Intuitive Surgical, Inc. (ISRG) Earnings Call Transcript & Summary

Okay. Good afternoon, everybody, and thank you for joining us for the next fireside chat as a part of the virtual Vegas Healthcare Conference from BofA. I'm Bob Hopkins. And we have a fireside chat scheduled now with Intuitive Surgical. Calvin Darling is here, who, as everybody knows is Senior Director of Finance and Investor Relations; and Philip Kim, Investor Relations. And I want to thank you guys for joining us. And this will be a fireside chat today. But I know, Calvin, you had some quick introductory comments to make, and then we'll kick it off. Thank you for being here.

No. Thank you, Bob. It's great to be with you this afternoon, and thanks, everyone, for joining. Before we get started, I'd like to mention that comments this afternoon 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, which are described in detail in our SEC filings. Investors are cautioned not to place undue reliance on such forward-looking statements. Bob?

Great. Okay. So I think as a place to start, maybe with just a little bit of follow-up from your Q1 report, where, again, we all appreciated the details you gave on a week-by-week basis by geography, it was incredibly helpful. I'm just curious, from what we've heard from others, it's -- while we've been at a low base, things have kind of continued to improve over the course of April. I think most of the companies we follow now have sort of commented through most of April. And I just want to sort of check in to make sure that you guys have seen sort of similar, again, off a low base, but encouraging signs on a week-by-week basis, just as a place to start.

No. Bob, yes, I don't think we disagree with the things you're stating on a macro basis. From our standpoint here, our emphasis is working collaboratively with our customers, being as supportive as we can. We announced our customer support program just about 1.5 weeks ago, that's been well received. And we're just trying to be as involved and supportive as possible as folks are looking to move their surgical program forward. And that can take a lot of forms. We've talked about the financial relief with the assistance program. But things like, we've been talking for a long time about analytics, helping customers. We've been talking about some of our consulting in genesis. Helping people set up the efficient operations, I think, is going to be very core as people work out of this. Setting up COVID and non-COVID zones is usually a theme here and capping the smallest possible footprint with surgery in general. And da Vinci systems can be at the core of capping that minimal footprint using the least resources, whether it's hospital, operating staff, shorter recovery times, I think we can really be at the core and put some of our resources to bear. So we look at the trends by country and by region, there's clearly a lot of variability across the board and territories and types of procedures, and we're looking to get, again, the details of the customer to move things forward.

Okay. Thank you for that. So it sounds like you're not seeing things that are dramatically different from other companies in terms of slight progress off of the low base over the course of April. One geography I'd love to hear your views on, because it really stuck out in your presentation, was Japan. And I know it's become a nice source of growth for you guys. And just want to make sure that there wasn't anything in your view that's changing dramatically about Japan relative to the table that you put up on the Q1 call, and whether or not you think that the kind of stability that we've seen there is sustainable?

Well, you're right. Japan has been a nice source of growth for us in recent quarters. We got 12 additional procedures, granted reimbursement status in April of 2018, and those are contributing meaningfully to growth. We have been growing over 40% year-over-year for the past several quarters. And in fact, even Q1, we sustained the growth rate in the 40% range with COVID. And so you can see that in the graph. And when I say on the graph, we showed various countries and geographies and the procedure trends by week. So for interested parties and looking still up on our website, Japan was one that showed pretty consistent [ trend ] throughout the quarter. But as the quarter was ending and heading into the second quarter, some restrictions on movement were put in place, and things could potentially be different. We're not going to get into specific procedure trends inter-quarter here. But I think the point is you're going to see variability by country. And even at the country level, it's not necessarily straight-line from what the history was. We're going to move through a cycle here at different paces, and there may be some start/stop would go from different markets. And we'll see, we'll see what happens in Japan and the other markets.

