Intuitive Surgical, Inc. (ISRG) JPMorgan Healthcare Conference Call Transcript

Intuitive Surgical, Inc. (NASDAQ:ISRG) JPMorgan Healthcare Conference Call January 10, 2024 12:00 PM ET

Company Participants

Gary Guthart – CEO & Director

Brian King – Head, IR

Jamie Samath – SVP & CFO

Conference Call Participants

Robert Marcus – JPMorgan Chase & Co.

Robert Marcus

Good morning, everyone. Happy to continue day 3 of the JPMorgan Healthcare Conference. I’m Robbie Marcus, the Medtech Analyst. Really pleased to introduce our next session. CEO of Intuitive Surgical, Gary Guthart, will do a quick presentation, then we’ll join him on stage for Q&A. Gary?

Gary Guthart

Good morning. Happy to be with you here today. And Robbie, thank you for the opportunity to speak. As you know, we’ll be discussing some things that are forward-looking. We encourage any of you to go to our website on the Investors section and review our disclosures and SEC filings. For those of you who haven’t followed our company, our mission is pretty straightforward. We think that minimally invasive care and acute interventions, those that happen in professional healthcare environments are important, that we can improve them using advanced technologies and that there’s a significant need to improve them.

And, we think that those improvements can be substantive, not a couple of percent here or there, but transformative. And we think that there’s an urgency to it. We think it can be profoundly better than it is. We’ve been at it. The company was incorporated in December of ’95. We’ve been at it for some time, and I think we’re still in the end of the beginning, not the beginning of the end, and we’ll talk a little bit about that.

This last year, our customers used our products in something over 2.2 million procedures in the year. Total experience on da Vinci platforms is now over 14 million. It continues to be an active subject of clinical research, the vast majority of which is not sponsored by us. We do sponsor research. The mass — the database is driven almost entirely independently of Intuitive. And I think both of those things are really healthy. I think it’s healthy for us to invest. And I think it’s healthy for people to assess independently.

We had a good year in placements. We are now 3 different hardware platforms, our multiport platform. Over 1,300 placements are flexible bronchoscopy platform, Ion, over 200 placements in our single-port narrow access surgery system, SP at over 50. Total installed base of systems now over 9,100. Multiport at over 8,000, Ion at over 530 and Single port over 170. So starting to get exciting. 2023, I’d like to use this conference as a little bit of a look back and then look forward. Every year has its strength and its challenges. I think clarity on those things is really important for our organization, and I’d like to share it with you I won’t read the objectives. For those of you who were with us, you know them, there were some challenges.

There was a significant amount of environmental uncertainty in China. Some of it was regulatory, some of it was around pricing regulation of the entire health care field. And that put some pressure on our business in China relative to our hopes and plans at the start of the year. We have those new platforms. They came with some more manufacturing challenges than I would hope. That’s a little bit off par for the course with complex technologies. We have more scrap costs and some margin — product margin pressures in the year. We are working them down. They’re complex — these are complex supply chains. I actually think that there’s excellence and competitive advantage in resolving them. But they take focus and effort, and we are focused and are exerting effort to resolve them.

We started the year speaking to all of you about the impact of GLP-1s on bariatric surgery. And that has continued through the year. The near term, we still continue to see a deceleration of bariatric surgery with the rise of GLP-1s. What that means for future years will be resolved. We can talk — I’m sure we’ll talk about it another time. But the deceleration hasn’t stopped, we’re still growing, but it’s decelerating. And in our flexible bronchoscopy space, our installs have actually been limited by our availability of manufacturing volume for the parts that are used in every case, the consumables, that’s the catheter. We are the constraint. We are working incredibly hard to resolve those sense of constraints.

I’m actually quite pleased with the progress we’re making here in the fourth quarter. But we could have put in more systems, have we had more catheters, but we did not want to install systems and then be inadequately then with the volume of product they need to grow their programs at the pace they wanted. We didn’t want to get in a situation where we had more systems out than we had catheters to supply, so that throttled us a little bit in the year, we’re starting to work through that and come out the other side.

