Good afternoon and welcome to Intuitive Surgical's first quarter conference call. With me today we have Gary Guthart, our President and CEO, Marshall Mohr, our Chief Financial Officer, and Aleks Cukic, our Vice President of Strategic Planning.

Before we begin, I would like to inform you that comments mentioned on today's call may be deemed to contain forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties.

These risks and uncertainties are described in detail in the company's Securities and Exchange Commission filings. Prospective investors are cautioned not to place undue reliance on such forward-looking statements.

Please note that this conference call will be available for audio replay on our website at IntuitiveSurgical.com on the Audio Archive section under our Investor Relations page. In addition, today's press release has been posted to our website.

Today's format will consist of providing you with highlights of our first 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 first quarter financial results. Aleks will discuss marketing and clinical highlights, and then I'll provide an update to our financial forecast for 2010.

Finally, we will host a question and answer session. With that, I will turn it over to Gary.

Thank you for joining us today. In this first quarter, our team has executed well.

We continue to see broad interest in da Vinci surgery by our customers across a variety of procedures, which is reflected in our strong financial results for the quarter. With regard to procedures, we experienced continued growth in numerous specialties.

Urologic and gynecologic procedures continue to lead the way, and we see early signs of growth in both general and colorectal surgery and thoracic procedures. We are also pleased that European procedure growth was strong in the quarter.

While the diversity of procedures is encouraging, it presents both opportunities and sales management challenges. The breadth of procedures is commanding increased investments in our sales force and is reflected in our recent hiring.

Turning to systems, U.S. sales were robust.

We did, however, see an increase in pressure on hospital capital budgets in Europe, where capital sales conversations mirrored those in the U.S. during the first half of last year.

Lastly, we sold our first systems in Japan this quarter post our Shonin approval. We'll discuss Japan in greater detail later in the call.

As we move to highlights for the first quarter, recall that Q1 2009 financials included a revenue deferral associated with the introduction of the da Vinci SI system. In my year-over-year comparisons, I will compare financial performance excluding the deferral to give a more accurate picture of relative performance.

With that as background, operating highlights for the first quarter are as follows. Procedures grew 37% over the first quarter of 2009.

We sold 104 da Vinci Surgical Systems, up 38 from 66 during the first quarter of last year. Total revenue was $329 million, up 58% over last year.

Instrument and accessory revenue increased to $123 million, up 50% over last year. Total recurring revenue grew to $173 million, up 43% from prior year and comprising 53% of total revenue.

Net income was $85 million, up 112% over last year. We generated an operating profit of $157 million before non-cash stock option expense, up 78% from the first quarter of last year and representing 48% of Q1 revenue.

With operating profit percentage at this level, we do not expect to pursue further margin expansion. We will continue to share productivity gains with our customers and we will continue to invest in R&D and long-term growth opportunities for the business.

We ended the quarter with $1,396 million in cash and investments, up $224 million from last quarter and up $574 million from last year. Significant cash outlays during the quarter included $16 million invested in intellectual property and fixed assets.

Excluding the impact of these outlays, as well as $93 million from stock proceeds and $6 million used for working capital, we generated $153 million in gross cash flow from operations, which is 180% of our reported GAAP net income in the first quarter. I share this number with you because we believe that it is the best measure of the economic horsepower of our company.

As we continue to make significant investments in research, development, and manufacturing. Our largest investments focus on four areas.

First, we are extending our instrument offering through major additions like multifunction energy devices and robotic stapling. Second, we are improving and expanding our imaging capabilities.

Third, we are developing new patient-side mechanisms. Finally, we are creating surgical networking and training technologies.

Overall, we're pleased with the progress of our product development teams and our technology partners, both in the depth of their achievements and in the speed with which they are accomplishing them. Lastly, as we enter new surgical markets and drive into new product arenas, we will invest in building our team and expanding partnerships and in acquiring those technologies that can make a difference to robotic surgery.

This quarter we added 94 people to our team, predominantly in sales, manufacturing, and R&D, bringing our total team to 1,357 employees. With that, I'll pass the time over to Marshall, our Chief Financial Officer.

Thank you, Gary. Prior to providing you with the details of our first quarter results, I would like to provide you with a quick review of the deferral accounting that took place during 2009, which sets into context the proper comparables.

Last year we offered certain first quarter 2009 customers the opportunity to upgrade their da Vinci S systems to da Vinci SI systems at a discount to the otherwise list price for such an upgrade. We also offered those customers the opportunity to return da Vinci S accessories in exchange for da Vinci SI accessories.

As a result, we deferred a total of $20 million of revenue in the first quarter of 2009, comprised of $18 million of system revenue associated with system upgrade offers and $2 million of accessory revenue. We recognized $14 million of the total $20 million deferral in our second quarter of 2009 and the remaining $6 million in the third quarter of 2009.

I will now walk you through our revenue results with comparisons to the first quarter of 2009 as though the deferral had not occurred. Our first quarter revenue was $329 million, up 58% compared with $209 million for the first quarter of 2009 and up 2% compared with $323 million for the fourth quarter of 2009.

First quarter revenues by product category were as follows. First quarter instrument and accessory revenue was $123 million, up 50% compared with $82 million for the first quarter of 2009 and up 8% compared with $113 million in the fourth quarter of 2009.