Okay. And just for everyone's benefit, I'm not sure what the source of this optimism is, but from a couple of the companies we've talked to today, I think that some of the restrictions that were recently put in place in Japan may be lifted this week. We'll have to see and -- we'll have to see how that plays out. But that would be encouraging as well. You mentioned, Calvin, your -- the programs you've put in place to help your customers and the money you'll be spending to do so. I think the press release and the commentary made was quite clear. I guess my question on spending would be before COVID, you guys laid out some plans on -- for operating expense growth in this year. And I'm just wondering how COVID has changed that kind of core OpEx growth -- spend growth that you talked about at the beginning of the year, has COVID altered that? Or do you still plan on spending to that level this year?

Yes. So to your question, Bob, with respect to spending, there will be less travel and spending for events like, for example, flying to the Bank of America conference, travel-related spending, T&E, we'll have less spending on hospital events. We're pausing hiring with respect to volume-related roles within sales. And we haven't been too specific on how much of our cost structure is fixed versus variable. But we have stated that we will continue to invest in our customers and innovation. We'll invest in our supply chain, and we're supporting our employees and taking the long-term view. We spent a long time building the right organization, and we want to make sure we retain them. And so while spending will decrease in the second quarter related to some COVID impacted areas, much of our spending will continue. We do believe we need to invest for the long term. We have a unique opportunity to expand the benefits of computer-aided surgery and acute interventions around the world. And so that's how we're thinking about spending.

Okay. That makes sense, Philip. But just as a -- maybe as a follow-up, the things that you talked about, travel and a couple of other areas, what percentage of total spend do you think those things make up? It sounds to me like it might be kind of the minority, maybe less than 10% or 20% of total spend. But I was wondering of those things that are being impacted because of COVID from a spend perspective, what percentage of total spend does that represent?

We haven't gotten to that level of specificity, but we have talked about how much of our spending will continue.

Okay. That's fair. And I know those flights from San Francisco to Los Angeles -- or to Las Vegas are pretty cheap. So one other question I want to ask is just another thing that you guys have been talking about for a while now is meeting the needs of your customers and being flexible -- you being flexible from an operating lease perspective because you have the balance sheet to do it, and it's because what your customer has looked for. I would imagine in this environment, customers might be looking to those types of arrangements, even more than in the past. So I guess maybe the way I'd frame the question is, would you be surprised if a year from now if 70-plus percent of your system placements were done over some sort of operating lease or usage-based model?

Yes. I don't know if we would specify a certain percentage, but we would expect leasing as a percentage of new placements to trend higher over time. As we partner with customers during the recovery, operating leases and usage-based agreements could be a tool for our customers. And so the rate of system placements under leasing could increase. Leasing will never go to 100% of system placements because leasing is illegal in China. And if you look historically, at least publicly traded hospitals have preferred to purchase the capital outright, which enables them to take advantage of depreciation given that they're evaluated on EBITDA. So given the new environment that we're in, it certainly is possible that we would see more leasing and that percentage to go up over time.

And how about in the shorter-term here? Because I know that this particular quarter, Q1, the leasing percentage was not higher. Should we expect that to kind of continue on its trend that it was previously on? Or could we see an extension of what we saw in the first quarter?

I think more broadly, we would likely see an extension of what we've seen more broadly. I think what we saw in Q1 was more of an anomaly.

Okay. And then just generally, taking a step back on sort of a similar topic, which is the topic of system placements, especially in a recessionary environment. Obviously, you guys were a public company back during the 2008-2010 time frame, is that an instructive period for what might happen over the course of the next year in your view? Or do you think that the current environment is much different? Just wondering how much we can look back to 2008-2010 to try to help educate us on what might happen, assuming we go into a pretty deep recession here?

