da Vinci 5 will rely upon their particular person program and what they see the worth of that, partially, given the upper pricing or lease prices for da Vinci 5.

Larry Biegelsen — Analyst

That is very useful. After which, I needed to ask about China. You talked about it a few instances on the decision as we speak. We just lately noticed a brand new stimulus introduced there.

And my query is — and you’ve got talked concerning the anti-corruption initiative. Is that also having an affect? And the way are you guys desirous about the brand new stimulus that was introduced there? Will that assist drive placements? Thanks for taking the query.

Dave Rosa — President

Hello, Larry. It is Dave. Answering the second a part of your query first across the stimulus. In speaking to our groups, we do not see that it should have a fabric affect on the placements of programs or an affect on the quota.

With respect to form of the working surroundings of China and the anti-corruption that you simply referenced, there is not any query that the working surroundings stays difficult. , the well being system in China is form of rebasing round economics and medtech. I feel that is clear throughout the trade. , On the position facet, clients are persevering with to worth our choices clearly.

And we’re seeing, as you recognize, the emergence of home programs. And so, regardless of these challenges and every little thing that is occurring within the surroundings in China, we’re nonetheless seeing double-digit progress in procedures. So, we stay assured and stay up for persevering with our investments and focus in China.

Larry Biegelsen — Analyst

Thanks for taking the questions, guys.

Operator

And we’ll look to the subsequent query from the road of Travis Steed of Financial institution of America. Please go forward.

Travis Steed — Analyst

Hey, congrats on the great quarter. I needed to perhaps — if there’s any method you’ll be able to assist us perceive the form of the demand facet of the dV5 equation? I do know we’re in a constrained rollout, however 47% of the placements within the U.S. have been dV5 this quarter. And I do not know if there’s any option to form of rank order a number of the elements, it’s essential mark off and test off the listing to form of get the total launch.

Heard the software program/{hardware} improve, however I assume there’s another variables to think about as nicely.

Dave Rosa — President

Yeah. Hey, Travis. It is Dave once more. There — it is a few the elements that we have mentioned prior to now, and it is actually form of three major areas.

One is ensuring that we’re maturing our provide chain and our manufacturing capability in order that we’re, once more, capable of get to the standard, to the price, to the yields that we anticipate as we strategy a broad launch. The second half is what Jamie described across the software program and {hardware} replace, the place we’re attempting to get that built-in into our programs and balancing the manufacturing unit output. After which, the third factor is, listening to our clients. And so, as these placements occur, we’re listening to our clients and responding to their suggestions.

And we’ll be releasing some software program updates alongside the best way right here with the intention to reply to that suggestions. And so, we need to get that in place earlier than we get to product launch.

Jamie E. Samath — Chief Monetary Officer

Travis, I’d simply add, your query — a part of your query is on the demand facet. I’d say that within the early section of a launch, you tend to see early adopters search for the most recent expertise and likewise the bigger establishments, the massive IDNs. And so, it’s important to form of give it a while to see the total set of shoppers by way of what that curiosity might be and the segments of shoppers, once more, that may search for proof to construct over time, for buyer perception to construct over time. And so, you most likely want a while to see the total set of shoppers by way of what the total image of demand for da Vinci 5 is.

And once more, that takes a while. da Vinci 5 is a platform that, as we did with Xi, we’ll put money into extra time, and so you will construct a set of capabilities additionally over time.

Travis Steed — Analyst

That is useful. And, Jamie, perhaps on the gross margin facet, you recognize, very sturdy and solely — one time was 50 foundation factors. So, I used to be form of underneath the impression perhaps initially gross margins could be a bit lighter with dV5. Simply are you able to elaborate on the energy and margin this quarter?

Jamie E. Samath — Chief Monetary Officer

Sure, I’d simply say that — I imply, we form of describe from a sequential foundation what drove the development quarter on quarter. It was decrease stock reserves. Our groups did an excellent job with respect to element price efficiency with our suppliers and within the logistics space. And that form of got here in sooner than we anticipated.

These are a set of groups that, for a few years, had been engaged on provide due to COVID and the pandemic and what occurred by way of provide constraints. And people groups, in more moderen durations, have refocused on price reductions. And we noticed that are available early, and so we have been actually happy to see that. And so, nice efficiency within the quarter.