The increase compared with prior quarters reflects procedure growth and higher initial stocking orders. The amount of instrument and accessory revenue we realize per procedure, including initial stocking orders, was approximately $1,970 per procedure, which is approximately $170 higher than the first quarter of 2009 and approximately the same as the fourth quarter.

The year-to-year increase primarily reflects higher stocking orders in the current quarter and customer buying patterns, as we believe that customers reduced inventory levels in the first quarter of 2009 in the face of a deteriorating economic environment. We expect instruments and accessories per procedure to decline over time, given that initial stocking orders have a lower impact on a larger install base.

First quarter 2010 systems revenue of $155 million increased 77% compared with $88 million of systems revenue for the first quarter of 2009, and decreased 4% compared with $162 million of systems revenue for the fourth quarter. We sold 104 systems in the first quarter of 2010, compared with 66 systems last year and 110 systems last quarter.

80 of the 104, or 77% of the units sold in the quarter, were da Vinci SI systems. There were 17 da Vinci Standard systems traded in this quarter, compared to 6 in the first quarter of 2009 and 23 last quarter.

First quarter system revenue also included $5 million of upgrade revenue, compared to none in the first quarter of 2009 and $7 million in the fourth quarter of 2009. Our first quarter average sales price per system, including all da Vinci models but excluding upgrades and the revenue deferral, was $1.45 million, an increase from $1.33 million realized in the first quarter of 2009, and an increase from the $1.41 million realized in the fourth quarter.

The increase compared to the prior year reflects the introduction of the SI product, which has a higher price point than the S. The increase compared to the fourth quarter reflects favorable customer and product mix.

We expect ASPs over the next several quarters to return to historical levels. Service revenue increased to $51 million, up 29% compared with $39 million last year, and up 6% compared with $48 million last quarter.

The growth in service revenue was driven by a larger system install base. Total first quarter recurring revenue, comprised of instrument, accessory, and service revenue, increased to $173 million, up 43% compared with the first quarter of 2009, and up 8% compared with the fourth quarter of 2009.

Recurring revenue represented 53% of total first quarter revenue, compared with 58% in the first quarter last year, and 50% last quarter. Revenue by geography was as follows: Non-U.

S. revenue represented 21% of our total revenue in the quarter, compared with 25% of total revenue in the first quarter of 2009 and 22% of total revenue in the fourth quarter of 2009.

Overall procedures grew faster outside of the U. S.

We sold 24 systems outside the U. S., compared with 22 in the first quarter of 2009 and 30 last quarter.

Seven of the systems sold in the first quarter were to early thought leaders in Japan. We would remind you, however, that adoption in Japan is expected to proceed slowly, and therefore we expect system volume to decline in Japan quarter to quarter.

Excluding Japan, non-U. S.

system sales decreased, attributable to reduced capital spending in a challenging European economic environment. Moving on to the remainder of the P&L.

Let me remind you that there were no costs deferred in conjunction with the first quarter 2009 revenue deferral, and therefore the $20 million deferral had an equal impact on revenue, gross profit, and operating income. Gross margin in the first quarter was 73%, compared with first quarter 2009 gross margin, excluding the impact of the deferral, of 71%, and compared with fourth quarter 2009 gross margin of 72%.

The increase in gross margin reflects increased system ASPs, material cost reductions, and absorption of fixed costs over a larger revenue base. First quarter 2010 operating expenses of $111 million were up 32% compared with the first quarter of 2009, and up 6% compared with the fourth quarter.

The quarter-over-quarter increase reflects costs associated with employees added during the quarter and increased investment in research and development. We added 94 employees during the quarter, including 49 employees in the sales/service organization, as we continue to expand our clinical sales force, and 39 employees in operations, as we continue to grow manufacturing capacity and invest in research and development.

First quarter 2010 operating income was $130 million, or 40% of sales, compared with $65 million, or 31% of sales, for the first quarter of 2009, excluding the impact of the deferral, and $128 million, or 40% of sales, for the fourth quarter of 2009. First quarter 2010 operating income reflected $27 million of non-cash stock compensation expense, compared with $23 million for the first quarter of 2009 and $25 million last quarter.

The growth in non-cash compensation reflects our annual grant made February 15th of each year. Our effective tax rate for the first quarter of 36% was lower than our 2009 rate of 41%, reflecting the implementation of our international tax structure.

Our net income was $85 million, or $2.12 per share, compared with $40 million, or $1.02 per share, for the first quarter of 2009, excluding the impact of the deferral, and $78 million, or $1.95 per share, for the fourth quarter of 2009. Now moving to the balance sheet.

We ended the first quarter of 2010 with cash and investments of $1,396 million, up $224 million compared with December 31st, 2009. The increase during the quarter reflects $153 million of cash flows from operations and $93 million from the exercise of stock options, partially offset by $16 million of capital expenditures.

$3 million of our capital expenditures related to the construction of our new manufacturing facility next to our corporate headquarters in Sunnyvale. We anticipate that building to be completed in early 2011.

Our accounts receivable balance decreased to $180 million at March 31st from $205 million at December 31st. The decrease in accounts receivable reflects the timing of system shipments.

Our net inventory increased to $69 million at March 31st from $58 million at December 31st. We increased inventory during the quarter, since we believe that inventory at December 31st was below optimal levels.