Yes. We're definitely in unprecedented times with this coronavirus pandemic, to say the least. First quarter, we saw some impact on capital placements. We had some follow-through of things that were already in process entering the quarter. But towards the end, there were definitely some system placements that were deferred out as hospitals' attention, frankly, just started to move towards COVID care and away from the next da Vinci system. And we commented on the earnings call, we expect that Q2 systems will be significantly lower than previous. So we have felt the effect now that it's really difficult to characterize how the recovery will occur. You asked about '08-'09, and there are some similarities, but there are some pretty big differences as well. Obviously, in '08-'09, it was more of a real estate bubble that caused a macro level recession impacting everything, including hospitals. This time, it's a direct impact on the operations of the hospital where resources are shifting from one area, from lots of areas really to COVID care. So that's really is the core of it, and decisions have to be made directly as it relates to the services they're providing. Other differences on the positive side now, I'd say, it's 12 years later. And I think there's a much stronger positive consensus regarding the value of robotic surgery, both clinically and economically than back in '08 and '09. A lot of our business now, especially in the U.S., is programmatic, where we're selling into existing customers who are expanding their programs with additional systems. So there's a lot more just programmatic element. It's a broader base of business, more procedures, more categories, general surgeries further along. And I think also importantly, we talked about it, there are more options for placements now. There are leasing options, both capital and operational as well as usage-based leases, which can be really effective tools to work through this. We talked about the fact that we are focused on supporting our customers through the phases of the virus and the recovery and the relief program as well. But you do look at '08 and '09, and the hospitals that did adopt a more conservative capital acquisition approach and prioritize their needs, we're seeing some of that now. And with our eye on the customer support and moving through towards the -- restoring the procedure volumes, we'd expect that in the long term, that capital placements will reach an equilibrium point. But it's really hard for us to predict what the time line and shape of that path is going to be.

That's interesting, Calvin. Yes, I guess I hadn't thought about it quite like that, that on the one hand, there's -- it's a much bigger direct negative to hospitals, this environment, but at the same time, you can offer hospitals more flexibility. And so there's some differences that could be incrementally negative relative to that time period and some differences that could be incrementally positive. I still have to think, and this is just -- this is my view that the net of those 2 things, though, at least temporarily, now not long term, but temporarily, would be still maybe perhaps a more challenging environment than '08-'09, the net of those 2 things, given the direct hit to hospitals, knowing that, that's not something that hopefully will last more than a certain period of time. But I don't know, would you kind of disagree with my assessment that it's interesting commentary, but maybe still a little bit worse than that time frame or just not willing to come to that same conclusion?

Yes, you may be right. It's super hard to say. And for us right now, we don't even forecast publicly our system volumes anyway. And in these times, it's even harder than ever. And so again, I think if we just have the focus on working constructively with customers, supporting them, rebuilding the procedures, we have confidence that the cycles on capital will eventually hit their equilibrium, like I said, but I wouldn't want to make a guess. I just try to lay out the frame of thinking about it, and you have your view.

Yes. No, it's helpful. Helpful. I really appreciate it. And then maybe switching to the -- on the procedure side. And I know you guys have done a lot of work on this as you try to think about the current environment and going forward. But can you just walk us through which procedures that you expect might come back more quickly versus the ones that you expect might take more time within your current portfolio of procedures?

Yes. Bob, on the earnings call, I talked about certain procedures that have been less impacted, things like colorectal procedures, some of the lung -- in the lung cancer procedures didn't see as much impact. Higher impacted procedures that can be deferred more in the short-term would be things like hernia repair, the gynecologic -- benign gynecologic procedures and bariatric procedures. You work through the recovery process, like we talked about there are going to be some differences by geography and by hospitals. I think we're going to see differences by specialty as well. It's really -- it's a continuum of urgency across the spectrum of the cases that have been deferred. And then within each health center, you've got specialties of emphasis for them that they want to work through a particular patient base that they're working through and then resources they're trying to manage as well as economics to think about. So there's a lot of things up there. In general, I think that you're going to see the more urgent, the quicker they're going to come back. And it's not necessarily cancer or noncancer, there are clearly some pretty urgent noncancer where strangulated hernia or [ heart problem ] are the things that need to be done, but I think it's going to work down that continuum of urgency more than anything.

And do you think there's any credence to the notion that patients may try to move quickly to get certain things done for fear of a second outbreak of COVID-19? Are you kind of anecdotally hearing anything in that regard? Just wondering what you think of that idea?