You noticed us enhance the steering for the yr. I’d say if we — as we have a look at the second half, you will notice elevated depreciation, as I described. You will note a excessive proportion of the income be new merchandise, da Vinci 5 and Ion and SP. In Q2, of the 70 da Vinci 5 placements, solely 11 of them have been buy association.

So, form of a muted impact by way of gross margin within the quarter. The opposite placements are working leases the place you see the economics play out over time.

Travis Steed — Analyst

Nice. Thanks loads.

Operator

OK. We’ll go to the subsequent line. Robbie Marcus, JPMorgan, please go forward.

Robbie Marcus — Analyst

Oh, nice, thanks, and I will add congratulations on a really stable quarter right here. I needed to ask concerning the suggestions within the discipline. You talked about within the script a bit. We have all talked to docs and have heard from them.

I would love to listen to from you, you recognize, each what the physicians are saying but in addition what the establishments are saying. Clearly, demand is there, 70 items this quick is actually sturdy. However what is the pushback, if any, for facilities? How do they really feel concerning the potential to drive higher economics and sooner procedures and higher outcomes with da Vinci 5 and the suggestions so removed from the physicians?

Dave Rosa — President

Yeah, Rob, perhaps I will begin. That is Dave. Simply beginning with a number of the suggestions that we have mentioned earlier than, you have a look at what clients are instantly appreciating and a number of the stuff you would anticipate round ergonomics, will increase in precision and imaginative and prescient, the pinnacle in UI, onscreen graphics, and different issues. And so, taken collectively, every a type of options are resulting in some effectivity features particularly in form of console time.

And that has been form of seen throughout the shopper base. And I feel that is the place we’re beginning — you recognize, we’re listening to a bit bit about what can that imply by way of including a process a day, growing utilization of the system. And so, that is what each our surgeon clients and our govt clients are noticing because of their funding in da Vinci 5. , a number of the different options, Case Insights, Pressure Suggestions, we’re excited to work with clients, and we all know that is going to take time to develop and actually quantify a few of these impacts.

By way of pushback, as we speak, what we’re seeing is a bit bit what Jamie talked about. We’re beginning, clients should consider the worth of da Vinci 5. We’ve these early adopters which can be enthusiastic about what it may be. And as we transfer in by way of our measured launch, we’ll proceed to should underscore and reinforce the worth that it brings and talk that to executives and their groups.

Gary S. Guthart — Chief Govt Officer and Director

I will simply leap in and add a bit. We anticipate to be evaluated towards the quadruple or the quintuple goal with regard to da Vinci 5. And we’re assured that we’re going to get there. I feel we’re going to develop the information to assist that perspective.

The apples-to-apples value variations aren’t that nice when you add inflator. And a number of the different issues which can be inbuilt, we’ve simply received to justify that distinction. One of many questions I’d ask, and, Dave, you’ll be able to reply this, is are there any procedures that physicians desire utilizing da Vinci Xi to da Vinci 5? In different phrases, is there any desire to stick with what they’ve?

Dave Rosa — President

Yeah. So, you recognize, Gary, in all of my discussions and with the group, surgeons desire the use da Vinci 5 for the explanations we talked about.

Gary S. Guthart — Chief Govt Officer and Director

So, I feel on the executive facet, so long as you’ll be able to show that the quadruple goal or the quintuple goal is being happy, that they’re getting worth for the comparatively modest apples-to-apples value improve, I feel we really feel fairly good. I’d say on pressure reflection and on Case Insights, these are highly effective foundational new capabilities which can be going into the market. And I feel that is actually attention-grabbing. And we’ll work with main clients to begin evaluating the place do they make sense and the place do not they.

We, in fact, imagine that there are going to be procedures and affected person populations the place they make a ton of sense and so they generate actual worth. So, early, it’s about information era and analysis and suggestions. And later, we’ll begin to drive that by way of scientific publications and different issues. So, I feel there’s a left hand, proper hand right here.

And a few of it’s what you get as we speak. You get precision, you get imaging, you get ergonomics, you get throughput. There are some issues that, on this platform, you get to take part in its analysis and improvement. And that may come later.