We will likely continue to increase inventory levels in future quarters. With that, I would like to turn it over to Aleks, who will go over our sales, marketing, and clinical highlights.

Thank you, Marshall. During the first quarter, we sold 104 da Vinci systems, 80 in the United States, 11 in Europe, and 13 in rest of world markets.

As part of the 104 system sales, 17 Standard da Vinci systems were traded in for credit against sales for new da Vinci SI systems. We had a net 87 system additions to the installed base during the quarter, which brings to 1,482 the cumulative number of da Vinci systems worldwide: 1,091 in the U.S., 264 in Europe, and 127 in rest of world markets.

44 of the 104 systems installed represented repeat system sales to existing customers. Also during the quarter, nine customers purchased upgrades to convert their da Vinci S systems into da Vinci SI systems.

The outlier this quarter was Japan, with seven da Vinci placements. As was stated earlier, several of these placements were sold to early Japanese thought leaders who were anxiously awaiting Shonin clearance and importation rights.

Although we're pleased with these sales, we don't expect this rate of Japanese purchases to continue for the near future. Clinically, we had another nice quarter with good sequential procedure growth within our targeted procedures.

da Vinci hysterectomy and prostatectomy showed solid growth, whereas partial nephrectomy, sacral colpopexy, ENT, and colon and rectal procedures showed large percentage sequential growth. Within our hysterectomy business, for the first time in several quarters, DVH for malignant conditions showed larger sequential growth than DVH for benign conditions.

It's difficult to say for certain why that was, but it's our belief that three factors probably played a role: one, the Q1 reset of copayment minimum spending; two, high unemployment rates; and three, the difficult sales force task of simultaneously managing multiple high-growth procedure businesses. The latter we can do something about.

In fact, we recently made some adjustments to our sales structure to better support the large benign hysterectomy market. During the quarter, nearly 300 da Vinci-related clinical publications and abstracts appeared within various peer-reviewed journals.

With the current trend in healthcare policy moving directionally toward comparative effectiveness research, it's our belief that we'll be well positioned in the evidence-based environment. With volumes of peer-reviewed da Vinci publications already in print, as well as more due to be published, clinicians, policymakers, and patients are in position to make informed healthcare decisions.

As we've said before, comparative effectiveness research, done well, is something we very much support. As it pertains to DVP versus open prostatectomy, an excellent comparative study out of Vanderbilt University was recently published in the Journal of Urology.

The paper emanated out of the university's Department of Urology and Biostatistics and is entitled, Robotic-Assisted Laparoscopic Prostatectomy versus Radical Retropubic Prostatectomy for Clinically Localized Prostate Cancer: Comparison of Short-Term Biochemical Recurrence-Free Survival. 1,904 men represented the cohort study between June of 2003 and January of 2008, where 491 received an open retropubic prostatectomy and 1,413 received a DVP.

As you might suspect, the study is filled with detailed analysis, from which I'll spare you today, but I'd encourage those of you interested to pick up a copy and read through it yourselves. To summarize, the three-year biochemical recurrence-free survival rate was statistically similar between the da Vinci prostatectomy and the radical retropubic prostatectomy groups on the whole, as well as when stratified by pathological stage, grade, and margin status.

On a multivariate analysis, extracapsular extension, pathological grade 7 or greater, and positive surgical margin were independent predictors of biochemical recurrence, while surgical approach was not. The authors concluded by saying, and I quote, The likelihood of biochemical recurrence was similar between groups when stratified by known risk factors of recurrence.

Surgical approach was not a significant predictor of biochemical recurrence in the multivariate model. Our analysis is suggestive of comparative effectiveness for robotic-assisted prostatectomy, close quote.

Of all the desired endpoints associated with prostatectomy, none is more important than cancer control. One of the fastest-growing procedures that you haven't heard a great deal about is da Vinci sacral colpopexy.

Sacral colpopexy is performed for the condition of vaginal vault prolapse and has an estimated annual U. S.

market opportunity of between 60 and 70,000 patients. The gold standard surgical approach for this debilitating condition is an open sacral colpopexy, but since this approach requires a laparotomy, which is associated with longer hospitalization and increased blood loss, the postoperative road to recovery is often slow and painful as compared with less invasive approaches.

Traditional laparoscopic approaches were introduced nearly 15 years ago and in the hands of skilled laparoscopists can be an alternative to the open approach. However, laparoscopic sacral colpopexy is considered technically challenging due to its limitations, such as lack of depth perception and surgical access required for difficult suture placements.

da Vinci is rapidly proving capable in overcoming these clinical and technical challenges. A paper out of the Department of Obstetrics and Gynecology at the University of Rochester Medical Center, entitled Recovery After Robotic-Assisted Laparoscopic Sacral Colpopexy: The Patient's Perspective, authored by McNanley, Buchsbaum, et al., looked closely at the patients' perioperative experience.

In their analysis, patients were queried about resumption of activities such as work, driving, bowel function, whether recovery went as expected, and whether they would recommend this surgery to others. Use of pain medication, pain scores, and perioperative data were collected.

N was 21 patients, which is admittedly small, but smaller than desired sample sizes is the reality of evaluating procedures that are still in the early part of the adoption curve. Be that as it may, I think it's pretty significant when 100% of the respondents stated that they would recommend a da Vinci sacral colpopexy to a friend.

