Intuitive Surgical, Inc. (ISRG) Q3 2022 Earnings Call Transcript

Intuitive Surgical, Inc. (NASDAQ: ISRG) Q3 2022 earnings name dated Oct. 18, 2022

Company Contributors:

Brian King — Treasurer and Head of Investor Relations

Gary S. Guthart — Chief Government Officer and Member of the Board of Administrators

Jamie Samath — Chief Monetary Officer

Analysts:

Travis Steed — Financial institution of America — Analyst

Amit Hazan — Goldman Sachs — Analyst

Larry Biegelsen — Wells Fargo — Analyst

Robbie Marcus — JPMorgan — Analyst

Richard Newitter — Truist — Analyst

Jayson Bedford — Raymond James — Analyst

Matt Tyler — Jefferies — Analyst

Adam Maeder — Piper Sandler — Analyst

Matt Miksic — Barclays — Analyst

Drew Ranieri — Morgan Stanley — Analyst

Presentation:

Operator

Women and gents, thanks for standing by. Welcome to the Intuitive Third Quarter Earnings Launch Name. [Operator Instructions] As a reminder, this convention is being recorded.

I’d now like to show the convention over to our host, Head of Investor Relations, Mr. Brian King. Please go forward.

Brian King — Treasurer and Head of Investor Relations

Good afternoon, and welcome to Intuitive’s third quarter earnings convention name. With me immediately, now we have Gary Guthart, our CEO; and Jamie Samath, our CFO.

Earlier than we start, I wish to inform you that feedback talked about on immediately’s name could also be deemed to include forward-looking statements. Precise outcomes might differ materially from these expressed or implied because of sure dangers and uncertainties. These dangers and uncertainties are described intimately in our Securities and Alternate Fee filings, together with our most up-to-date Type 10-Ok filed on February 3, 2022, and Type 10-Q filed on July 22, 2022. Our SEC filings might be discovered by way of our web site or on the SEC’s web site. Traders are cautioned to not place undue reliance on such forward-looking statements.

Please be aware that this convention name might be out there for audio replay on our web site at intuitive.com on the Occasions part beneath our Investor Relations web page. At this time’s press launch and supplementary monetary knowledge tables have been posted to our web site.

At this time’s format will encompass offering you with highlights of our third quarter outcomes as described in our press launch introduced earlier immediately, adopted by a question-and-answer session. Gary will current the quarter’s enterprise and operational highlights. Jamie will present a evaluation of our monetary outcomes, then I’ll focus on process and medical highlights and supply our up to date monetary outlook for 2022. And at last, we’ll host a question-and-answer session.

With that, I’ll flip it over to Gary.

Gary S. Guthart — Chief Government Officer and Member of the Board of Administrators

Thanks for becoming a member of us immediately. Our enterprise fundamentals strengthened in Q3 with 20% process progress in da Vinci procedures in contrast with Q3 of final 12 months and strong efficiency in every of our international areas. Our capital placements mirrored 13% progress in our put in base to fulfill process demand accompanied by continued will increase in utilization per system per 12 months, wholesome indicators for our clients and for us. Ion additionally skilled will increase in installs, procedures carried out and annualized system utilization.

Provide chain challenges, whereas nonetheless current, are abating from their pandemic peaks. Wanting extra carefully at procedures, 20% progress is up from 14% final quarter and above our three-year compound annual progress price of 16% in the course of the pandemic. Normal surgical procedure, our largest process class, is rising on the quickest price of any class, fueled by bariatric surgical procedure, cholecystectomy, hernia restore and different procedures in america.

In Europe, a number of international locations are rising properly with diversified use past urology. Germany, the U.Ok. and Eire, Italy and Spain stood out within the quarter. In Asia, Japanese process progress accelerated relative to Q2 and Korean progress remained strong. Procedures in each international locations are additionally diversifying past urology. In China, process progress was simply above our international common, hampered partially by regional rolling lockdowns that proceed to affect procedures and utilization.

Turning to capital. We positioned 305 techniques within the quarter in contrast with 336 in Q3 a 12 months in the past and 279 final quarter. Robust process demand is supporting da Vinci put in base progress of 13% within the quarter. Per system utilization grew 7% within the quarter, up from our three-year compound annual progress of 5% over the pandemic. Utilization was aided by restoration from a softer U.S. process quarter final 12 months in addition to buyer efficiency of extra varieties of procedures and better quantity classes and will increase in buyer effectivity.

Si trade-ins continued to sluggish given the decline in remaining trade-in alternative. Ion placements grew to 50 this quarter, up from 28 final 12 months and 41 final quarter, reflecting continued progress in an early market. Total, our clients are buying techniques the place there’s alternative for process progress.

On the funding entrance, we proceed to deal with our platforms in multiport and luminal, single port and digital by way of indication and regional regulatory expansions, innovation and services that meet buyer wants and product high quality and value refinements. We count on our new platforms to method our historic ranges of contribution margin over time. Progress year-to-date has met our expectations.

With regard to our bills this quarter, we moderated headcount progress to deal with deeply integrating these workers who joined us prior to now a number of quarters. Going into 2023, we count on the speed of progress in fastened bills to sluggish as we pursue leverage in our enabling capabilities and sequence a few of our ahead investments. We’ve had a strong quarter attaining product and companies milestones. We proceed to broaden entry to our multiport merchandise, coaching and companies globally. Standouts within the quarter embody file international quarterly new surgeon coaching completions to first case and accreditation of our know-how coaching pathway by the Royal Faculty of Surgeons within the U.Ok. For Ion, we submitted our registration utility in China, and we obtained German regulatory medical research approval for Ion ablation know-how, which begins our medical journey in direction of enabling interventions past biopsy. Ion procedures grew 211% within the quarter.

Turning to our single-port platform, da Vinci SP. Procedures grew 46% year-over-year, with specific energy in Korea, the place our SP crew launched next-generation SP devices and our Firefly enabled endoscope. We additionally acquired PMDA clearance within the quarter, market SP in Japan throughout a broad set of medical indications, just like the indications SP has in Korea.