After which, it’s a core expertise platform upon, which we are able to construct. Jamie talked about it earlier. So, it’s that set of sequences that provides us some confidence to maintain pushing exhausting.

Robbie Marcus — Analyst

Properly, Gary, you anticipated my follow-up query. So, let me ask one other one right here. One of many gadgets of suggestions I’ve heard from physicians is that Case Insights and the pressure sensing can assist present physicians be higher. However extra importantly, it might assist physicians that do numerous lab procedures or open procedures, make it simpler for them to regulate to robotics.

Is that one thing you might be listening to? I do know it’s early within the launch right here. However how do you concentrate on these options and the flexibility to get extra conversion from lab to robotic?

Dave Rosa — President

So, I do suppose there are a number of methods to think about Pressure Suggestions and give it some thought. One in every of them is, we do suppose it could possibly have an effect on studying curve. And so, as laparoscopic surgeons or newer surgeons to the platform adopted, we imagine that Pressure Suggestions and, you recognize, pressure suggestions by way of Case Insights can enhance their time to proficiency on the robotic. In the case of form of long run scientific outcomes and what Pressure Suggestions and the information surrounding it, it is what Gary described.

We imagine it to be a robust element of trying to the long run and saying how will we enhance surgical outcomes? Does gentler surgical procedure imparting much less pressure on tissue have a distinction in outcomes? Our speculation is strongly sure. And so, that’s what’s going to take a number of quarters in time to develop. However I do imagine there may be form of two segments the place Pressure Suggestions can have that affect.

Robbie Marcus — Analyst

Thanks very a lot.

Operator

And we’ll go to the subsequent line. And that’s the line of David Roman, Goldman Sachs. Please go forward.

David Roman — Goldman Sachs — Analyst

Thanks, and good afternoon, everyone. I needed to begin on an Ion query. Appreciating a number of the provide chain dynamics which will have contributed positively to progress within the quarter, however perhaps you might go into a bit bit extra element about what you are seeing within the discipline from an adoption perspective, to what extent you are seeing increased diagnostic yields on Ion lead to earlier intervention for sufferers and whether or not these interventions are going down using da Vinci or not?

Gary S. Guthart — Chief Govt Officer and Director

Yeah, so with respect to getting a affected person into the diagnostic pipeline, that is form of an unbiased variable from Ion and/or da Vinci. And so, that is by way of screening or incidental findings. However as soon as they’re in there, then Ion is providing actually, actually efficient option to go and biopsy that lesion. And so, we have a look at form of two major variables there.

One is the dimensions of the lesion, after which one is the diagnostic yield. And so, the essential a part of this, is to diagnose smaller and smaller lesions. Now, the smaller the lesion, it’s correlated to most cancers stage. And that is the place, if you happen to get it at stage 1A, you’ll be able to have very, very excessive survival, so we’re pushing towards smaller lesion dimension.

After which, diagnostic yields which can be nearly as good as attainable, approaching TTNA ranges or CT-guided biopsy ranges, and finally, we hope to exceed these. And so, these collectively, Ion is proving to be a very efficient software at doing that nicely whereas sustaining an improved security profile over CT-guided needle biopsy. And so, when any individual is recognized with Ion and it’s deemed to be most cancers, then oftentimes, they might transfer to a da Vinci process. It is actually as much as the tumor board and that doctor about the easiest way to deal with that affected person.

It might be with da Vinci, it could be with radiation or another different. So, oftentimes they’re coupled, however not all of the instances.

David Roman — Goldman Sachs — Analyst

That is a really useful context. Thanks. And perhaps I might ask a monetary query on the follow-up right here. I feel as I have a look at the working expense targets for the yr, a lot of the discount truly seems to be prefer it stems again to what might need been a slower begin to the yr.

I feel you grew opex about 7% in Q1 and noticed an acceleration right here in Q2. However perhaps you might simply assist unpack a bit bit about — a bit little bit of the dynamic underpinning the working expense progress for the steadiness of the yr and the way we must always take into consideration form of normalized opex progress. Is that form of the seven quantity the place you began the yr form of the low double-digit quantity the place you are trending now? After which, I do not know if you happen to’re keen to supply any perspective on the incremental depreciation, however you have been form of in just like the $90 million vary in Q1, $100 million vary — excuse me, in Q1 of this yr. Are we speaking a couple of $10 million per quarter improve, $20 million? And any framing you give could be useful on that facet as nicely?