72% indicated that their recovery went better than expected, 28% felt that the recovery went as expected, and zero felt that the recovery went worse than expected. Patient advocates have been a powerful component to the success of several da Vinci procedures, we're encouraged when we hear the early reports on an emerging procedure support this trend.

Over the past few quarters, you've heard us describe substantive product development projects aimed toward the general and colorectal surgery markets. We've also highlighted that colorectal, and specifically low rectal cancer resections, are among our fastest-growing procedures.

The number of peer-reviewed publications in these specialties has grown rapidly, and this past quarter was no exception. In the Annals of Surgical Oncology, a study entitled Multicentric Study on Robotic Tumor-Specific Mesorectal Excision for the Treatment of Rectal Cancer was published.

It was a prospective three-center study on 143 consecutive patients, which, for the record, was analyzed by an independent researcher. The three centers included City of Hope National Cancer Center in California, the European Institute of Oncology in Milan, and Hospital San Matteo in Spoleto, Italy.

In their commentary, the authors stated that to the best of their knowledge, the present study evaluating robotic-assisted tumor-specific rectal surgery represents the largest series ever published with the longest follow-up period. The majority of the patient cohort had either mid or low rectal tumors, and 65% received neoadjuvant chemoradiation.

Even though both conditions are known to render surgical dissection demanding, successful excisions were successfully completed in over 95% of the patients, and successful restoration of bowel continuity was achieved in 78. 3% of them.

Margin clearance was obtained in all but one patient, with a number of harvested nodes that compares favorably with that of open and laparoscopic series. Survival curve analysis revealed a three-year overall survival rate of 97%, and isolated recurrence, local recurrence, were not found during mean follow-up of 17.

4 months. When discussing the technical differences between laparoscopy and robotic approaches, the authors stated and I quote, Laparoscopy offers an optimal tumor-specific mesorectal excision, or TME, with intact pelvic fascia and even greater accuracy than the open technique, but use of non-articulated forceps, camera tremor, and surgeon fatigue make this procedure demanding and restricted to a few centers.

Robotic TME seems to enhance microdissection accuracy, leading to a better and more comfortable mesorectal dissection with a lower risk of circumferential resection margin. Later, the authors went on to say, and again I quote, We feel that robotic surgery could dramatically change the standard approach to rectal cancer employed to date.

This week, the 12th World Congress of the Society of American Gastrointestinal and Endoscopic Surgeons, or SAGES, convenes in Landover, Maryland. This year, Intuitive will have a bigger presence than in years past.

Clinical prototypes of our single-site product for single-incision da Vinci surgery will be on display at our booth. To be clear, these products are early within the FDA clearance process and should not be viewed as commercially available products at this stage.

However, da Vinci multi-port general and colorectal surgery products and procedures, which are commercially available, will be discussed and featured within various conference sessions. Our product development and marketing groups have been very active in the area of general and colorectal surgery, and the reason is simple.

It's our belief and the belief of many of our customers that the benefits of da Vinci surgery can positively affect a number of patients being treated within these specialties. Though we are in the early phases of procedure adoption within these specialties, the early indicators appear positive.

That concludes my remarks, and I'll now turn this time over to...

Thank you, Aleks. I will be providing an update to our financial forecast for 2010, including procedures, revenues, and the other elements of the income statement on a GAAP basis.

I will also provide estimates on significant non-cash expenses to provide you with visibility of our expected future cash flows. Starting with procedures, as Gary mentioned, our procedures this past quarter grew 37% over the year-ago first quarter.

We continue to expect our total procedures to grow approximately 35% for the year from the approximately 205,000 procedures performed in 2009. Moving on to revenues, based on the upside we recorded in the first quarter, we are increasing our forecast for annual revenue growth to 27 to 30%, which is up from our previous estimate of 25%.

As a reminder, our revenues can fluctuate quarter to quarter as system placements may vary. With regard to our Japan revenues, as previously mentioned, while we sold seven systems in Q1, we do not expect to maintain this level of quarterly system sales in Japan for the balance of 2010.

With regard to gross margin, the 73% margin we achieved in Q1 was higher than in previous quarters due to higher ASPs on systems and manufacturing efficiencies. We expect ASPs to return to historical levels.

As Gary indicated, we will continue to share productivity gains with our customers, and as a result, we expect gross margins to be approximately 72% for the year. Moving to operating expense, we are making significant investments across multiple areas of our business, particularly our sales force, manufacturing, and R&D.

We now expect our total GAAP operating expense to grow by 27 to 29% in 2010, compared with our previous forecast of 25% growth. In terms of non-cash expenses, we expect to record stock compensation charges of approximately $122 million in 2010, which is a little lower than our previous forecast of $127 million.

In addition, previous purchases of intellectual property are scheduled to amortize in our R&D line at approximately $15 million for the year. Other income, which is mainly comprised of interest income, is expected to come in between $16 and $18 million for the year.

With regard to income tax, as Marshall mentioned earlier, we have begun taking advantage of the international tax structure we created to report a lower tax rate this year. We recorded a 36.2% tax rate for Q1, and we expect to record the same rate for the full year.