Not so much. I think that the hospitals, for the most part, are looking to set up separate areas for COVID care and non-COVID care, including surgery and having an area where there's regular procedures to ensure the non-COVID status. So as long as that confidence can be maintained, I think that that's going to be a core of building back the operations, and that's really, I think, at the core of it.

Okay. And then one other question I'd love to get kind of your latest thinking on is, when you think about the clinical trials and clinical work that you've got going on, how has COVID impacted any sort of time lines relative to your pipeline? Are those -- are things delayed or changing? Is there anything that you'd be willing to kind of call out here that's changing or perhaps not much is changing? Just wanted to make sure that we check that box, so to speak, because I know your pipeline is an important part of the story.

Yes. So the time line still remain fluid. No update from what we said on the conference call on data capture for studies like the Ion PRECISE study. With respect to SP and a colorectal indication, we would not provide a new time line until we have better visibility. In the longer term, though, we still see significant opportunity in both Ion and SP. And yes, the long-term opportunity hasn't changed there.

Okay. And then on Ion, can you give us a sense for kind of where you are with that rollout? Like how many placements perhaps are out there? And how your thoughts on the commercial opportunity have evolved now that you've been in the market for a bit?

Yes. So we placed 8 Ion systems in the quarter. We have a commercial installed base of 18 systems. The market opportunity for Ion is significant as we think about lung cancer diagnosis. With respect to lung cancer in the U.S. alone, incidence of several hundred thousand cases annually; China, over 1 million; globally, it's one of the leading causes of death. With respect to Ion, we called it a platform technology, but it's too early for us to be talking about specific other indications for Ion. We're solely focused on the lung cancer opportunity right now, which is significant. If we take a step back and just think about lung cancer diagnosis as a big market, we can agree that if you look at the 5-year survival rates in lung cancer, that low -- that 18%, that rate hasn't changed significantly since 1975. It's only changed -- moved 2% in 40-plus years. So we're hoping to make progress on that. The world has done -- has improved 5-year survival rates before. If we take a look at prostate cancer, for example, in 1975, the overall 5-year survival rate was 66%. Now it's 98%. There's obviously a lot of things that took place for that to happen, early detection -- made a big shift possible, screening was important, PSA testing, diagnostic capabilities. Treatment options have improved. We're hoping that we can make significant changes to lung cancer diagnosis on a broader scale over time.

Okay. And then 2 last questions in the remaining time that we have. First question is a little bit longer term, and I'm trying to ask all the companies this same question about, your kind of thinking about post-COVID. Are there anything you guys really kind of point out that you think might change as a result of COVID, when we think about the medtech ecosystem a little bit longer term? And if not, fine. But I'm just curious, as we are kind of into this now for a couple of months, just maybe other 1 or 2 things that kind of the new normal might look like on the other side of this that are worth talking about, both from a broad medtech perspective as well as from an Intuitive Surgical perspective?

That's a really good question, Bob. And we've been kind of in this new way of life now for a couple of months, and it's just this ongoing experiment and new ways of doing things and finding solutions, given the challenges we're facing right now. Clearly, in the near term, there are going to be some changes just in regards to surgery and operations that are necessities that are probably creating some inefficiency and adding costs, just managing a world with COVID in it for now. And things like this having more PPEs and masks and the plastics and the screens, more testing of patients and distancing. I think all of that is creating challenges as we look to reengage. We'll see how much of that ends up sticking. But in terms of things that may stick for a longer period of time, a lot of our interactions these days have been virtual. For Phil and I, working with investors, it's been a lot of phone calls and Zoom meetings. Our field teams, our sales teams and training teams have been, I think, pretty adaptive and nimble about pivoting over towards electronic means of communication. And some people like it. I think digital diagnosis of some issues on the service side, there's more of that going on now rather than field visits. The trade show events that are more virtual, these events are virtual. So some of these may stick, some of them may not. As regards to the system as well, things like TelePresence are playing a bigger and bigger role where you can have the training and clinical support, proctoring and their interactions with sales interoperatively can have pretty good effect now than potentially in the future. And then I think the other thing I'd bring up is just efficiency of operations. As I mentioned, as people are looking to reengage and build the surgical volumes back up and looking to cast the smallest possible footprint with the surgeries, and that means efficiency. And we've been talking for quite a while about sharing analytics with customers and converting data and analytics and providing them insights in terms of how to run the most efficient program possible where there are opportunities to improve. Basic things like setup times and processes, how long certain -- which tools are used, how long they're used, who stands where in the OR, point-of-care, those types of things. We've got consulting work that does similar -- have similar types of benefits towards the choreography in flow. So I feel like that some of those learnings now that are necessitated in its recovery are going to lead towards more efficient operations in the future.