Jamie E. Samath — Chief Monetary Officer

Sure. Quarter to quarter, it may be a bit lumpy relying on these bills the form of — usually are not constant throughout quarters. So, I simply say, if you happen to take the primary half, opex grew 9%. And also you have a look at the up to date steering, it says the second half grows 11% to fifteen%, 16-ish p.c.

So, an acceleration within the second half. From a framing perspective, roughly we’re trying to keep R&D about income progress, and it has been at 11%. , final couple of years, the primary half is about 11%. After which, you’ve got seen us describe how we have been leveraging enabling features.

By way of then what the opex steering was on the final name versus what it’s as we speak, there are a few of these lumpy bills which can be not within the yr simply due to timing. We’ve checked out some headcount that we had deliberate for the yr that we have pushed into 2025. That is actually round focus, not round something apart from focus. The place you see alternatives to proceed to leverage perhaps at higher charges than we anticipated, then we’ll notice these effectivity advantages.

However we do anticipate second half working bills to be increased than the primary half. And that is primarily pushed by depreciation. Not able to be particular about what the relative improve in depreciation expense is, however it’s contemplated in that ramp-up in second half working bills.

David Roman — Goldman Sachs — Analyst

Nice. Thanks very a lot.

Operator

And we’ll go to the subsequent line. And that would be the line of Rick Clever, Stifel. Please go forward.

Rick Clever — Analyst

Good afternoon, everyone. Hello, Gary. Hello, Dave. Simply — I hoped that you might speak a bit bit extra concerning the process progress outlook broadly.

You gave us — you bumped up the vary and have been very clear concerning the low-end elements on the low and the excessive finish. However I used to be simply curious, I am undecided I perceive out of your perspective, is our bariatric or GLP-1 strain is leveling off right here? Or have they leveled off? , how cheap is it to suppose you might get to the higher finish? And form of the identical query for the China Asia pressures you talked about as nicely, might you simply elaborate a bit bit on that? Thanks.

Gary S. Guthart — Chief Govt Officer and Director

Yeah, with regard to how to consider the vary, I’ll ask Brian to step in and try this. So, Brian, try this, after which we’ll come again to speak a bit bit about GLP-1s. And I will, maybe, take that. After which, I feel on China, I will take it to Dave.

Brian King — Vice President, Treasurer, and Head of Investor Relations

So, Rick, I am simply going to reemphasize or restate what the vary was. So, ramp dimension, 15.5% to 17%, is process steering for the yr. On the low finish, we’re assuming, you recognize, that bariatric procedures continues to melt. We did speak a bit about even final quarter and this quarter in Asia round doctor strikes that have been impacting procedures in Korea together with delayed tenders impacting process or capital placements in China, which, due to this fact, impacts total procedures or process progress.

And on the excessive finish of the vary, we’re actually assuming that bariatric primarily stabilizes at present quarter charges. And once more, that, you recognize, Korea and China don’t get any worse.

Gary S. Guthart — Chief Govt Officer and Director

, talking of bariatrics, two results are occurring. The GLP-1s are altering to the surgical market. And even inside that, there may be some share change between laparoscopy and robotics that is occurring. So, you’ve got two issues which can be coming by way of and so they internet out.

It’s not — the affect of GLP-1s on the bariatric surgical procedure market from our perspective in mixture has not bottomed but. And the truth is I do not suppose anyone is aware of when and the place that may precisely accept a few causes. I feel a few of it’s trying on the places and takes of effectiveness, and you’ve got constrained entry to the medicine and you’ve got some new medicine within the pipeline. So, that may play out over time.

And if any individual informed you they knew the reply, I am undecided I imagine them. Having mentioned all that, we’re not depressed about it. I feel that it’s going to play out. I feel there is a position for bariatric surgical procedure.

And I feel in our clients’ palms with our programs, I feel that surgical procedure has accomplished nicely. So, I feel we’re simply going to should all undergo it collectively. I feel we will look that have collectively. With regard to form of longer-term outlook of procedures in China and total sentiment, Dave, I will form of kick to you.