In our digital portfolio, our My Intuitive app and portal are being adopted broadly in areas by which they’re launched because the go-to digital portal for da Vinci clients. Installs of our in-room computing platform, Intuitive Hub, grew 21% over the third quarter final 12 months. And software program updates to our hub put in base, improved usability and enabled telepresence.

In abstract, our core enterprise strengthened within the quarter as acute pandemic affect softened. We’re managing spend progress whereas investing in core progress alternatives for the longer term.

I’ll now cross the time over to Jamie to take us by way of our funds and a few persistent macroeconomic points in larger element.

Jamie Samath — Chief Monetary Officer

Good afternoon. I’ll describe the highlights of our efficiency on a non-GAAP or professional forma foundation. I may also summarize our GAAP efficiency later in my ready remarks. A reconciliation between our professional forma and GAAP outcomes is posted on our web site.

In Q3, progress in procedures, the put in base of da Vinci techniques and common system utilization was wholesome. The energy of those key enterprise drivers resulted in a professional forma working margin of 36% and professional forma EPS of $1.19. Concurrently, we noticed headwinds from the sturdy U.S. greenback lingering provide chain points and inflation, which collectively negatively impacted professional forma working margin by roughly 2 proportion factors in comparison with the third quarter of final 12 months. I’ll take you thru these particulars.

Q3 process progress of 20% mirrored a rise in U.S. procedures of 18% and OUS process progress of 24%. U.S. process progress mirrored a positive comparability to the 12 months in the past quarter, given the affect of the Delta variant final 12 months. On a three-year compound annual progress price foundation, U.S. procedures grew roughly 13%.

In China, our second largest market, in the course of the quarter, procedures continued to get well from the affect of COVID-related lockdowns that we described on final quarter’s earnings name. Nevertheless, we proceed to see regional lockdowns happen as COVID circumstances rise.

Turning to capital. We positioned 305 techniques within the third quarter, 9% decrease than the 336 techniques we positioned final 12 months. Third quarter system placements included roughly 15 techniques that have been delayed on the finish of final quarter attributable to element provide delays. There have been 71 buying and selling transactions within the quarter as in comparison with 136 in Q3 of 2021, reflecting the decline within the variety of Si’s remaining within the put in base. As of the top of Q3, there have been roughly 739 Si’s remaining within the put in base, of which 191 are within the U.S.

Excluding buying and selling transactions, international system placements grew 17% from final 12 months. The put in base of da Vinci techniques grew roughly 13% year-over-year, in line with current traits. The utilization of medical techniques within the area, measured by procedures per system, elevated nearly 7% in comparison with final 12 months. Utilizing a three-year compound annual progress price, third quarter utilization was in line with historic averages, growing nearly 5%. Common system utilization within the U.S. grew 6% year-over-year, an enchancment from the 1% decline in utilization in Q2. Because of our process and capital efficiency, Q3 income was $1.56 billion, a rise of 11% from the third quarter of 2021.

On a continuing forex foundation, third quarter income grew roughly 15%. Within the third quarter, income denominated in non-USD currencies represented 22% of complete income. On a revenue-weighted foundation, utilizing present alternate charges, internet of hedges in place for This fall, the U.S. greenback is roughly 3% stronger than the charges realized in Q3.

Extra income statistics and traits are as follows: within the U.S., we positioned 175 techniques within the third quarter, decrease than the 227 in Q3 of 2021, reflecting a decline of 66 techniques related to trade-in transactions and a difficult macroeconomic surroundings. Exterior the U.S., we positioned 130 techniques within the third quarter in contrast with 109 final 12 months. Present quarter system placements included 54 into Europe, 32 into Japan and 14 into China in contrast with 47 into Europe, 20 into Japan and 17 into China within the third quarter of 2021. As of the top of Q3 2022, there have been 40 techniques remaining beneath the present quarter in China, which can be out there to the three home opponents which have accomplished native registration with NMPA.

Markets which might be served by way of distributors have represented roughly 10% of system placements thus far this 12 months. Our distribution companions buy product from us in U.S. {dollars} and promote of their native currencies. Whereas now we have not skilled a big affect thus far, the strengthening of the U.S. greenback reduces distributor margins and will trigger delays in capital purchases.

Leasing represented 37% of Q3 placements in contrast with 42% final quarter and 41% within the third quarter of 2021. The decrease lease combine is a perform of buyer and regional combine. And whereas leasing will fluctuate from quarter-to-quarter, we proceed to count on that the proportion of placements beneath working leases will enhance over time.

Third quarter system common promoting costs have been $1.5 million, in line with final quarter. System ASPs have been negatively impacted by the next trade-in combine and the affect of FX, offset by the next mixture of Xi twin console placements. We acknowledged $17 million of lease buyout income within the third quarter in contrast with $22 million final quarter and $25 million final 12 months. Lease buyout income has various considerably quarter-to-quarter and can possible proceed to take action.

Instrument and accent income per process was roughly $1,800 in contrast with roughly $1,900 for each final quarter and final 12 months. On a year-over-year foundation, FX negatively impacted I&A per process by roughly $50. The rest of the year-over-year discount was primarily a results of buyer ordering patterns. In the course of the quarter, our distributors and clients in sure OUS markets decreased their stock as provide chain predictability reasonably improved. We

Positioned 50 Ion techniques within the quarter as in comparison with 28 within the third quarter of final 12 months. The put in base of Ion techniques is now 254 techniques, of which 112 are beneath working lease preparations. Third quarter Ion procedures of roughly 6,400 elevated 211% on a year-over-year foundation. Ion is within the new MDR regulatory evaluation course of in Europe. And in the course of the quarter, we submitted Ion into the regulatory course of in China. As a reminder, regulatory evaluation time traces in China are prolonged.

