Intuitive Surgical, Inc. (ISRG) Q1 2023 Earnings Call Transcript

Intuitive Surgical, Inc. (NASDAQ: ISRG) Q1 2023 earnings call dated Apr. 18, 2023

Corporate Participants:

Brian King — Treasurer and Head of Investor Relations

Gary Guthart — Chief Executive Officer and Member of the Board of Directors

Jamie Samath — Chief Financial Officer

Analysts:

Travis Steed — Bank of America — Analyst

Robbie Marcus — JPMorgan — Analyst

Larry Biegelsen — Wells Fargo — Analyst

Jayson Bedford — Raymond James — Analyst

Richard Newitter — Truist Securities — Analyst

Matt Taylor — Jefferies — Analyst

Drew Ranieri — Morgan Stanley — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Intuitive Q1 2023 Earnings Release. [Operator Instructions] And as a reminder, this call is being recorded.

I’d like now like to turn the conference over to our host, Head of Investor Relations, Mr. Brian King. Please, go ahead.

Brian King — Treasurer and Head of Investor Relations

Good afternoon, and welcome to Intuitive’s first quarter earnings conference call. With me today, we have Gary Guthart, our CEO; and Jamie Samath, our CFO.

Before we begin, I would like to inform you that comments mentioned on today’s call may be deemed to contain forward-looking statements. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties. These risks and uncertainties are described in detail in our Securities and Exchange Commission filings, including our most recent Form 10-K filed on February 10, 2023. Our SEC filings can be found through our website or at the SEC’s website. Investors are cautioned not to place undue reliance on such forward-looking statements.

Please note that this conference call will be available for audio replay on our website at intuitive.com on the Events section under our Investor Relations page. Today’s press release and supplementary financial data tables have been posted to our website.

Today’s format will consist of providing you with highlights of our first quarter results, as described in our press release announced earlier today, followed by a question-and-answer session. Gary will present the quarter’s business and operational highlights. Jamie will provide a review of our financial results, and I will discuss procedure and clinical highlights and provide our updated financial outlook for 2023. And finally, we will host a question-and-answer session.

And with that, I will turn it over to Gary.

Gary Guthart — Chief Executive Officer and Member of the Board of Directors

Thank you for joining us today. Use of our products grew strongly in the first quarter versus a year ago, helped by positive surgical trends and strong execution by our team. New capital installs were likewise strong as customers built their da Vinci and Ion system capacity to meet demand. Revenue grew 14% on the back of this continued adoption. Some manufacturing and supply challenges this quarter negatively impacted our product margins. This is an opportunity for sharper execution going forward.

Our R&D and innovation engines are making good progress with strength in Ion adoption, progress in our digital efforts and indication expansions for Ion and SP. Overall, our core business remains strong with some near-term procedure and product cost dynamics that we’ll discuss today.

Starting with procedures, we saw surprising strength in the quarter led by general surgery in the United States and procedure growth beyond urology outside the United States. On a procedure basis, cholecystectomy, bariatric surgery and hernia repair led the way. All our major regions performed well. Standouts included India, Spain, U.K., Japan, Germany, and Italy. U.S. performance was significantly above trend, and China is recovering from lows in Q4, though not yet meeting our expected 2023 run rate. Given the first quarter of the year exceeded our procedure expectations, we’re reviewing underlying drivers. The return of patients to healthcare providers and diagnostic pipelines post pandemic continues, with evidence of both an increased patient census and some diagnostic pipelines running above pre-pandemic levels after several years of lag. We also see a commitment by our hospital customers to work through staffing constraints to maintain surgical volume.

Lastly, customers are expressing confidence in our products as a clinically and economically sustainable path forward for minimally invasive surgery. Taken together, we see continued share gain from open surgery and laparoscopy in several procedures and in several countries as evidence accumulates in our favor. Strong growth in procedures and a capable product portfolio has supported a healthy capital placement quarter. Worldwide, we placed 312 da Vinci systems and 55 Ion systems in Q1 compared with 311 da Vinci systems and 34 Ion systems in Q1 2022.