Dave Rosa — President

Sure, you recognize, what I’d say concerning the longer-term form of outlook right here is our choices, after I mentioned earlier than, are extremely valued in China. The programs are utilized at a excessive clip. And, you recognize, we’re there’s worth that surgeons and sufferers place on high-quality, minimally invasive care. And so, that is, I feel, the draw of this.

By way of a number of the headwinds, to me, there are form of two areas. One is the capital surroundings that we talked about. And with constrained capital surroundings and placements, it has an affect on process progress. After which, there’s different areas round this sort of rebasing by the federal government round economics.

And so, it has varied impacts. It may well have impacts in provinces round cost codes. And that’s one other headwind for us by way of process progress and utilization long run.

Gary S. Guthart — Chief Govt Officer and Director

One — two feedback I would make on each the headwinds. I feel sooner or later, I would anticipate each of them to be time restricted. I feel there will be an equilibrium that might be discovered between GLP-1s and surgical procedure sooner or later. I additionally really feel just like the rebase line in — the financial rebase line in China and the mixing and emergence of home programs.

However these issues will begin to discover an equilibrium additionally. How lengthy is that going to take is I feel what’s underlying this query. And the reply is we do not know. However I feel that minimally invasive surgical procedure in China is very valued.

There is a perception in robotic-assisted surgical procedure as being essential. And our merchandise and ecosystem is valued. So, I feel that we’re keen about finishing that.

Rick Clever — Analyst

Yeah. Gary, if I might only one follow-up. The query I’ve gotten, I feel, most incessantly put up the launch of dV5 is what new process — what new incremental TAM will da Vinci 5 unlock? I had the privilege of interviewing Dave, who could be close to at hand as we speak, that query at SRS. And I mentioned the best way da Vinci 5 unlock the overall surgical procedure TAM, what’s going to da Vinci 5 unlock.

And Dave very eloquently mentioned it should unlock the routine use of robotic surgical procedure day by day. Do you agree with Dave? And is that — are your clients understanding that imaginative and prescient or getting that that is what you are aiming at? Simply any response to these ideas, I would respect. Thanks, Dave.

Dave Rosa — President

You are welcome, Rick.

Gary S. Guthart — Chief Govt Officer and Director

Sure. I will begin. Yeah, I agree with him. No shock.

Perhaps simply to reiterate our place. There’s two totally different ways in which it could possibly assist develop long-term. A technique is to go deeper into the process base, we’re in already to assist care groups and physicians who’ve up to now not needed to undertake, or have chosen to not undertake, or have had a barrier to adoption, to assist them undertake. And that may be by way of a number of the performance of dV5 and what it does, a bit little bit of simpler entry to different capital, for instance, of Xis turn into extra utilized in extra locations, it could possibly launch entry constraints collectively as a portfolio.

These are highly effective issues, and that speaks to what Dave spoke about. We do not suppose we’re accomplished getting extra indications on dV5, and people are issues that would occur sooner or later. And as we get nearer and see what these alternatives are, we’ll describe them.

Rick Clever — Analyst

Thanks.

Operator

OK. We’ll go to subsequent line. Drew Ranieri, Morgan Stanley, please go forward.

Drew Ranieri — Morgan Stanley — Analyst

Hello, thanks for taking the questions. Perhaps simply one thing that we additionally heard from SRS was that dV — da Vinci Xi remains to be very nicely thought of within the discipline and there are surgeons that also need to get their palms on it. So, simply are you able to speak a bit bit extra about a number of the underlying demand for Xi within the U.S.? And, Jamie, I feel you identified, too, that you simply form of anticipate dV5 to sequentially enhance all year long. So, perhaps simply speak to us about what which means for Xi, given that you simply’re having broader conversations with hospital directors and surgeons as they’re desirous about constructing capability for robotic surgical procedure?

Jamie E. Samath — Chief Monetary Officer

Yeah, I’d simply say within the U.S., demand for Xi form of has two segments to it. You have got clients that want incremental capability, da Vinci 5 is not obtainable within the time that they want it. And so, they’re coming into into preparations with us to take Xi now to serve that growth of capability they want. After which, they’ve the improve proper constructed into the association to maneuver to da Vinci 5 when it turns into obtainable probably in broad launch.