This is a significant improvement over the 41% tax rate we reported for 2009. For calculating earnings per share, we ended the first quarter with 39.2 million common shares outstanding and approximately 5.1 million option shares outstanding.

Depending on our average stock price this year, a portion of the 5.1 million option shares will be added to the fully diluted shares calculation. Assuming our stock price remains where it is today, we estimate that our share count for calculating EPS in Q2 will be approximately 40.6 million shares, and for calculating EPS for the year, we estimate it will be approximately 40.8 million shares.

Finally, regarding our cash flows, since we are forecasting to report over $137 million in non-cash stock compensation and amortization expenses for the year, our cash flows will continue to be significantly higher than our reported net income. We believe cash flows generated from operations is a better measure of our actual performance than net income.

Once again, cash flows from operations in Q1 were $153 million compared with our net income of $85 million. With that, we would like to open the call to your questions.

Operator, can you check to see that the callers can actually dial in for questions?

Operator, I just received a message that it's not working on their end.

Looks like it's just come up.

Okay.

Hey, good afternoon, guys. It's Tao from Deutsche Bank.

Good afternoon.

Hey. First question, you mentioned on the call a comment about sharing productivity gains with customers, and I'm just wondering if you could go into that a little bit more.

You talking about sort of discounts, providing free equipment? I just wasn't sure about that thing.

That's Gary. Just a combination of things.

I think one thing is that as we move into more price-sensitive procedure markets, we expect that margin levels may fluctuate. The other thing is as we bring online technologies for training and networking, things like simulation, those are opportunities to help our customer and may have really a different margin profile.

Thanks. That's helpful.

Also you also talked about the sales force adds. I was wondering if you could go into, are you adding them by indication?

Are you adding them internationally? Then also just lastly on the international front in Europe, was that sort of the headwinds that you were seeing, was that new from the beginning of the year?

Did they start at the end of last year? Because Q4 was pretty robust, Q1 obviously a little bit choppier.

Is that kind of what you're seeing going forward, kind of continued choppiness until the macro environment improves? Thanks.

Ben, take that?

Okay. I think the first part was sales force.

As we mentioned, we added 49 people to our sales and marketing group, and about 40 of those were in the field this past quarter. Part of that comment is we're still adding quite a few people to the sales force, and we continue to hire a lot of folks.

With regard to the last part of that question, European demand, one thing I would say is that I just want to point out procedures in Europe grew very well in the quarter, which makes us feel good about the overall health of that business. Now system sales were down in the quarter, and you're right, they did fluctuate a little bit from Q4 to Q1.

Generally speaking, we think that there's a challenging economic environment in Europe, and that's making system sales in Europe under some pressure.

How long that's going to last, we don't know. Yeah,

I don't know that it's anything different than you're seeing in the general descriptions of the broader economic markets. Thanks.

Just wanted to follow up on something, Aleks, that you mentioned, the notion of changing the sales structure to better support benign hysterectomy. Can you talk about that a little bit more?

Again, I think I would ask you to not overstate that. In other words, we've added some GYN specialists in the area.

The focus, again, if you look at with respect to the GYN community, and specifically the benign GYN segment, it's really spread out. That's a procedure that's done in a lot of different places, and there are a lot of people that own large practices.

We're really trying to focus some specialists, if you will, in that area, they don't have to make the decision on should they go and support a prostatectomy case or a partial nephrectomy case. Believe me, there's a lot of integration that is going to be natural in the sales organization, but we're really looking to bolster that side of it a little bit more.

Okay. Do you see a similar dynamic as you move into some of these other procedures?

Because you're obviously talking about some good growth and a pretty wide variety of procedure codes. You've obviously done this in cardio, you're doing it a bit now in gynny.

Do you see that as something maybe you end up with more frequently?

I don't think we're in any position to say that this is any sort of a long-term strategy. I think we're really looking at it from the perspective of where is the opportunity and what are the vital few things we can do to really attack that opportunity right now.

Longer term, based on once a product is put out, once there's a clear understanding of the choreography of the salesperson's territory, those things will get visited. It's way too early to say that it should be something you should expect in the future.

Okay. Then just briefly on Japan, the seven systems that went out, do you have a sense of what those thought leaders will be doing with the product before you get the shonin and really are able to move forward and promote the product?

We do have the shonin, they can go ahead and use it. We have basically all indications that we have in the U.S.

except for pediatric cardiac, although we do have thoracic and ENT. They can use it.

It's reimbursement that we don't have yet. We'll see a mix of those different procedures across that set of customers.

Okay. In terms of not having the reimbursement, though, how does that constrain you in the near term with the product?

I think until we have reimbursement, the broad adoption will be constrained. That's because of the way they have to go through their mixed billing process.

In other words, there's not really a mechanism for them to do private pay.

Okay. Thanks.

Hi, guys. This is actually James in for David.

Hi. I had a question about the EU market.

How is the, obviously very strong procedure results over there, but how is the procedure mix and adoption curve OUS developing compared to the U.S.? Is prostatectomy still the driving force on the OUS growth, or are you seeing a little bit of a different development there?

I think generally speaking there has been a lag between outside markets, outside the U.S. markets, and the U.S.

The answer to the second part of that question, yes, prostatectomy is a big driver outside the United States. It's still a driver within the United States, but it's a bigger driver outside the United States as it pertains to the percentage of their overall procedures.