Transferring on to the remainder of the P&L. Professional forma gross margin for the third quarter of 2022 was 69.8% in contrast with 71.3% for the third quarter of 2021 and 69.2% final quarter. Q3 professional forma gross margin included a onetime profit of roughly 50 foundation factors associated to the favorable conclusion of sure oblique tax issues. Professional forma gross margin was decrease than final 12 months, primarily as a result of stronger U.S. greenback, manufacturing and logistics inefficiencies because of the provision chain surroundings, increased element pricing and elevated fastened prices relative to income. Indicators of provide and stock held modestly improved within the quarter however remained properly beneath pre-pandemic ranges.

Professional forma working bills elevated 24% in contrast with third quarter of 2021, pushed by elevated headcount, increased R&D-related undertaking prices and better journey prices. Development in working bills has been primarily in help of our Ion platform, next-generation robotics capabilities, our digital capabilities and growth of our infrastructure to permit us to successfully scale. We’re additionally seeing increased regulatory prices because of elevated regulatory necessities globally and growth of our new platforms into OUS markets.

As Gary talked about earlier, in the course of the quarter, we slowed our hiring tempo, including roughly 530 workers, decrease than the 700-plus workers now we have added per quarter within the final three quarters. As we look ahead to 2023, we count on our working expense progress might be decrease than the expansion for this 12 months. The slowing progress price of working bills displays the completion of a few of our infrastructure and enterprise course of enchancment investments and deliberate leverage in our enabling capabilities.

As a part of our planning course of, we’re additionally conducting a evaluation of our capital expenditure priorities and we’ll present an replace as to the result of this evaluation on the subsequent name.

Inside this framework, we’ll proceed to spend money on our new platforms, Ion and SP, next-generation capabilities and our digital ecosystem given the return profiles we see for these investments.

Professional forma different earnings was $7.2 million for Q3, decrease than $10.4 million within the prior quarter, primarily as a result of affect of overseas alternate losses from remeasurement of the stability sheet ensuing from the continued strengthening of the U.S. greenback. Our professional forma efficient tax price for the third quarter was 23.4%, according to our expectations.

Third quarter 2022 professional forma internet earnings was $429 million or $1.19 per share in contrast with $435 million and likewise $1.19 per share for the third quarter of final 12 months. Capital expenditures in Q3 have been $153 million primarily comprised of infrastructure investments to broaden our services footprint and enhance manufacturing capability.

I’ll now summarize our GAAP outcomes. GAAP internet earnings was $324 million or $0.90 per share for the third quarter of 2022 in contrast with GAAP internet earnings of $381 million or $1.04 per share for the third quarter of 2021. The changes between professional forma and GAAP internet earnings are outlined and quantified on our web site and embody extra tax advantages related to worker inventory awards, worker stock-based compensation, amortization of intangibles, litigation fees and good points and losses on strategic investments.

We ended the quarter with money and investments of $7.4 billion in contrast with $8.2 billion on the finish of Q2. The sequential discount in money and investments mirrored share repurchases and capital expenditures, partially offset by money from working actions.

In the course of the quarter, we accomplished a $1 billion ASR along with the $607 million of shares repurchased within the first half. Because the finish of 2021, our diluted share rely has decreased by roughly 7 million shares or 2% and now we have a remaining authorization to repurchase our shares of $2.5 billion.

And with that, I wish to flip it over to Brian, who will focus on medical highlights and supply our up to date outlook for 2022.

Brian King — Treasurer and Head of Investor Relations

Thanks, Jamie. Our general third quarter 2022 process progress was 20% in comparison with 20% for the third quarter of 2021 and 14% final quarter. The three-year compound annual progress price between the third quarter of 2019 and third quarter of 2022 was 16%. Within the U.S., third quarter 2022 procedures exceeded our expectations with progress at 18% year-over-year in comparison with 16% for the third quarter of 2021 and 11% final quarter.

Process progress displays a optimistic affect relative to Q3 final 12 months, which was impacted by the Delta variant. On a three-year compound annual progress foundation, U.S. process progress was 13%. Third quarter process progress continued to be pushed by common surgical procedure with energy in bariatrics, cholecystectomy and hernia restore. Developments in malignant procedures, particularly colorectal and lobectomy procedures have been additionally sturdy. Development in gynecology, our second largest process class within the U.S., additionally skilled double-digit progress whereas extra mature urologic procedures grew within the excessive single digits.

Exterior of the U.S., third quarter process quantity grew roughly 24% year-over-year in comparison with 30% for the third quarter of 2021 and 22% final quarter. On a three-year compound annual progress foundation, process progress was 21%.

Turning to Europe. Process progress was led by sturdy progress in Germany, U.Ok., Italy and Spain. In all the areas famous, process progress outdoors of urology was sturdy normally surgical procedure and gynecology classes. Particularly, in Germany, we skilled early-stage progress in benign hysterectomy and colorectal surgical procedure. Within the U.Ok., progress was led by benign hysterectomy, colorectal and cholecystectomy procedures. Whereas nonetheless early stage, year-over-year process progress in these non-urology procedures was nearly 4 instances increased than urology.

Turning to Asia. In Japan, progress normally surgical procedure and gynecology continued to be sturdy. We skilled strong progress in these classes led by gastrectomy, rectal resection and benign hysterectomy. Additional contributing to sturdy process efficiency was continued early-stage progress in newly reimbursed procedures, particularly colon resection and nephrectomy procedures.

In China, we proceed to see a restoration within the first couple of months of the third quarter as COVID circumstances started to say no and lock down restrictions have been lifted. Process progress was pushed by urologic procedures, particularly prostatectomy and partial nephrectomy, together with sturdy progress in colon resection inside common surgical procedure. Later within the quarter, we started to see procedures begin to average as COVID started to reemerge in varied areas and rolling lockdowns have been carried out.

Korea process progress was additionally strong within the third quarter. Development in procedures continued to be broad-based with sturdy progress in SP procedures.

Now turning to the medical facet of our enterprise. Every quarter on these calls, we spotlight sure not too long ago revealed research that we deem to be notable. Nevertheless, to realize a extra full understanding of the physique of proof, we encourage all stakeholders to totally evaluation the intensive element of scientific research which were revealed through the years.