And one sort of follow-up there is, you mentioned some of the safety requirements that are out there now and logistical challenges that we're dealing with as folks try to ramp back up. Qualitatively, Calvin, how do you think about the ramp back in procedure volumes in light of those new safety guidelines and the logistical hurdles? And frankly, in some cases, robotics takes a little longer. So how do we factor those things in as we try to think about the ramp back up in procedure volumes?

Yes. These are challenges in the process. So as we're working through with the customers, what their plans are and what their -- what activities need to take place. This is part of it. We based it in manufacturing, and we're building systems. These things are going to be part of life for a while. My personal belief is that, I think that from a process standpoint, a lot of this can be minimal impact. As you get just more practice using the shields and the masks and some of the other screenings that will be involved in the testing, I think you can work that into the process. So I think from a flow standpoint, there are opportunities to get to a pretty reasonable place. But then there'll be a learning curve on some of this stuff as well.

And then I guess last question. Again, it's another follow-up on that. Robotics, where does it fit into that calculus? Is robotic sort of a net aid in terms of ramping stuff back up? And I'm thinking a little more short-term here because I know the answer long term. Or is it -- do you think that because still a lot of surgeons are learning on robotics and a lot of surgeons, it takes a little bit longer? Is it something that -- do you think that dynamic could affect procedure volumes over the course of the next 6 months?

Well, minimally invasive surgery is going to be very important as we work through recovery and you're looking to minimize the impact on hospital resources. So that's robotic. It could be laparoscopic. And really, it's going to be procedure-by-procedure in circumstance where the differences lie between, say, lap and robotics. But I think that there's an important role to play. Robotics is a contributing factor to reducing the impact on whether it's the length of stay, the duration of the recovery period, the potential for complications or recurrences. Those are generally better aligned with robotics. Again, it varies by procedure. But I think the key for us is, again, as we work with the customers to do everything we can to make sure that the machines are in the right places, that the teams are in the right places, that the pieces are in place to have the best possible effect, which, again, we can be on the right side of that equation.

And then sneaking on maybe one last one, just in the last minute here. From a longer-term perspective, as we think about 2021, are there any things that you would kind of point out as we try to model the business that are just things you think are worth mentioning? Obviously, don't expect guidance here, but just things that you think are worth pointing out as people try to put together models for thinking a little bit longer term? And one of the reasons I ask is that our public models out there are pretty far below consensus. Just -- I don't think we're making any dramatic assumptions other than high percentage of leasing and lower leases in a tough economic environment. But just big picture, are there any things that you would point out to folks trying to put together some long-term modeling?

Yes, I think Phil laid it out pretty clearly. Now we are basically staying the course for continuing to invest in R&D. Our long-term opportunity is very much intact as we work through this. And we don't want to compromise our future opportunities by making shorter-term decisions, whether that's this year or next. So I think we're mostly staying the course, and we'll modulate clearly as we move through.

Calvin and Phil, thank you very much for joining us. That's all we have time for. That concludes this fireside chat. I just -- again, I want to thank you guys for participating, and we look forward to talking again soon. Thank you very much.

Thanks, Bob.

Thanks.

Okay. Thank you.