You have got one other section of shoppers within the U.S. who’re form of wait and see with respect to what the worth might be of da Vinci 5. And once more, they search for constructing proof and form of a broadening of buyer perception. And a part of that consideration is the profile of that buyer, what their technique is, what their process combine is.

And, in fact, as a part of the consideration, they’re trying on the incremental value, which as Gary described, once you do the total stack is not truly that vital. However these clients which have tight capital budgets who, like Xi, which is a succesful system, are extra a wait and see. So, I feel by way of as you look ahead, that may evolve with respect to how da Vinci 5 capability expands, and the extent to which then extra clients can take that system. However there’s a section of shoppers that basically like Xi.

Drew Ranieri — Morgan Stanley — Analyst

And has there been any change in desirous about bringing da Vinci 5 to the broader world markets? I do know that you simply’re engaged on a few regulatory filings proper now. However any replace on timing or additional market growth? Thanks for taking the questions.

Dave Rosa — President

Sure. Simply by way of our OUS plans, I feel it is in step with what we’ve communicated, which is we’re in discussions with Korea and Japan and do not anticipate to launch in Europe earlier than the tip of subsequent yr. And in order we glance past that, it is simply too early to element out these plans, and we’ll let you recognize as they get a bit bit extra into focus right here.

Operator

OK. And we’ll go to the subsequent line right here. Adam Maeder, Piper Sandler, please go forward.

Adam Maeder — Piper Sandler — Analyst

Hello. Good afternoon. Thanks for taking the questions, and congrats on the good quarter. Two from me.

The primary one is on dV5, and I particularly needed to ask concerning the {hardware} and software program modifications that you simply plan to make within the again half of the yr. What are you hoping to enhance upon? What are the magnitude of the modifications that you simply plan to implement? It feels like they’re comparatively minor however needed to substantiate that. After which, I had a follow-up. Thanks.

Dave Rosa — President

Positive, positive. I will take that. So, a number of the near-term additions that we’re speaking about embrace the mixing of hub capabilities of Intuitive Hub. After which, from the surgeon having this head finish expertise, after they’re within the console, they’re going to have the ability to begin accessing and controlling Intuitive 3D fashions, with the ability to manipulate them from the console with the controls there.

And likewise, they’re going to have the flexibility to entry and replay intraoperative video. After which we’ll additionally embrace and combine in simulation. So, that form of offers you a taste, I feel, of a number of the items that we’re including that we have talked about in these {hardware} and software program upgrades. As well as, there might be some software program upgrades that embrace responding to buyer suggestions as nicely and a number of the issues that we have heard as we’re going by way of our measured launch right here.

After which, if you happen to look a bit additional out, some intraoperative expertise constructing blocks that we’re engaged on, akin to process step mapping and 3D depth mapping that may use some AI and ML algorithms and leverage this compute energy of da Vinci 5. And people issues will set us up for some extra superior options sooner or later that leverage that basis.

Adam Maeder — Piper Sandler — Analyst

Actually good colour, Dave. Thanks for that. And for the follow-up, needed to ask about SP. Congrats on the thoracic indication.

I am curious how a lot you suppose that expands the chance for SP right here within the states. I do know you are additionally engaged on colorectal, so curious when you’ve got timelines there. After which, collectively, does that form of provide the indication base to push SP extra aggressively within the U.S.? Thanks for taking the questions.

Jamie E. Samath — Chief Monetary Officer

Sure. By way of thoracic, within the early interval, that process truly is perfect when you’ve got a stapler and have been in improvement for a stapler for SP. And so, we’ll have the ability to work with early adopters on the thoracic indication. However it’s actually when the stapler comes that you simply’re capable of form of extra robustly drive adoption.

One of many benefits of SP is, in fact, then the chance to entry the physique in ways in which does much less harm to wholesome tissue. In the present day, within the U.S., by way of thoracic for a number of, we’re already comparatively extremely penetrated. And so, actually, the query then is relative worth of SP in comparison with Xi. What was the second a part of your query? I am sorry, if you happen to might repeat it.