Earlier immediately on the Annual CHEST convention in Nashville, Tennessee, Dr. Erik Folch from Massachusetts Normal Hospital introduced preliminary efficiency updates from the PRECIsE research. Outcomes have been in line with knowledge launched final 12 months and demonstrated encouraging outcomes for diagnostic yield and sensitivity of malignancy for samples obtained by way of an Ion process with a robust security profile. We anticipate the ultimate knowledge from PRECIsE to be revealed within the first a part of subsequent 12 months.

Persevering with with Ion, a bunch from the Mayo Clinic in each Rochester, Minnesota and Jacksonville, Florida, led by docs Alejandra Le Mateos, Janani Reisenauer and Sebastian Fernandez-Bussy, revealed a retrospective case sequence in respirology, evaluating the efficiency of the Ion and the luminal system with the CT guided transthoracic method for pulmonary lesion biopsy. A complete of 225 sufferers have been included on this research. 113 who underwent an Ion process with a median nodule dimension of 18 millimeters and 112 who underwent a transthoracic biopsy with a median nodule dimension of 16 millimeters. Inside the Ion Group, the general diagnostic yield and sensitivity for malignancy reported was 87.6% and 82.1%, respectively, which have been akin to the identical outcomes from the transthoracic method. Importantly, the speed of problems was considerably decrease for the Ion method with a 13% distinction relative to the transthoracic method. Additional evaluation demonstrated an roughly 80% decreased probability of pneumothorax related to the Ion process.

The authors concluded partially that robotic-assisted method with Ion might be as correct because the transthoracic method for sampling pulmonary nodules with related or decreased problems and ought to be thought-about as a way for nodule biopsy.

Turning to the surgical facet. Dr. Leonardo Sandrolini from the College of Bologna and colleagues revealed a scientific evaluation and made an evaluation, evaluating the robotic-assisted and laparoscopic approaches for left colectomy procedures within the Worldwide Journal of Colorectal Illness. Knowledge from 11 totally different articles, together with over 52,000 sufferers have been included on this evaluation, with over 13,500 within the robotic arm and over 39,000 within the laparoscopic arm and with no distinction in preoperative traits reported. With regard to perioperative outcomes, a 4% decrease conversion to open price was reported for the robotic-assisted method in comparison with the laparoscopic method. Additional evaluation demonstrated the chance of conversion to open for the robotic-assisted method was roughly half the remainder of the laparoscopic method. As well as, the evaluation confirmed the next threat of postoperative problems after a laparoscopic left colectomy, in addition to a decrease price of superficial wound infections for the robotic-assisted method. The evaluation additionally confirmed anastomotic leak was 30% much less possible with the robotic-assisted method in comparison with the lab group.

The authors concluded partially that robotic left colectomy requires much less conversion to open surgical procedure than the usual laparoscopic method and extra research are warranted to focus on doable benefits in utilizing the robotic platform for let colectomy.

I’ll now flip to our monetary outlook for 2022. Beginning with procedures. On our final name, we forecast full 12 months 2022 process progress inside a spread of 14% to 16.5%. We are actually growing our forecast and count on full 12 months 2022 process progress of 17% to 18%. This vary continues to mirror the uncertainty related to the course of the pandemic. The low finish of the vary nonetheless assumes growing COVID hospitalizations, regional lockdowns and staffing strain at hospitals for the rest of the 12 months. On the excessive finish of the vary, we assume COVID-19-related hospitalizations world wide proceed to say no all through the rest of 2022, and there are not any extra vital impacts from additional resurgences. The vary doesn’t mirror vital materials provide chain disruptions or hospital capability constraints just like what now we have skilled at the beginning of the pandemic.

Turning to gross revenue. On our final name, we forecast our 2022 full 12 months professional forma gross revenue margin to be inside 69% and 70.5%, anticipated to be in direction of the decrease finish of that vary. We are actually refining our estimate of professional forma gross revenue margin to be inside 69% and 69.5% of internet income given the continuing affect of upper enter prices associated to provide chain and the affect from a stronger U.S. greenback. Our precise gross revenue margin will differ quarter-to-quarter relying largely on product, regional and trade-in combine, fluctuations in overseas forex charges and the affect of recent product introductions.

With respect to working bills, on our final name, we forecast professional forma working expense progress to be between 23% and 25%. We’re adjusting our estimate and now count on our full 12 months professional forma working expense progress to be between 21% and 23%. We’re narrowing our estimate for noncash compensation expense to vary between $520 million to $530 million in 2022. We’re additionally updating our estimate for different earnings, which is comprised principally of curiosity earnings to complete between $40 million and $50 million in 2022, a lower from our earlier estimate of $60 million and $70 million. The lower primarily displays decrease curiosity earnings on money that was used to repurchase shares and likewise the online affect of sure overseas alternate good points and losses.

On final quarter’s name, we forecast 2022 capital expenditures inside a spread of $700 million to $800 million. We are actually decreasing our estimate for capital expenditures for 2022 to be within the vary of $600 million to $700 million. With regard to earnings tax, we proceed to estimate our 2022 professional forma tax price to be between 22% and 24% of pretax earnings.

That concludes our ready remarks. We are going to now open the decision to your questions.

Questions and Solutions:

Operator

[Operator Instructions] And first, now we have a query from the road of Travis Steed with Financial institution of America. Please go forward.

Travis Steed — Financial institution of America — Analyst

Hey. Thanks for taking the questions and congrats on the nice quarter. Possibly, Gary, on the capital promoting funnel, simply possibly you might remark how the funnel has modified because the starting of the 12 months whenever you initially highlighted a slower funnel. And simply attempting to sq. away the 13% put in base progress with the decrease funnel. And if that’s being offset by the 7% increased utilization and the way to consider capital within the de novo placements shifting ahead?