We did have areas of strength. General surgery procedures in the United States grew very nicely. I’m sure we’ll talk about it more. The performance in Europe and in Japan was really heartening in the last year, for those of you of you who have followed us, we invested a lot to get there. These are not single-year turnarounds, you invest to do it. These are multi-specialty teams that we have put in, and I’m just proud of them. I think they’ve done a great job. We’re starting to move Ion and SP into regions outside the United States. We’ll touch on that a little bit.

And System placements are strong, not just in the United States. We think that these things matter globally, and we prioritize which countries we think are in a good position to accept them, and that has worked out well for us certainly in the year.

In procedure trends, we saw a rebound post pandemic 22% procedure growth in the year. You can see the splits between kind of the big categories, urology and gynecology and you see now that general surgery is the biggest of the categories globally. Looking into 2024, we think we’ll see between 13% and 16% growth, you’ll have a chance to talk to Jamie Samath and Brian King shortly and they’ll tell you the whats and the whys are behind that.

Worldwide capital system placements annually, you can see incremental or greenfield in the dark bar on the left and in the light bar, those are trade-ins. That’s in our multiport product line that da Vinci XI, our fourth generation system was launched in 2014. We followed with a value model called Vinci X a couple of years later.

So trade-ins, those are well penetrated. I’ll show you in the next slide, but that looks like installed base grew 14%. So 22% procedure growth, 14% installed base growth, just do the quick math and you’re seeing utilization growth go up. That is a fantastic thing. So procedures per system per year, that’s an estimate of value and return on investment for our hospital customers. We like to see that advance, and that’s been good.

As you play through, that’s what revenue has done. So good procedures, good system placements that translates to growth in revenue. Revenue growth rate is not as fast as procedure growth rate and capital install rate, in part because we’re doing a higher mix of risk-sharing arrangements and leasing in our capital portfolio. I’m sure it’s something we can talk to you about later. That means that the mix of recurring revenue, that revenue that we’re paid on when people use our products has increased over the years. That’s been intentional on our part. We think that, that aligns us well with our customer. It removes capital acquisition barriers when they want to build their programs. And so we’re pleased with this number. It is not without trade-offs.

When you do move to leasing versus sales, it’s not a uniformly great thing, but we think those trade-offs are well managed and understood. If you kind of zoom out and say, what are the growth drivers, 22% growth on a reasonably large base, that’s pretty good performance. Where is it coming from? Year-over-year growth outside the United States in segments outside of urology, which is starting to become penetrated are now 35% so really healthy growth. 25% U.S. general surgery growth. So you’re both the largest category and amongst the fastest growing. So that’s a rare event, and we’re pleased. And everything else that isn’t in those categories growing pretty nicely, too. So it’s a multi-segment growth opportunity for us.

Sizing the market, we tend to be more conservative in this than some of our peers. Let me tell you what it is and how we think. So the first thing is for products on the market today as we stand here in January of ’24, with the clearances we have in the countries in which we operate, we think there are, give or take, 7 million patients annually who — for whom this would be a good solution, the economics work, the healthcare system can absorb it. So we were at 2.2 million. That’s — if you say, well, what are you working on? We are believers in innovation. We have a robust innovation pathway, things in development already or things in our research labs. We think we can grow that opportunity annually to be about 21 million, but that’s one of the things that we haven’t brought to market yet. For those of you who are modeling, I would not model everything the same at the 21 million as you do at the 7 million. Those are the things we work on.