Adam Maeder — Piper Sandler — Analyst

Yeah, glad to. I used to be simply asking about colorectal timing. I feel you’ve got the IDE research that is ongoing. And I feel that might be your fourth indication as soon as the colorectal indication is in hand.

So, does that form of offer you essential mass from a sign standpoint to form of, you recognize, push extra aggressively with SP within the U.S?

Jamie E. Samath — Chief Monetary Officer

Sure. The work on the IDE has progressed. We haven’t any extra element at this level. And, clearly, that then provides one other class with respect to the set of indications within the U.S.

And I feel it does have the — give us the chance to each complement SP process progress within the U.S. and add to the rising utilization we see of the SP platform within the U.S. However I feel we even have the chance for added indications over time within the U.S. Colorectal, like thoracic, may even require the SP stapler.

Gary S. Guthart — Chief Govt Officer and Director

Operator, we’ll take yet one more query from yet one more name, after which we’ll wrap.

Operator

OK. That might be from the road Richard Newitter, Truist Securities. Please go forward.

Wealthy Newitter — Truist Securities — Analyst

Thanks for taking the query. Perhaps for Jamie, simply, Jamie, prior to now, you’ve got talked about, you recognize, a long-term or an intermediate to long-term three, four-year time-frame to get again above sustainably 70% gross margin. A, right me if that is not true, however I am fairly positive that is what you’ve got mentioned prior to now. I am simply curious simply with a number of the initiatives perhaps paying dividends sooner than anticipated and sooner, I do know you’ve got some manufacturing transition occurring for Ion disposables, that is a giant initiative, is it attainable we’re shifting towards that objective a bit sooner, sooner? , I would love to listen to any ideas there.

Jamie E. Samath — Chief Monetary Officer

Particularly, 70% gross margin, that is not sustainable within the brief time period. It continues to be our aspiration to have gross margin at 70% within the medium time period. There’s work for us to do over that interval with respect to, clearly, da Vinci 5 prices. We’ve to proceed to progress on Ion and SP prices.

And as we have mentioned, we’ve incremental depreciation within the second half and extra vital incremental depreciation subsequent yr. And so, that may even require us to then manufacturing capability associated, which you construct in chunks. We’ll should income leverage that incremental depreciation over a time period. Definitely, by way of the baseline of the place we’re at, the price reductions we described on element prices and logistic prices have are available a bit earlier.

And that is why we have raised the steering for gross margin for this yr. However the aspiration for 70% gross margin remains to be a medium-term aspiration.

Wealthy Newitter — Truist Securities — Analyst

Thanks, and — if I might simply perhaps — OK —

Gary S. Guthart — Chief Govt Officer and Director

I will wrap it there. Thanks. That was our final query. In closing, we imagine that there’s a substantial and sturdy alternative to essentially enhance surgical procedure and acute interventions.

Our groups proceed to work intently with hospitals, physicians, and care groups in pursuit of what our clients have now termed the quintupling, higher, extra predictable affected person outcomes, higher experiences for sufferers, higher experiences for his or her care groups, higher entry to nice care and finally, a decrease whole price of care. We imagine worth creation in surgical procedure and acute care is foundationally human. It flows from respect for and understanding of sufferers and care groups, their wants and their surroundings. At Intuitive, we envision the way forward for care that’s much less invasive and profoundly higher the place illnesses are recognized earlier and handled shortly so sufferers can get again to what issues most.

Thanks to your assist on this extraordinary journey. We stay up for speaking to you once more in three months.

Operator

Thanks, everybody, for becoming a member of as we speak’s convention name. [Operator signoff]

Period: 0 minutes

Name individuals:

Brian King — Vice President, Treasurer, and Head of Investor Relations

Gary S. Guthart — Chief Govt Officer and Director

Dave Rosa — President

Jamie E. Samath — Chief Monetary Officer

Larry Biegelsen — Analyst

Jamie Samath — Chief Monetary Officer

Travis Steed — Analyst

Robbie Marcus — Analyst

Gary Guthart — Chief Govt Officer and Director

David Roman — Goldman Sachs — Analyst

Rick Clever — Analyst

Drew Ranieri — Morgan Stanley — Analyst

Adam Maeder — Piper Sandler — Analyst

Wealthy Newitter — Truist Securities — Analyst

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