Gary S. Guthart — Chief Government Officer and Member of the Board of Administrators

What we’re seeing on that facet, on the capital facet, is that the place we see wholesome process progress, the put in base progress is conserving tempo. And also you’re completely proper in your query to type of hyperlink utilization progress with put in base progress.

On the utilization facet, the 7% is increased than the norm. It’s obtained somewhat artifact in it, we expect, which is a 12 months in the past, third quarter was somewhat bit suppressed due to the Delta variant. So I believe it’s arduous to maintain doing 7% quarterly. If the purchasers might do this, we’d be delighted. Utilization is sweet for them, it’s good for us and it’s superb. It’s simply arduous to maneuver in a sturdy means due to all of the workflow points within the hospital at massive, not simply robotics, however simply throughout the system. So we’re seeing each. I believe the capital facet, what we’ve seen right here is that capital is out there to be competed for in case you can develop into a excessive precedence inside the hospital to get it. So it’s not a lot that the capital surroundings is straightforward as it’s aggressive. And in case you can rise on the celebration record, then we’ll discover that the loop, and we’re seeing that in put in base progress in greenfields and in Ion.

Operator

Thanks. And subsequent now we have a query from the road of Amit Hazan with Goldman Sachs. Please go forward.

Amit Hazan — Goldman Sachs — Analyst

Thanks. A few questions, if that’s okay. First, I believe, possibly simply to ask about the way you’re fascinated about the pipeline for extra mature procedures. If I heard you proper, urology and gynecology up excessive single digits, double digits within the U.S., fairly good numbers. Simply wish to make certain these are clear. After which simply type of the everyday query about your personal sources, exterior/inner buyer discussions, simply the way you’re fascinated about the diagnostic pipeline for these decrease rising most cancers procedures and type of the place we’re or the place we’re heading relative to the trough ranges that have been noticed final 12 months?

Gary S. Guthart — Chief Government Officer and Member of the Board of Administrators

Okay. On the difficulty of type of the standard of progress on urology and gynecology, Brian, I’m going to kick that to you.

Brian King — Treasurer and Head of Investor Relations

Certain. And I believe Gary touched on it on the earlier reply, a component of that being only a comparability interval from final 12 months. However nonetheless seeing actually wholesome progress in these specific classes. As I known as out, progress in gynecology, which is our second largest process class, did have, I’d say, double-digit progress most likely within the decrease finish there after which these extra mature urologic procedures being these excessive single digits, but it surely’s actually favoring from the comparability from final 12 months, however nonetheless doing rather well.

Jamie Samath — Chief Monetary Officer

On the diagnostic pipelines, what we proceed to see for essentially the most half is comparatively regular by way of the exams which might be occurring, principally somewhat beneath the volumes that we noticed pre-pandemic. The one exception that we’ve seen within the U.S. in type of current traits is a tick up in colonoscopies. I wouldn’t say that it’s proof that that’s impacted da Vinci procedures but, as that’s a current development. Clearly, we’re inspired by the truth that extra sufferers are in a position to get again to having these diagnostic exams, and we’ll see how that performs out by way of surgical procedure.

Gary S. Guthart — Chief Government Officer and Member of the Board of Administrators

On only a follow-up level to Brian, your reply. I believe the opposite factor is that whereas we’re mature in urology and gynecology in america, there’s nonetheless somewhat progress there too. However outdoors america and Europe and Asia, we’re nonetheless comparatively early, and we expect that in these two classes, we’ll proceed to see progress.

Jamie, only a follow-up level in your reply on the diagnostics facet. You have been saying it began to come back again, and we’re seeing somewhat little bit of an uptick. It’s completely clear that there’s been a trough or a bolus of people that stayed out of diagnostic pipelines, and that hasn’t absolutely recovered. And their illness is progressing. That can be completely clear within the literature. So how large that’s and what that appears like as they arrive again into the well being system by way of surgical procedure and da Vinci surgical procedure, you’re simply going to have to attend and see. It’s a tough factor to measure. However I believe there’s a bolus on the market, and it’s unlucky given illness development.

Operator

Thanks. And subsequent now we have a query from the road of Larry Biegelsen with Wells Fargo. Please go forward.

Larry Biegelsen — Wells Fargo — Analyst

Good afternoon. Thanks for taking the query and congratulations. Simply two for me. I wished to begin, Gary, with the colour commentary you gave on opex spending subsequent 12 months. If we take a look at the final 5 years, you grew EPS sooner than gross sales — or pre-COVID, I’m sorry, 4 to the 5 years. This 12 months, it seems like earnings will most likely be down. How a lot of a precedence is EPS progress? And what would want to occur so that you can get again to the algorithm the place you grew EPS sooner than gross sales? And I’ve one follow-up.

Gary S. Guthart — Chief Government Officer and Member of the Board of Administrators

We watch it. We wish to guarantee that we’re environment friendly stewards of our bills and our capital. And the place we see an effectivity, we’ll pursue it. That’s what I’ve been messaging and that’s what I used to be speaking about right here within the script. We expect there are alternatives for us to extend our productiveness and to do a greater job onboarding among the employees we’ve introduced in, serving to them develop into extra productive extra rapidly.

We expect there are actually good alternatives in our new platforms, the issues we’ve been speaking to you about. Ion is rising properly. SP, as we pursue extra indications, I believe might be fairly sturdy and we’re happy with multiport, presently what’s out there, the issues we’re engaged on in addition to our digital instruments. So we expect these issues are essential. We don’t wish to starve them, however we’ll sequence them. So it’s a balanced method. A few of it’s ensuring that our progress engines stay intact, and we proceed to innovate. Different components are simply ensuring that we’re being environment friendly with our use of capital and that we’re constructing a lean group as we develop.

Jamie, you may converse somewhat bit to the expense characterization as you see it.

Jamie Samath — Chief Monetary Officer

There’s simply a few framing feedback I’d make, Larry. When you take a look at the midpoint of the process steerage we offered, on a three-year CAGR foundation, that’s process progress of about 15%. Simply over 15%. You do the identical for our opex steerage, that’s just below 15%. So type of again to 2019 on a three-year CAGR foundation, process progress and spending progress comparatively in line.