So we think there’s a future opportunity, and we’re excited to pursue it. Again, I think we’re looking at upside. We’ll speak a little bit to one of the things we’ve been doing. It’s been on a very nice growth curve and that’s flexible bronchoscopy. We all know lung cancer is a serious global issue. Lung cancer detection remains a significant unmet need. This is just roughly speaking, estimated incidence of lung cancer by region. We have our Ion System, flexible bronchoscopy. First indication is biopsy for distal lesions in the lung. So we’re cleared and making nice progress in the United States. We’re cleared in Europe just starting our Phase I launch. We’re in the U.K. now. We’re cleared now in Korea, just a recent clearance, and we’re on the pathway, we’re submitted in China and getting excited about what that might offer us over time.

So this is what Ion has done. As I said before, multiport, that’s the standard, or the da Vinci system you’re used to. Ion is growing nicely and continues to get nice uptake placements on top utilization on bottom, leading robotic bronchoscopic system in the market.

SP, single access procedures. SP has been in the market a little bit longer. Because of our interactions with our global regulators, the way they view it has been a little different than they have with da Vinci multiport and so we need additional indications. But you’re seeing an acceleration in placements, we’re actually seeing some nice uptick in growth in procedures, again, 48% procedure growth in 2023.

So studies and submissions, we completed our accrual and are working on the submission for the colorectal IDE. We completed that in ’23 for Thoracic IDE. We completed that accrual. We have breast oncology, nipple-sparing mastectomy, IDE in flight that is still accruing, and we have recent clearances, BPH clearance in Q1 of ’23 in the United States, we have broad clearances in Korea and now Japan, and we expect a broad European clearance in this first quarter of 2024. So we’re starting to be able to get the regulatory space, the regulatory clearance is required to drive this as a multi-specialty platform. We’re quite pleased with system performance.

Unmet need. So let’s just talk. When we go out and talk to our customers, this is from the American College of Healthcare Executives and ask them what’s on their mind, this is what they come back with. This top 4 is roughly what you hear all over the world when talking to healthcare systems, they reorder a little bit by which country you’re in. Our workforce challenges remain a serious concern, both availability of staffing turnover and costs. Financial challenges as pandemic financial support for healthcare systems has been drawn down, financial challenges have gone up.

In the United States, behavioral health and addiction issues are on the rise. And of course, always on the list patient safety and quality of outcome, something we care a lot about. We focus our organization by looking at how we can actually do this, how can we help in this way I think we have demonstrated that we can help in all of them, and we continue to drive it. So when we sit down with hospital C-suites, we start here. We know you’re working on this, how can we help you? And then we go from there.

Looking at adoption. You think about our platforms, and we have everything from pretty well-established platforms like our da Vinci platform to newer ones like Ion, the progression that goes on for our hospital customer is, first, they look at what we’re saying and they say, “I’m willing to adopt. So I’m going to put it into a pilot program, let’s see what you can do”. That’s how they start. And as it starts to look good and if we deliver on our claims and they start to see evidence that we can impact those things that I just showed you, then they’ll buy another one, and they’ll start to operationalize it.

So this kind of idea of going from 1 to 2 is a big step. One, they buy on belief and, two, they buy on evidence is pretty exciting. So how are we doing? Well, if you look at integrated delivery networks that own 20 or more, these are sophisticated organizations, they’re corporate, they have analytics capabilities that we partner with them on. How are their programs going? This is the growth rate of IDNs who own 20 or more da Vinci systems in their portfolio. It’s growing at 22% as of Q4 of 2023, and single buildings, a single hospital building with multiple ORs, how many have 7 or more? I’m not sure that when I saw, I started in April 1996, I’m not sure that 7 was a magic number. I wouldn’t have thought that. But you walk by OR1, OR 2, OR3, and they all have a da Vinci all the way up to 7. How many, that’s growing at 48%.

So there’s a point at which they standardize. It isn’t unknown. It isn’t a risk for them. It’s the way they want to do their business. And to do that, you have to show clinical value, you have to show operating value and operating excellence, and you have to show ROI so that it’s economically feasible. So we look to this because it’s evidence of what they do, not what they say.