Capital placements were healthy in the United States, our distribution markets, U.K. and in India in the quarter. Our product portfolio and our teams are competing effectively with the offerings of a growing set of competitors, notably in OUS markets, where customers have had more time to evaluate the relative strengths of our offerings. Procedures per system per quarter grew 13% during Q1 versus a year ago. Systems are being used more hours per operating day, and customers are increasing the mix of shorter duration procedures. Both trends are good long-term indicators for our business. Customers are finding more value in their systems and are moving more of their procedure volume on to our devices compared to other surgical approaches.

Turning to our finances. Our revenue growth of 14% reflects the strength of our procedures and capital placements, while average selling prices remain stable. Our margins were pressured primarily by charges taken in our stapling line, due to a raw material lot non-conformance that necessitated scrapping instruments. We also experienced lower manufacturing yields during the bring up of new production lines in our high-volume production facilities to support multi-port accessory and Ion catheter growth. Customer availability was briefly impacted for stapling, but has since recovered and we are working on bringing customer stocking levels back to their par levels.

For our Ion catheters and our multi-port accessories, we are investing in capabilities to increase yield and robustness in the face of rising demand. We’ve worked through the issues that drove the bulk of these scrap charges in the quarter.

Finally, in SG&A and R&D, we are spending roughly to plan, while continuing to pursue productivity improvements post-pandemic. Jamie and Brian will take you through our finances and forward outlook in more detail shortly.

On new products and indications, we have had a productive quarter. We received our CE Mark for Ion and we expect to launch in the U.K. as our first entry into the European region. As we focus on scaling Ion, we initiated our first high volume production lines in our Mexicali facility, increasing production volume 50% over just the prior quarter. In digital, our simulation subscription installed base grew 36% year-over-year, as virtual reality training becomes more deeply embedded in the training pathway. Our Intuitive Hub installed base grew 41% year-over-year and utilization during da Vinci cases grew 80% year-over-year, as customers use our Intuitive Hub computing system to record and analyze procedures more routinely.

Turning to SP. We received new indications for SP in the United States through a 510(k) clearance in urology, covering simple prostatectomy, removal of a non-cancerous prostate for treatment of advanced benign prostate hyperplasia. We also installed our first da Vinci SP system in Japan, and they completed their first set of cases.

For 2023, our priorities are as follows: First, we are focused increased adoption for our priority procedures in countries through outstanding training, commercial and market access execution. Second, we are pursuing expanded indications and launches for our new platforms. Third, we are focused on excellence and continuity of supply, product quality and services provision, as we emerge from pandemic stresses. And finally, we are pursuing increased productivity in our functions that benefit from scale. You can see from our first quarter results the relevance of these priorities and our urgency in pursuing them.

I’ll now turn the time over to Jamie, who’ll take you through our finances in greater detail.

Jamie Samath — Chief Financial Officer

Good afternoon. I will describe the highlights of our performance on a non-GAAP or pro forma basis. I will also summarize our GAAP performance later in my prepared remarks. A reconciliation between our pro forma and GAAP results is posted on our website. Before I dive into the details of our Q1 results, I will expand on the two areas of note in the quarter, as Gary highlighted: procedure growth and gross margin.

Global procedure growth in Q1 of 26% came in well above our expectations, with notable strength in the U.S., where procedures also grew by 26%. As a reminder, procedures in Q1 of last year reflected an adverse impact from COVID in the early part of the quarter in the U.S. and the latter part of the quarter in Korea and China. We believe that the return of patients to normalized healthcare routines, including diagnostics and improved staffing levels have positively impacted this quarter’s procedures. However, it is difficult to precisely characterize or estimate the degree or duration of this impact.