Only one different factor I’d spotlight to make a degree. When you take a look at the reported income progress for Q3 and 11% year-over-year, in case you take a look at our recurring income progress, that’s about 80% of our complete income, 16%. When you regulate that on a continuing forex foundation, it’s 20% income progress, and so comparable with the 20% process progress. If you look again at ’18, ’19, usually, process progress and income progress are comparatively related. You’re seeing a disconnect proper now for the explanations we’ve described, the decrease trade-in volumes. Commerce-in volumes thus far this 12 months are down 40% from the prior 12 months, and also you’re seeing the affect of FX, as we’ve described. And so there are some macro and secular degree impacts on what’s taking place within the P&L this 12 months. Particularly on spending, we type of described it within the script. There are some infrastructure investments that we’ve been making that begin to full, and that creates the chance for us to spend at a decrease progress price. And given the work that we’ve performed and the investments that we’ve made, we’re going to search for some leverage in our enabling capabilities, significantly as we get into subsequent 12 months.

Ultimate factor that Gary talked about was as you take a look at type of our pipeline, there’s some pure sequencing that you simply’ll do with respect to a few of our programmatic spending subsequent 12 months. And people elements play into the slowing working expense progress price that we’ve described.

Larry Biegelsen — Wells Fargo — Analyst

That’s tremendous useful. If I might sneak yet one more in. Gary, you’ve talked about an enormous quantity of variation in surgical procedure world wide. You’ve talked about creating instruments to establish finest practices to scale back the variation and enhance outcomes. The place are you in that course of? And what are the capabilities you continue to have to develop to make {that a} actuality? Thanks.

Gary S. Guthart — Chief Government Officer and Member of the Board of Administrators

Sure, I really like that query. There’s a few issues. On the type of the baseline, it’s essential to collect sufficient of the precise knowledge to characterize variability of care groups and variability of sufferers. So there’s a affected person inhabitants, it’s obtained variability, and also you’ve obtained care crew or doctor variability as properly. And getting the precise knowledge streams, getting them saved and determining the right way to do the correct of evaluation or evaluation on them, curating that knowledge, ensuring it’s annotated correctly. Some primary stuff that it’s a must to do to have the ability to search for significant sources of variation.

We’re properly down that pathway by way of getting the precise knowledge streams, having the precise conversations with our clients and beginning to do the evaluation. So I’m excited by it.

As we take a look at the right way to ship that, we’re nonetheless in a, I believe, surgical science discovery part. We’re partnered with lots of the high hospitals, tutorial hospitals world wide taking a look at surgical knowledge science, beginning to determine sources of variation and drawing it again to causality, not simply correlation. So I believe the baseline is there, the power to gather and collect that knowledge, I believe {our relationships} with top-tier researchers are in place, and we’re beginning to see early indicators that look actually good.

Ultimate level I’d make is there are some basic items we will do which might be logical and never terribly difficult that may assist personalize studying pathways and coaching pathways, and we’re beginning to work by way of that now. That’s sorts of applied sciences that can come out into the sector first.

So I believe it was a long-term journey. A few of the issues we talked to you about Intuitive Hub or among the baseline capabilities there by way of the precise knowledge collected, annotated the precise means and shared with the precise hospital clients to get us good outcomes.

Operator

Thanks. Subsequent, now we have Robbie Marcus with JPMorgan. Please go forward.

Robbie Marcus — JPMorgan — Analyst

Nice. Thanks for taking the query. I’ll add my congratulations on a pleasant quarter. Possibly simply to dial in somewhat bit extra on the capital tools surroundings. You touched on this, and it’s nice to see procedures driving placement volumes. However are you seeing any adjustments, whether or not it’s within the U.S. or Europe as we’re in an unsure financial surroundings world wide, it’s clearly not displaying up within the numbers but, however simply seeing if there’s any price of change or if the outlook is any totally different than the present surroundings? Thanks loads.

Jamie Samath — Chief Monetary Officer

Simply a few issues I’d spotlight. As we’ve spoken to clients, and that is principally anecdotal, you do see some enter that staffing pressures are easing somewhat bit, significantly with respect to trip charges and labor prices. These two elements are nonetheless means above pre-pandemic ranges, however you see somewhat little bit of enchancment within the quarter, at the very least primarily based on each these anecdotes and the survey work that we’ve seen.

In Q2 and Q3, you noticed clients going by way of the method of reexamining their capital budgets. And that causes some delays in capital investments and clearly, they reprioritize what they spend money on. I believe robotic surgical procedure continues to be an space of potential worth for purchasers. That does trigger some delays.

On the OUS facet, we haven’t seen a big affect but thus far by way of capital spending by these clients. Typically, we’re at earlier phases of adoption. The payer constructions are totally different. And so, thus far, at the very least, what we’ve seen is type of good capital numbers within the OUS markets, as you may see from the type of comparisons. When you take a look at European placements in Q3, they have been up 15%. Placements in Asia have been up 36% year-over-year. So we haven’t seen something thus far. I’d say there are clearly financial dangers, significantly in Europe with the vitality scenario there, the scenario with Ukraine and Russia. We haven’t seen these manifest but.

Operator

Thanks. And subsequent, now we have a query from the road of Richard Newitter with Truist. Please go forward.

Richard Newitter — Truist — Analyst

Hello. Thanks for taking the questions and congrats on the quarter. Simply with respect to the spending sequencing feedback that you simply made, what ought to we be fascinated about that with respect to implications or type of a next-gen console system and among the different varieties of iterative know-how developments you’ve talked about within the pipeline. Is there any implication for a brand new system, if you’ll, or next-gen console and the cadence of the spending you’re speaking about? Thanks.