One of the things that we’ve been working on, we’ve been in the Internet of Things for surgical robots for about 13 years now. We started our AI efforts maybe 7 years ago. So how will surgical data science, that’s how we like to think about AI, rather than using the buzzword. Let’s talk about what we think it means to us. How is the surgical data science is going to help?

I think it’s going to be interesting. I think it’s powerful. I think it will be messy. It will be an interesting decade and I think will be exceptionally powerful by the end. But let’s talk about what the need is, and let’s talk about where Intuitive is focused in the space. So the needs are pretty straightforward, plain words, right? First of all, AI/ML, big learning, big data, these are all tools. They’re not aims. They’re a tool in support of a need — improve patient care through better outcomes. There is huge variability in patient outcome. Not every surgeon can get the same outcome as the very best and the very best have opportunities as well. You look at the availability of well-trained care teams in most economies, and they’re short and it’s getting worse because the demographics of most of our societies are aging.

So you’re aging out your trained care teams and your patient population, which includes all of us, is getting ready to need more care. So you need better care teams faster. We sit with our teams and go — look the goals better to care teams faster. How are we going to do that? What can we do?

And the last one is financial pressure. Same thing, demographic issues are going to put pressure on consumption of care, fewer workers, more people consuming care, we got a problem. So if we don’t start getting a way toward lower consumption of resources on a per-episode basis, you’re going to be stressed. So that’s what the need is. That’s what we ought to be targeting these investments towards.

Everybody has something to say about AI these days because you all are excited about it, and therefore, everybody has to put it in their talk. Let’s talk about what we think we can do. Why are we in a position to do something? We do analytic investments where we look at combined data sets of what we bring and what our hospital customers bring. We did more than 1,000 of those in 2023. Our products are high-tech, interconnected, cloud connected ecosystems with 99.9% uptime. I’d like that to be better, but it is not trivial to get to 99.9% is fantastic. I think our customers trust us.

We do workflow consulting. We get in there to understand efficiency, how we can help them. We work with their teams. We don’t send them white papers from California and hope to get it. We deploy our teams into their environments to help them get what they need. We did that over 3,300 times in the year. The installed base now is wonderful for gathering insight data and the ability for us to generate action from that insight. And we’ve built some trust with our customer that will be there. If anything goes wrong, and we’ll get out and fix it.

What does that mean in terms of products and things we bring to market? We bring to market things that help with preoperative planning. We talk about 3D models. The internal name for that has been Iris, that’s augmented reality for the OR. We are in kind of Gen 2 of our product just coming out of Gen 2 now. We’re pretty excited about it. Every surgeon that goes through our learning channels uses Intuitive Learning, which is mixed medium online and in their hands. Opportunity, SimNow is virtual reality training. It is fully embedded in our learning pathway, and it has been for a decade. People are excited about VR. VR has been fully embedded for us. And these things are linked on the back end and becoming increasingly so we have opportunities to link them even better that allows you access to your data, the ability to manage your own digital life through our app.

That app is now nicely penetrated, continues to grow up, looks really good. That turns into interoperative guidance, things you can use in the OR to help the case in the moment that includes Intuitive telepresence. Think of that as a HIPAA-compliant face time for the operating room and that runs through our Edge Compute, our computing system that sits in the room that’s called Intuitive Hub. And that’s nice. Okay.

You got pre-op, you got inter op, you got postop, what happens to postop? You had a chance to gather that data to see what happens. Our AI suite our analytics engine is called Case Insights that goes back, looks at the data over many procedures looks at what you just did and assesses how you’re doing this is early, but extremely exciting. So this will be early and messy and exciting. The prototypes are spectacular and validation is hard. So, it’s easy to show you something that will blow you way. What’s interesting is to validate it clinically. Is it determinant as to better outcome or not? And I think we’ve got to prove that. And are in the audience. I would ask that anybody to say it prove it.