If you look at the GYN side, there is a lag there, which you would expect. The numbers in terms of a percentage sequentially, or for the past few quarters, has been strong, but it's at a much lower base.

I think in general it's our expectation that there will be a lag. The OUS markets will lag the broader U.S.

market. Now there may be exceptions on a country-by-country basis, but generally speaking that's the case.

Right. As you try to make a bigger push into general and colorectal surgery, what gives you the confidence there that you can be as successful in general surgery, both from a share and margin perspective, where there is much more focus and pressure on procedural cost in those areas?

I think if you look at, and I think you started the question correctly with the separation of general and colorectal, and I think you could continue to sub-segmentize it even further. I think what we have always believed is where there's great patient value, we stand a very good chance to be rapidly adopted.

Now within all of those procedures, or I should say within some of those procedures in the broader category, you find that laparoscopy has been introduced, or had been introduced, 15 or as many as 20 years ago in some of those areas, but the penetration is very low. Why?

Because it's technically demanding. What we have found in the past is where those procedures have been technically demanding laparoscopically, where we can prove capable, we tend to have rapid adoption.

We are not saying anything about margins in those areas or really giving you anything beyond that, other than if we can find procedures with high patient value, which we believe there are several, then we believe we'll be successful.

Okay. Could you give us some detail on what the two or three most attractive general or colorectal procedures might be for you?

I think if you looked at it by some of the peer-reviewed literature that's out there or the anticipation from the surgeon categories, low rectal cancer really sticks out. If you look at low rectal cancers, there is laparoscopic colorectal surgery being done all over the United States and all over the world, but when you get to the low rectal cancers, those tend to be restricted to a few centers, high-volume centers.

There seems to be a lot of consistency between that anatomy, obviously, and the male pelvic anatomy in working in prostatectomy. The same challenges that existed in laparoscopic prostatectomy exist in laparoscopic low rectal cancers.

There are some indicators there that I think are favorable. When you move into other areas, such as, again, now moving up into general thoracic, sort of non-cardiac thoracic operations, that could be a large area, and again, I think the same thing can be said there.

Then within general surgery, we will see. It's too early.

There's different platforms that we've, as I mentioned, that we're showing, and we'll just see where some of those products land.

Great, thanks guys. I'll jump back in queue.

Hey, good afternoon. Maybe just coming out of the conference in Orlando this week, can you talk a little bit more about your thoughts on single port and maybe talk a little bit about the market opportunity?

How attractive is the market beyond gallbladder for that initial product? Any color you can give us around how you're thinking about pricing or consumable use would be helpful.

I know it's early, but... And

it is early, and therefore there's really not a lot of depth that I'm going to, or any of us really will go through at this point. As a reminder, we're not through the FDA, and so we're certainly going to be very cautious and careful with recognizing that we're not even approved yet, we're not going to make any claims.

I think generally, from a sort of 5,000-foot level, when we look at some of those procedures, if we look at where the multi-puncture or the multi-port da Vinci procedures have not been able to penetrate, they tend to be in some of the simpler, quote, simpler procedures within general surgery. The single port...

Anything we're able to really pick up in that area, we look at as accretive. Beyond that, it's really hard for me to go into great detail, whether it be laparoscopic Collis or some of the other high-volume, low-technical-challenging procedures.

It's hard to say. We will wait till it comes out, till we start doing some procedures in abundance, and we can start looking at the data and really determining what the value is going to be.

Okay. Can you talk a little bit about how the transoral is doing?

You talked about, I think, last quarter about some of the initial ENT procedures. How is that ramping?

Yeah,

I think if you look at it, again, as a reminder, coming off of a small base, on a sequential basis, when we look at the procedures, there was very strong growth on a sequential basis, but it's off a small base. If you look at the interest within the community, and as you mentioned, I think you said you were at the World Congress on robotic surgery, the expectations, I think, were exceeded in terms of the number of ENT surgeons that attended that conference and that attended the various sessions.

If you look at the requests for training and some of the other early indicators, they all appear positive. We're pleased with the early progress.

We know in our minds and minds of a lot of our customers that there is high patient value there, and we get excited about procedures where we can do that.

Could you maybe also comment just briefly on how you view the competitive dynamic with external beam radiation therapy? There was a new LINAC introduced yesterday from Varian, and clearly they've talked more about trying to go after prostate a little bit more aggressively.

Can you just comment on whether you feel a need to fund more clinical studies, or how you view the competitive dynamic there? Yeah,

there are several studies ongoing now that look at prostate cancer treatment between open surgery, robotic surgery, and different forms of radiation therapy. I think the way we look at it is the patient population is segmented.

For the younger patients, surgery makes a lot of sense. There's a lot of data to indicate that surgical resections result in better long-term cancer outcomes than radiation.

Where the discussion comes in is kind of the patient's age. I think we'll have to see.

I'm certainly not ready to make any claims about what their new products can or cannot do, and we have several studies, I think, in the works that we'll publish over the next few years.

Just one last one maybe for Ben. Any updated thoughts on capital deployment priorities this year?

You obviously talked about the cash you've built up.

Finally I think that... Yeah.

As we look at the cash, we really look at it in four buckets. The first bucket is really where in organic need do we have a requirement for cash infusion, and we've been doing that quarter over quarter and will continue to do so.