Gary S. Guthart — Chief Government Officer and Member of the Board of Administrators

Throughout the platforms, we work on enhancements to the robotic system facet or full innovation there. We work on devices and equipment and software program updates and generally partnered product. Basically, we preserve our precedence and our cadence on these issues that we expect are going to have the most important affect to our clients that permit them to get higher outcomes or to deal with new alternatives that they’re not addressing immediately.

We proceed to take a position and have a excessive precedence on high quality enhancements and issues that can make our clients extra glad. Another issues that are typically nice concepts, however maybe will not be extremely pressing, then these issues will sequence out. And that’s a dialog we routinely have. What do now we have to do at excessive precedence and do it at prime quality rapidly? What are the issues that may sequence after that?

So arduous to reply your query intimately from a course of viewpoint. If it issues loads to our clients, if it’s a excessive dissatisfier or excessive alternative, these issues get put in line first.

Operator

Thanks. And subsequent, now we have the road of Jayson Bedford with Raymond James. Please go forward.

Jayson Bedford — Raymond James — Analyst

Hello. Good afternoon. Thanks for taking the query. One matter that I believed was attention-grabbing. You talked about ablation know-how with respect to Ion and beginning a trial in Germany. Are you able to discuss a bit extra concerning the know-how and the scale and scope of the trial and possibly any kind of time line you may provide within the U.S. by way of beginning a trial?

Gary S. Guthart — Chief Government Officer and Member of the Board of Administrators

Properly, I’ll discuss somewhat bit concerning the motivation by way of the small print of the trial, I don’t have them at our fingertips, however our crew can reply to that in a future name. Right here we all know that Ion can navigate deep into the lung, we all know that surgeons and interventional pulmonologists wish to deal with tissue there. They need to have the ability to interact with it a method or one other. So ablative know-how can be utilized for a few totally different illness states, and now we have excessive curiosity in that, whether or not it’s inoperable most cancers or whether or not it’s one thing for emphysema or power bronchitis.

So with the ability to navigate there with an vitality supply will finally be essential. The primary one which we’re speaking about right here, I consider, is a microwave vitality supply. There are another vitality sources that persons are considering. In some circumstances, we’re creating it ourselves. And in a number of different circumstances, we’re partnering with others. And we expect that can open the door to extra indications for Ion within the lung and elsewhere. We’re fairly enthusiastic about it. Apologies for not having the small print of the trial at our fingertips, however I think about our crew will get that to you sooner or later.

Operator

Thanks. And subsequent, now we have the road of Matt Tyler [Phonetic] with Jefferies. Please go forward.

Matt Tyler — Jefferies — Analyst

Hello. Thanks for taking the query and congrats on a pleasant quarter. I wished to get some up to date ideas. You’ve been requested somewhat bit about this within the current previous and on this name, however possibly you might give us some suggestions on the way you’re fascinated about capital spending from hospital clients going into recession and fascinated about how this one might evaluate to what you’ve seen prior to now with among the totally different cycles that the corporate has gone by way of over an extended time period, possibly do some evaluate and distinction and discuss concerning the demand surroundings that you simply see on the market and the way you’re going to compete for different priorities for capital.

Jamie Samath — Chief Monetary Officer

Simply with respect to prior cycles, and this one truly, Matt, is somewhat attention-grabbing in as far as we indicated in Q1, we noticed some softness within the capital pipeline in Q1 and Q2 and to some extent, that continued in Q3. If I look again at prior cycles in 2008, you noticed three quarters of a year-over-year decline in capital placements. 2013, I believe we noticed 5 quarters in a row of declining capital placements. After which when COVID hit in 2020, once more, three quarters in a row. I solely give these as reference factors. I don’t suppose we will say that these are indicative as to what might occur if and when there’s a recession within the U.S. or past. So I believe, truthfully, in case you take a look at the development of the financial projections, it’s fairly advanced and arduous to name at this level. So we simply give these historic reference factors.

Gary S. Guthart — Chief Government Officer and Member of the Board of Administrators

Two feedback for me. After all, the incidence, the depth and the form of a recession not possible for us sitting at this desk to foretell. What I can speak about is how the conversations with hospital executives have gone. I believe normally, there perspective is to serve their affected person inhabitants as finest they will with applied sciences that can get the outcomes they need on the value factors they need it. I believe we’ve been doing properly with that. I believe each on the product facet and our capability to display financial viability and contribution margin good points for hospitals has been highly effective. And I believe that offers us some energy going into the longer term. That stated, relying on how arduous and deep it’s, then it turns into a query of what they wish to provide there. Their affected person inhabitants and how much choices they’re going to need to make.

I additionally suppose that relative to previous cycles, Intuitive has a few extra instruments within the toolbox by way of leasing portfolios and another issues. Laborious to foretell the place it would go. I believe our capability to display worth and regulate to capital placement fashions. It’s somewhat stronger than it was in previous years.

Operator

Thanks. And subsequent now we have Adam Maeder with Piper Sandler. Please go forward.

Adam Maeder — Piper Sandler — Analyst

Hello. Good afternoon. Thanks for taking the query and congrats on a pleasant quarter. I wished to ask about Ion, which if I’m taking a look at it appropriately, had a file placement for installs with additionally some very good quantity traits. So Gary or Jamie, are you able to simply speak about type of what’s driving that inflection and system placements? And then you definately referenced the PRECIsE knowledge that was introduced at CHEST, I believe, earlier immediately, in addition to the journal publication coming subsequent 12 months. Simply speak about any potential affect to adoption trying ahead. Thanks.

Gary S. Guthart — Chief Government Officer and Member of the Board of Administrators

I’ll bounce in and Jamie, you may assist. I believe we’re nonetheless within the early market. We’re happy with the expansion and the client suggestions that we’ve been getting the — and once we discuss to them and survey our clients, their satisfaction ranges are very excessive with the Ion product. I believe it’s pushed by a few issues.