That feeds into the customer portal that gives you analytics about how your program is running, either you personally or the institution that feeds into our custom hospital analytics. That’s just shorthand for how we integrate with the hospital electronic medical record. And people can navigate on role-based ways from their portable devices.

So that’s what we bring. This is an example. I don’t assess too much importance to this, just to give you a sense of what these kinds of things look like for people every — virtually every cancer operation has before the 3D model that’s built through CT imaging or MRI. Those things are built for radiologists. They’re not built for surgeons. So that radiology image is sitting there, you bought it, you paid for it, and it’s almost never used. It’s not, actually, it’s not a thing. So we’re kind of — simple thing, why don’t we just get into the PACS system?

You order up an image. We will do machine learning to create an anatomical model, put it into 3D, drop it. We have a radiologist look at the end to a confirmatory step, drop it into your iPad and you get to look at it, decide what you think it is that identifies where the tumor boundaries are, where the arterial structures are you can review it with the patient before the case, one of the highest values is that. And then you can drop it into your surgical console and use it as a reference guide while you’re doing the case. And over time, as we get better, those will be applied as augmented reality. Pokemon GO for surgery.

Intuitive Hub, you’ll hear this from us. What is it actually? It’s a computer with a touchscreen that is integrated and cloud connected to our da Vinci system and synchronized. It’s not an incredibly weird technology, but synchronization and data handling is really important. So what do we do, we allow that synchronization that allows both the surgeon and the care team and the machine learning algorithms to know what happened in a synchronized way. It turns out really, it’s important. We have some pretty nice tools that are getting stronger to allow you to do case assessments and to allow the machine to help you with those case assessments and then rotate them quickly into your My Intuitive App. We’re just in the beginning of it, but it’s starting to speed up and looks really good. And it allows for integrated teleproctoring over time.

So the beginnings of telemedicine or teleproctoring make it easy. If you need an expert to tap in and help you in a case, imagine it’s just as close as built into your da Vinci system and sitting on your phone. It’s not a third-party thing. You don’t have to run around and do it. These things are already cybersecure and HIPAA compliant and so off you go.

We have talked about with you in the past, something that we talk about as a computational observer that’s kind of the, my view of it, the brand name for it is Case Insights. And it’s this question of now with machines and machine learning and real-time assessment. Can the machine know what’s going on and provide an overview or insight into a couple of things? Off-line, better surgeon is faster. Remember that quote. Can we determine watching surgeons in the wild, who needs help and where they need help? And the answer to that appears to be yes. Now that’s back to you need to show the validation of a large — a large group of people to make that claim. And we haven’t done that validation yet, but we’re doing it. That’s what we’re up to.

And then the other thing is, can you, if you know that, can you identify things that are going on in the case in real time and deliver those insights to the surgeon so that they don’t make a mistake or that they have additional information to make a good decision. We think that’s absolutely true.

So this will be slow in the beginning and fast at the end. We are in the slow in the beginning phase. What that means is that you take some of the data that we have, and this is representative, it’s not all of it. And you start asking questions, this is where you’re machine learning capabilities and algorithms can help. What’s meaningful in the case. There’s an enormous amount of data from what they’re doing with their hands, to where they’re looking with their eyes to what kind of instruments are using to, how they’re applying energy to, what the case characteristics were part of the case for the patient.

As you look at that set of data, what’s predictive of better outcome? That’s the question you’re asking these data sets. And we’re starting to see a settling as to what involves performance or high performance. I’ll give you a true example. It’s kind of a weird one. I’ve been around these systems for a long time. I’m a reasonably dexterous person. I can sit down and use it the way it was intended to be used in the lab, but I’m not a trained surgeon and I don’t operate down anything other than the lab. And it can determine that I both know how to use the system and that I’m not a trained surgeon. That these computational observers are good enough to know that I know what the buttons do, but I have not been trained in technique.