Looking at the monthly trends in the U.S., January and February were particularly strong relative to historical seasonality. However, in March, we saw more normalized growth rates. Outside of the U.S., procedure growth of almost 28% was also ahead of our expectations with growth outperforming expectations across all our major international markets. In the first quarter, non-urology procedures represented roughly half of our total OUS procedures and grew 35% from quarter one of last year. Brian will provide additional commentary and our updated procedure outlook later in the call.

Pro forma gross margin in Q1 was below our expectations at 67.2%, lower than last quarter’s 68.2% and last year’s 69.8%. Q1 results reflected one-time adverse impacts of approximately 100 basis points relating to manufacturing related issues and an increase in inventory reserves as Gary detailed. While we largely resolved these one-time items in the quarter, we see opportunity to strengthen our manufacturing operations and improve product costs. This is a priority for our business unit and operations teams and aligns with our capital investment plans as we described on last quarter’s call.

Turning to other key metrics. In Q1, the installed base of da Vinci systems grew 12% to almost 7,800 systems, driven primarily by demand for additional capacity given procedure growth. Average system utilization grew 13% year-over-year, significantly above long-term trends driven by notable strength in procedure volumes in January and February, and by an increasing mix of shorter duration benign procedures in the U.S. While we do not expect this level of utilization growth to continue, we actively support our customers as they increase utilization of their da Vinci systems, which in turn lowers their per procedure costs.

With respect to capital performance, we placed 312 systems in the first quarter, ahead of our expectations with noble strength in OUS markets. Current quarter placements were roughly even with the 311 systems we placed in the first quarter of last year. There were 67 trade-in transactions in the quarter as compared to 108 last year. Excluding trade-in transactions, net new system placements increased 21% over the first quarter of last year. As of the end of Q1, there are approximately 560 SIs remaining in the installed base of which approximately 110 are in the U.S.

Q1 revenue was $1.7 billion, an increase of 14%. On a constant currency basis, first quarter revenue grew approximately 17%. Recurring revenue represented 81% total revenue and grew 21% over last year, driven by procedure growth and an increase in the installed base of systems under operating lease arrangements. Within I&A revenue for our advance technology categories, stapler and energy, revenue grew a combined 26% over Q1 of last year.

Additional revenue statistics and trends are as follows: In the U.S. we placed 141 systems in the first quarter, lower than the 186 systems we placed last year, reflecting a decline of 51 systems associated with trade-in transactions. Outside the U.S., we placed 171 systems in Q1, compared with 125 systems last year. Current quarter system placements included 101 into Europe, 16 into Japan and 18 into China, compared with 78 into Europe, 19 into Japan and nine into China in Q1 of last year. First quarter system placement performance in Europe included 32 placements in the U.K., driven by timing of the NHS budget period, which closes each year at the end of March. We placed 12 systems in India, a quarterly high for us, which in part stems from our recent procedure growth there. In Q1, procedures in India grew 55%, albeit from a relatively small base.

Reviewing the capital performance in the quarter. We do not expect the strength in U.K. and India to repeat in the remainder of the year. Customers, particularly in the U.S. and Europe, continue to be challenged by staffing, inflation, debt servicing costs and other financial pressures. And as a result, we expect customers to continue to be cautious in their overall capital spending. Leasing represented 42% of Q1 placements, compared with 42% last quarter and 35% last year. We are increasingly seeing customers address system access and capital budget barriers by choosing our usage-based leasing models. The proportion of placements under this structure continue to increase, particularly in the U.S. As a result of this trend and the earlier stage of our leasing program with OUS customers, we continue to expect that the proportion of play months under operating leases will increase over time.

Q1 system average selling prices were $1.47 million as compared to $1.43 million last quarter. The sequential increase in system ASPs was primarily driven by a lower mix of trade-ins. We recognized $24 million of lease buyout revenue in the first quarter, compared with $17 million last quarter and $16 million in Q1 of 2022. da Vinci instrument and accessory revenue per procedure was approximately $1,780 compared with approximately $1,820 last quarter and $1,870 last year.