The preliminary knowledge that’s come out of the PRECIsE trial that’s already been talked out and now the later knowledge, I believe, was engaging to the client base. I believe the opposite factor happening is that as we’ve put in extra websites and helped them carry their applications up, I believe they’re in a position to replicate that knowledge. I believe that it’s being generally adopted. And I believe that’s having a compounding impact. The concept that the early publications are being repeated within the fingers of recent groups which might be approaching board offers them confidence. And this can be a little little bit of phrase of mouth amongst the pulmonology group, offers them confidence that they will get what’s being revealed. And I believe that’s been sturdy for us. Jamie?

Jamie Samath — Chief Monetary Officer

I’d simply say there’s some endorsement of the architectural decisions that we made with respect, particularly to the dimer of the catheter, which makes an actual distinction to analysis of smaller lesions and also you see that within the medical knowledge. I believe that the engineering and the business groups have actually executed rather well by way of the interval since we launched the product. And I do suppose that there’s a halo impact of type of phrase of mouth throughout IPs and customers of the product. And I believe together with medical knowledge, that’s had a optimistic impact on our progress thus far. I wouldn’t characterize how we’ve progressed as far as an inflection particularly, I believe we’ve made continued development.

Operator

Thanks. Subsequent, now we have the road of Matt Miksic with Barclays. Please go forward.

Matt Miksic — Barclays — Analyst

Nice. Thanks a lot for taking the query. It’s spectacular quarter, so congrats on that as properly. I simply wished to observe up on a few belongings you talked about on by way of the macro elements type of affecting the market and your clients and your corporation somewhat bit, one being type of the staffing challenges that a few of these facilities are dealing with. Curious how that, if in any respect, is affecting the way in which both procedures are coming again or demand for system is evolving right here? After which into ’23, simply curious among the prices that you simply’ve talked about — everybody talked about, I do know it’s early to ask this type of query, however your ideas at this level as to how we should always take into consideration these prices evolving in ’23 is both form of rising and staying or rising after which with the ability to be managed down or simply by way of your value construction and the way it’s elevated. Any ideas you could have could be significantly appreciated. Thanks.

Jamie Samath — Chief Monetary Officer

Possibly the second a part of the query, I’ll take, Matt. So we’re not going to offer something particular with respect to ’23 numbers. We’ll wait till January to try this once we conventionally present steerage. I believe what we’ve stated with respect to working bills in 2023 for the explanations Gary described, the expansion price for that spending might be decrease than the expansion price that we skilled in 2022. And a major factor of that’s the variety of individuals that we’ll rent subsequent 12 months. And once more, what Gary described to us, given the staff that we’ve employed, there’s a interval right here the place we’re going to make sure that we successfully onboard these new hires and get them to a state of productiveness, and this might be a interval for us to undergo that type of absorption part. I’ll let Gary reply to the primary half.

Gary S. Guthart — Chief Government Officer and Member of the Board of Administrators

Sure. Matt, might you — I’m sorry, I simply missed somewhat little bit of that first a part of the query. Are you able to simply restate that one?

Matt Miksic — Barclays — Analyst

Certain. Simply within the context of things affecting the ebbs and flows restoration, what have you ever, of procedures and system, new system traits, how staffing — hospital staffing or challenges there are affecting these traits in your corporation, if in any respect?

Gary S. Guthart — Chief Government Officer and Member of the Board of Administrators

Sure, truthful query. It’s attention-grabbing. I believe there’s a put and a take there. On the robust facet, after all, if hospital staffing is de facto challenged, significantly because it pertains to OR employees, that may restrict procedures that they’ll carry out. Basically, I believe that folk are paying extra to get OR staffed, recognizing they wish to each deal with these sufferers and it’s essential to the income line of the hospital. So it’s primarily inflationary strain because it pertains to what’s taking place within the OR in our area. The attention-grabbing half is that high-quality MIS, minimally invasive surgical procedure, of which we allow helps to offset among the staffing necessities post-surgery. It’s fairly clear, truly. So if they will do the process then the varieties of surgical procedures we do, it would save them some back-end prices in staffing. So there’s somewhat little bit of a seesaw there.

To this point, I don’t suppose it’s enhancing by way of staffing constraints in a short time. It does sound prefer it’s stabilized and possibly on the slight upside of enchancment.

Operator, now we have time for yet one more query.

Operator

All proper. We’ve the road of Drew Ranieri with Morgan Stanley. Please go forward.

Drew Ranieri — Morgan Stanley — Analyst

Hello. Thanks for taking the questions. Gary, simply possibly on Ion. Are you able to — I do know it’s early days as you’re type of constructing the cells commercially, however a few questions. One is, are you provide constraint in any respect from assembly demand? After which are you able to simply give us a way of possibly the place you might be in account penetration for Ion, whether or not it’s 2 interventional pulmonologist or at a hospital degree? Thanks.

Gary S. Guthart — Chief Government Officer and Member of the Board of Administrators

On the provision facet, we’re working extraordinarily arduous to fulfill demand. On the capital facet, I believe we’re about there. We’re fairly shut, fairly near balanced. I don’t suppose we’re means forward or means behind. And likewise, on the consumable or per process facet, we’re working extraordinarily arduous to fulfill demand. And I believe we’re barely behind, not means forward and never means behind. We’re most likely operating shut however pushing arduous to continue to grow.

So on the penetration facet, I believe we’re somewhat bit early to enter share combine and issues like that, I believe we’re not fairly prepared to explain the place we’re both on the account facet or on the pulmonology facet. So we’ll save that for a future name.

Anyway, thanks. That was our final query. In closing, we proceed to consider there’s a substantial and sturdy alternative to basically enhance surgical procedure and acute interventions. Our groups proceed to work carefully with hospitals, physicians and care groups in pursuit of what our clients have termed the quadruple purpose: higher, extra predictable affected person outcomes, higher experiences for sufferers, higher experiences for his or her care groups and, finally, a decrease complete value of care. We consider 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 a way forward for care that’s much less invasive and profoundly higher, the place illnesses are recognized earlier and handled rapidly, so sufferers can get again to what issues most.

Thanks in your help on this extraordinary journey. We look ahead to speaking with you once more in three months.

Operator

[Operator Closing Remarks]