We also look out at technology partnerships that we can initiate or accelerate, and acquisitions of technologies that fit well with us. Again, we've done that as we've gone, and the cash gives us the flexibility to do that as we need it.

We'll look at returning cash to shareholders as kind of an anti-dilution measure when the time is right and where it makes sense. Of course we like to keep some for flexibility.

It really is that same set of priorities, and it really is looking at it quarter after quarter and doing what makes sense as we see it.

Thank you very much.

Hey guys, is everybody okay?

Yep.

First question for you is with regard to a product you have showcasing at SAGES, the simulator product that's presently on display. What is your strategy with that, and what do you think the market opportunity would be?

Gary Guthart:

we really look at it that is something that can supplement training. The goal really simply is to get more comfortable surgeons faster.

We don't look at that as a big revenue opportunity as a direct product line, we're not looking at it and saying, boy, this is a huge revenue opportunity in and of itself. We really see it as a way to have good outcomes sooner with our existing products.

You should not be looking at that and modeling with the big revenue stream off simulation is. I think there's a lot of interest in it, and a lot of interest that makes sense, but I would view it that way.

Where exactly would you record revenue from that in your P&L?

It is a physical product, but I think what Gary is mentioning is that the intent of that product is not to be a significant revenue generator, but to be helpful in all the training that we do with surgeons.

As we get closer there, we can answer that question.

Great. Since you called it out as part of the R&D and you've been talking a little bit more about colorectal, could you update us on the progress you've made with getting a surgical stapler on the market?

The product, again, just as a reminder, we did a licensing deal a while back, and we told you at that time and in subsequent quarters that the project is moving forward. We haven't put any timelines in place as to when it's going to be launched.

I would just say that the teams are very well resourced. They're very energized, and we're pleased with the progress they're making.

Great. Then lastly, you touched on this a little bit, but can you just talk to us a little bit?

You've talked about adoption curves for procedures in the past. Can you talk to us a little bit about the adoption curve internationally for gynecology and specifically DVH?

You broke up a little there. Was gynecology and specifically DVH?

Yes, that's correct. Yeah.

I would,

again, I would say that as a reminder, if you looked at, when we look back retrospectively at the DVP adoption curve between U.S. and O-U.S., we found that it was lagging by a couple of years.

If you looked at the overall numbers and you looked at the adoption rate and so on. Having said that, there were countries within Europe that looked very similar to the United States.

I would say with DVH, it is lagging. However, the number is small, but on a sequential basis, it's growing very well.

It grew very well this quarter. It's too early to say which countries are going to lead in that, but I think it's fair to say that the DVH for malignancies is being adopted, let's say more rapidly or more uniformly outside the United States than DVH for benign.

We have time for two more questions.

Thanks, guys.

Please.

I just assumed that we were done. Thanks, guys, for taking the questions.

Yep.

Yes, please operator.

Hi guys, it's back to Miroslava for Rick Wise. Congratulations on another very, very strong quarter.

Let me start with asking a capital spending question. I know you discussed Europe in quite a lot of details, but turning to the U.S., the placement here seemed very strong.

In fact, if I have this correctly, they didn't even decline sequentially in what is supposed to be a seasonally weaker first quarter. Now as the economy rebounds, do you think we can see an acceleration in U.S.

da Vinci SI placements, given that you do have a new product cycle as well? Any thoughts that you might relate on the capital spending environment here would be appreciated.

Miroslava, this is Ben. You're right.

We had a pretty strong quarter in the U.S. Again, from a broad standpoint, we take a look at the procedure growth, and in the long term system placements are going to be a factor of the need for those systems based off of the procedure growth.

Procedures are going pretty well. As we mentioned, we're still forecasting 35% procedure growth in the United States— sorry, worldwide— and that will lead to system sales.

Without speculating too much, because these things do tend to vary quarter to quarter, they were really strong quarters in both Q4 and Q1, and I don't know that it would be a fair thing for you to start modeling off of that and then expecting acceleration off of those numbers. We're not being really specific about it, but we are giving you some top-line guidance on revenues.

Okay. I do appreciate that.

Secondly, not to pick on you again, but gross margins, you're giving a guidance at 72%, but again, in the last few quarters it has been above that already. Why should gross margins go down so significantly in the next couple of quarters span?

Well,

actually, this is the only quarter I can recall that it was 73%. In Q4 it was 72%, and in the previous quarters it was lower than that.

Pricing has been very consistent. Since we launched the SI in Q2 of 2009, all of our pricing for our products has been exactly the same.

You see a little bit of fluctuation due to product mix and customer mix. I think that's probably just going to be the normal fluctuation you're going to be seeing.

If you just take a look at our historical average on the mixes that we've seen, we expect it to come in at 72%.

Okay. Maybe one more, can you update us where you stand with reimbursement in Japan?

Is there any timelines here that can be forecast? Are we several months away from getting any reimbursement in Japan?

Are we years away? How do we think about that?

Right now it's too soon to call. We're working through with our partners and with the government how to approach it, and as we get to know more we'll let you know.

Okay. Let me throw one last one.

We are at SAGES as well, and I appreciate the comments on colorectal procedures, but there's quite a bit of talk about everything else here, like bariatrics, cholecystectomy, including robotics. I'm just wondering, traditionally this has not been in your sweet spot, to say, because these have been the easy laparoscopic procedures.