So maybe not shocking, but I think powerful and interesting up to this moment, up to this point, why are we excited? All this data existed. It was just pouring out of these pipes on the floor. We’re just dumping it into nowhere. And so another question is, okay, well, let’s not dump it into nowhere. Let’s start to gather it, curate it, make sure it’s right and then see if we can determine what’s actionable from it, that’s what we’re up to.

Just to move to close, what we say doesn’t matter nearly as much as what we do. One way to do it is just go ask our customer, how we’re doing? So we measure Net Promoter Score carefully. We do it year-over-year. It is done in a blinded way. It’s done referencing other companies in the market to see where we stand, and we continue to do well.

What I’m told is that world-class is 70% or above in our figures here. I think this is U.S. figure, our figure in the U.S. is 80%. We’re doing okay, and we’re coming up nicely in the rest of the world. Why? If you ask how do you do this? Why do you think this is working? I think that the products meet the need that they’re after. I think they’re dependable. We have focused our commercial teams to be aligned with our customers’ mission. It’s about them. It isn’t about us. We have a serious focus on the data, you probably got a little bit of a feeling of that now. And when we have a challenge, we address it head on, we get in, we’re quite transparent, we deal with it.

What are we doing in 2024? 2024, we are focused on innovation, expansion of indications and launches of our platforms by region. There are several. They are interesting and we want to execute them well. Our leading indicator of customer satisfaction and performance is how often they use our products. It’s not capital placements that’s, means to an end, it’s a necessary evil. What’s most interesting is to use it for the things that they want to get done, and they’re feeling good about it. We have a need to focus on the quality of our products, our manufacturing pipelines and driving margin, especially on the — on the manufacturing side, we have outstanding manufacturing teams. We give them extremely hard challenges. This is not to diminish their contributions in any way. And we have the opportunity to optimize our SG&A. So we’re working on that, and that’s the last part. So with that, delighted to be here.

Let’s go ahead and take your questions. Thank you for attention.

Question-and-Answer Session

Q – Robert Marcus

Well, thanks a lot. There’s so much to talk about in that presentation. But I want to start with the great fourth quarter you just presented. 21% growth worldwide. An amazing net new placement number that I was telling my team had to do a double take and how good it was in the press release yesterday. So maybe we could start there and walk us through what you saw U.S. versus OUS urology versus general surgery and any other trends in the fourth quarter, you think are relevant?

Gary Guthart

Just to jump in. I know most of you know of these gentlemen, but just so we do it formally, Jamie Samath, CFO, Brian King Head of Investor Relations and our Treasurer.

Jamie Samath

Yes. So maybe I’ll take capital. Am I on, Robbie? So if you look at capital placements in Q4, 415, you’re right, Robbie, on a net new basis. That was up significantly. We saw strength in the U.S., in Japan and in our distributor markets. And within that 415, what you have is actually a decline in trade-ins. So that’s why the net new placements look strong. A couple of drivers. The procedure growth is the key driver. You see 22% procedure growth for the year. That drives the need for incremental capacity.

We see that particularly in the U.S. In Q4, we also saw strong Greenfield placements. So placements at hospitals where they’re buying their first da Vinci. We saw that in the U.S., we saw that in Japan, and we also saw that in distributor markets. U.S. is really driven by existing IDNs, actually investing in smaller hospitals, rural hospitals where they’re putting in place their first da Vinci. And that’s the confidence they have in their programs overall and then investing in those hospitals. Japan is really more about the fact that they’re at an earlier stage. There are more Greenfield accounts that are open to us just given where relative penetration is.

On the procedure front, we saw a strong OUS performance, so 29% growth in Q4 OUS. That, in part, reflects what is a strong print for China, but on a soft comp. So if you look at Q4 ’22 in China, actually, the procedures were negative as a function of what was happening with COVID at the time. But we’ve had some good OUS performance in markets like the U.K., Germany, Japan and China. If you look at the 22% for the year, last comment I’d just make is on a full year CAGR basis, our procedure growth is 17%. A large portion of the difference between 17% and 22% is likely the effect of this patient backlog phenomena that we’ve described.