How close are you to this opportunity now? Is there any instruments that you need to develop?

Is there any studies that you need to do? Are you making any sort of a push into these type of procedures?

How big is colorectal in the U.S. in terms of cases?

Yeah,

I think the answer to most of those questions is yes. We will need instrumentation.

We will need training pathways. We will need to push for peer-reviewed data and so on and so forth.

The answer to that is most often going to be yes anytime we move into new areas. As far as predictions of where the adoption might be and to which of those sub-segments you said, it's difficult to say and we won't speculate.

In terms of overall size of markets, if you look at the GI opportunity and you look at the colorectal opportunity, I believe estimates in the United States are that could approach 200,000. I'm pleased to hear that there's a lot of excitement around all of those areas.

That's really motivating, certainly for us, and that's why we're there. I think we have time for one more question, operator.

Thank you.

Hi guys, thanks for taking the question. I thought I would start off.

You talked on the call about focusing on sales in the GYN market. Does this open the door for more interaction at the patient level, possibly direct-to-consumer type marketing?

I wouldn't read that into the comments. I think, again, what we really strive for is providing patient value, and we understand the chain of events there.

There is a hospital customer. There is a physician customer, and they are the people that own the patient.

What we certainly do is provide a lot of information that patients can access to help them sort of narrow their search as to the various opportunities that are out there. We will always do our best to provide as much information as we can.

In terms of the interaction that you're seeing from a customer level at the website or through the phone, has there been any change in the way that customers are approaching the company in terms of the procedures that they're asking about, or does it mimic the current mix of prostate versus hysterectomy? Can you talk about that?

I can't think of any per se outliers in there. I can say that there's nothing remarkable that stands out in that that is different from what our expectations would be.

Okay,

and lastly, I know you don't typically talk about pipeline products, but can you give us a little bit more detail on the pathway to getting a SILS approved in the U.S.?

Again, the FDA clearance—we're in discussions with the FDA, let's put it that way. In terms of the process or the timeline, there's really not a lot more we can comment on at that point.

Thank you.

That was our last question. As we have said previously, while we focus on financial metrics such as revenues, profits, and cash flow during these conference calls, our organizational focus remains on increasing patient value by improving surgical outcomes and reducing surgical trauma.

I hope the following experiences give you some sense of what this means in the lives of our patients. One patient is Rhonda of Florida.

Rhonda describes her experience as follows: Although I have had a uterine fibroid for years, I have successfully been able to avoid surgery. I had no symptoms and the fibroid was causing no problems, I couldn't bring myself to go through my preconceived notion of a hysterectomy when it wasn't absolutely necessary.

After my recent ultrasound and subsequent CT scan revealed that it was now impacting my ureter and kidney, I could no longer avoid action. Thankfully, my new OB/GYN, Dr.

Carol McKenzie, recommended that I contact Dr. Sam about a da Vinci robotic procedure.

I was concerned that the fibroid was too big to even consider a robotic procedure, I called to check before even making an appointment. I felt very confident that I wanted her to do the surgery, but had previously scheduled a second appointment with a prominent surgeon who had performed the surgery on my friend just a few weeks earlier.

At my consultation with him, he was adamant that the fibroid was simply too large to consider anything other than an abdominal hysterectomy. I called Dr.

Sam's office to discuss it, and while she couldn't guarantee that it could be done robotically, she was 80 to 85 percent sure that she could do it that way. For me, those were good enough odds, and I truly believe that if anyone could do it, she was the one.

I went home the day after my surgery and was able to get up and down the stairs without significant pain, though I moved slowly. 72 hours after my surgery, I felt well enough to go to my daughter's soccer game and accompany my husband to his holiday party later that evening.

Although I was still feeling a little bloated and swollen, for the most part I felt amazing. For me, this experience has underscored how important it is for people to find out the latest treatments available, yet how important it is for people to also realize how critical it is to select the most competent and experienced technician.

After years of avoiding this surgery, it's so nice to finally have it behind me. The second patient is Doug, a marketing director at a hospital in West Virginia, who describes his experience as follows: I had been diagnosed with mitral valve prolapse as a child, but it had never progressed to anything remarkable until September of 2009, when I began experiencing shortness of breath, chest and back tightness, and uncomfortable palpitations.

After numerous tests, it was determined that my mitral valve prolapse had progressed to severe mitral regurgitation and that I would need to either have my valve repaired or replaced. After considerable research, I was committed to finding a physician and a facility that could, most importantly, repair my mitral valve, and secondarily, repair it with robotic assistance from the da Vinci surgical system.

My research led me to Dr. Marc Gillinov at the Cleveland Clinic Foundation, who did a fantastic job repairing both the anterior and posterior leaflets of my mitral valve robotically.

My recovery has been remarkably fast and easy. I feel great, and there are no signs of regurgitation or a heart murmur anymore.

I'm completely fixed. I can't tell you what a relief it is to know that my health problems are now solved, that my sternum didn't have to be sawed and spread apart, and that I can look forward to living a long, healthy life with my wonderful family.

I truly feel blessed. Patients like these are the strongest advocates for da Vinci surgery and form the very foundation of our operating performance.

We have 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 with you again in three months.