Robert Marcus

13% to 16% procedure volume growth for next year coming off a great 2023. I was previewing 12% to 16%, a lot of my peers were closer to 11% to 15%. This came in above that. Maybe speak to what’s included at the bottom end of the guide and what’s included at the top end of the guide?

Brian King

Yes. So our procedure guidance is 13% to 16% for 2024. I guess, one thing before I get into the low end and the high end of the range, I really want to emphasize that in ’23, we had 22% procedure growth for the year. You saw just elevated level of patients in the healthcare system or essentially backlog throughout 2023. So as you’re thinking about 2024, it’s really hard to predict what’s going to happen with backlog. So I’m not sure, I don’t know what’s really going to happen it that if that actually even carries over in 2024. But at the low end of the range, we’re assuming that bariatrics growth, I’d say, continues to decline modestly.

One of the things that we didn’t probably talk about as part of our procedure detail is that bariatrics growth rate actually had declined from last quarter to this quarter into around mid-single-digit growth rates. I’d say we are still continuing to take market share there. But as we look ahead to our 2024 procedure growth, we’re assuming that it continues to decline at the low end of the range.

We also assume that in China, anticorruption efforts, or activities that are going on there could continue to delay the tender process, which could delay installed base or growth in the installed base, which therefore would have an impact on procedures and then also backlog, not really carrying over into 2024.

At the high end of the range, 16%, we assume that bariatrics continues to — at the current growth rates that we recently experienced. There’s not a significant impact in China or from the activities in China that maybe there’s a slight benefit or sort of a continued moderation of backlog into 2024.

Robert Marcus

Great. Gary. The business is a very different position than the last time you launched a new multiport robot. Leases are a big part of the business. So when you guys launch a new robot, probably this year, maybe this year, if you want to comment? How should we expect the global healthcare organization to react when so many are in lease programs and also quite frankly, you’re doing so well with the old robot, maybe there’s less of a need to upgrade to a newer robot?

Gary Guthart

Yes. Let’s talk about generational changeover in general terms. So first, we are always working on things that we think are powerful and customer comes in and sits now with us and says, are you working on something new? And the answer is, yes. Of course, Like asking Mercedes, are they working on the next E-Class. I think the answer is yes. We’re going to do that. In fact, these development time lines are extremely long. So we’re not only working on the next one. We’re working on the next one behind that, too. We’re now larger and more capable organization that way, so we do that.

When do you bring it to market? Why would you bring such a thing? So three things are required. One of them is, it’s important enough to matter in a meaningful way. So does it, or does it not take the quadruple aim and make a difference that we think we can prove? So we certainly don’t want to rush something out there just because we feel like it’s time. It’s time to do it. And we didn’t make a change. That’s not. We’re not going to do it.

The second thing is you need to get your supply chains right. These are sophisticated. If you’re going to do something meaningful is not trivial to get the supply chain right. And last thing, the global regulators have to come along with you and understand it, review it, challenge you and accept it. When those conditions are met, then we come do it. And when we do that, we talk to our customers first and then we come talk to you not the other way around.

Robert Marcus

So last year, you expressly told us no new multiport robot coming this year. Any comment for 2024?

Gary Guthart

No comment.

Robert Marcus

All right. Jamie, maybe a question for you, where I look and I listened to your commentary on gross margin for 2024. You’ve talked multiple times about increasing depreciation flowing through the P&L. My model has year-over-year declines in gross margin in 2024. The Street has year-over-year improvements. Any color now that 2023 is preannounced that you could give us on ’24 gross margins and how to think either the up or down in the magnitude?

Jamie Samath

Yes, I’m not going to give the direction specifically because we’ll provide the guidance, obviously, on the earnings call on the 23rd. What I would say is, obviously, gross margin in, so far in ’23 has been below maybe where we’ve been in the past, pre-COVID. And there’s really three areas of focus for us.

One is the product costs for particularly our newer platforms, and Gary described that, and as Gary said, our teams are working hard, they’re making progress. That is a multiyear effort. Second, you’ve seen us have elevated capital expenditure, mostly for manufacturing facilities that sets us up for the medium term in terms of the capacity that we’ll need, but also, we think, gives us advantages in the virtuous cycle and what we can deliver to customers. And so you have a period there where you have incremental depreciation expense. And so you have to work through over time how do you absorb and then leverage that incremental depreciation expense.

And we do expect incremental depreciation expense coming in ’24. And that will be both in cost of sales and in operating expenses. And then over time, obviously, we have the opportunity to continue to drive growth through both our soft tissue business and our Ion platform. And over time, that gives us opportunities in gross margin. But we’ll give the actual guidance for ’24 on 23rd.

Robert Marcus

Great. Gary, the magic number of 7-plus robots at 48% of hospitals…

Gary Guthart

Actually, it was a growth rate, not an absolute number. Just so we’re on the same page.

Robert Marcus

Sorry. It’s still staggering. How many hospital IDNs have 20-plus robots? How many have 7-plus. And really, what it shows, as you mentioned, is the quality of the systems and the willingness for systems to invest both in the infrastructure, the training and the entire ecosystem. And I’m thinking about this, one, how this creates a huge competitive moat for Intuitive Surgical? And the just massive amount that a competitor would have to come in not only to break into those systems, but then to what they would need to add top of it to make it more worthwhile given your utilization per system continues to go up as you talked about in the session. So how do you think about this one as a strategic benefit for Intuitive Surgical and be as a competitive moat for — versus competitors?

Gary Guthart

Let’s talk about competition. I think the most important competition and honestly, I think the hardest for the company to react to is competition at the disease state level. And GLP-1s are a perfect example of that, which is what’s the root thing going on here. Somebody has a disease, they need to address it. And many of the fantastic companies that are at this conference are working on different things. And if somebody comes up with a good idea, we’ll shift — we’ll shift all these boundaries. And so that’s why we’re so driven less about technical features. Is it an open console? Or is it a thing on a little card? These are all means to an end. Are you going to drive a different outcome, and can you show it? So that’s number one. That’s where we focus the organization.

I think number 2 is you have to deliver on the quadruple aim, better outcomes, better experiences for care teams, better patient outcomes, better patient experiences and lower total cost to treat — lower total cost to treat at the end. And so that whole ecosystem that we put together is to demonstrate and then back it with data that we can do that. And I think what’s behind that 7 systems and the IDNs adopting is that we show in their hands with their data that the quadruple aim works. And if another competitor — another company comes out and shows that they can do that better in our format or a different format, people will be willing to move.

But I think what we’ve asked of everybody is show us the data, hold us to it and hold anybody else to it. And I think that’s our conversation. There will be companies that do it well. And there are companies will have different approaches to mechanism of action with disease fair enough, and there’ll be different companies with different technical architectures to try to do it. The bar that we’ve tried to set is that we hit all of the quadruple line that can prove that we do.

Robert Marcus

I’m giving you an unfair question because we have less than a minute left here. So I’ll make it a short answer for you. AI and big data, you talked about it a lot in the presentation here, small, moderate, major impact to Intuitive Surgical and Surgical Robotics overall in the next 5 years.

Gary Guthart

Economic impact as you see it in the P&L in the next few years will be small. Impact to the field in the next decade will be significant. Economic impact for people who do it well as organizations will be significant over the long term. So a little patience upfront focus on efficacy, and it will have an economic return at the end.

Robert Marcus

I’ve pages of questions left, but unfortunately, we’re out of time here. Thank you so much.

Gary Guthart

Thanks Robbie.