On a year-over-year basis, FX negatively impacted I&A per procedure by approximately $40, and ordering patterns in China had a negative impact of approximately $50 per procedure, as our channel partners continue to manage their inventory levels in a dynamic environment. On a sequential basis, the primary driver of the decline in I&A per procedure of $40 was customer ordering patterns in the U.S.

Turning to our Ion platform. In Q1, we placed 55 Ion systems as compared to 34 in Q1 of 2022. First quarter Ion procedures of approximately 10,200 increased 159% as compared to last year. During the quarter, we received CE Mark clearance for our Ion platform in Europe. While we will initially focus on the U.K. market and on the collection of clinical data in support of our European reimbursement strategy, regulatory processes for Ion continue to progress in Korea and China. 10 of the systems placed in the first quarter were SP systems, including our first placement in Japan following clearance last quarter. SP procedures grew by 37%, and average system utilization increased by 12% compared to Q1 of last year.

Moving on to the rest of the P&L. As previously referenced, pro forma gross margin for Q1 was 67.2%. And in addition to the one-time impacts described earlier, pro forma gross margin reflects the impact of higher component and labor costs; and relative to the year ago period, a stronger U.S. dollar. Gross margin for our Ion platform is currently considerably below our da Vinci business, resulting in an adverse mix impact to gross margin, given the higher growth rates of our Ion business. The key area of focus for our Ion and manufacturing teams over the next 18 months is to improve supply stresses, strengthen manufacturing capabilities, lower our product costs.

I&A prices have remained the same for the life of Xi. However, given the durability of component cost increases throughout the pandemic, we are executing an increase to the list price of da Vinci I&A from approximately 5% over the next couple of months. This increase reflects only a portion of the increased component and labor costs reflected in our gross margin. We expect the impact of this decision to be an increase in revenue and operating profit of approximately $100 million in 2023.

First quarter pro forma operating expenses increased 20% year-over-year, driven by — primarily by increased headcount added throughout last year, higher variable compensation, higher travel costs, and increased expenses associated with customer training. Operating expenses were moderately above our expectations due to higher variable compensation and training costs related to our procedure performance in the quarter. On a sequential basis, operating expenses were up 1%, including the annual reset of certain payroll taxes. Headcount increased by approximately 330 in Q1, of which roughly half are in support of revenue growth.

Capital expenditures in Q1 were $197 million, primarily comprised of infrastructure investments to expand our facilities footprint and increased manufacturing capacity including automation of certain production lines. Our pro forma effective tax rate for the first quarter was 22.1%, consistent with our expectations. First quarter pro forma net income was $437 million or $1.23 per share compared with $413 million or $1.13 per share for the first quarter of last year.

I will now summarize our GAAP results. GAAP net income was $355 million or $1 per share for the first quarter of 2023, compared with GAAP net income of $366 million and also $1 per share for the first quarter of 2022. The adjustments between pro-forma and GAAP net income are outlined and quantified on our website and include excess tax benefits associated with employee stock awards, employee stock-based compensation, amortization of intangibles, and gains and losses on strategic investments.

We ended the quarter with cash and investments of $6.6 billion compared with $6.7 billion at the end of last year. The sequential reduction in cash and investments reflected share repurchases and capital expenditures, partially offset by cash from operating activities. During the quarter, we spent $350 million to repurchase 1.5 million of our shares at an average price of $230 per share. From the beginning of 2022 through the end of Q1 this year, we have repurchased 12.6 million shares at an average price of $234 per share and have $1.1 billion remaining under current Board authorization to repurchase our shares.

And with that, I would like to turn it over to Brian, who will discuss clinical highlights and provide our updated outlook for 2023.

Brian King — Treasurer and Head of Investor Relations

Thank you, Jamie. Our overall first quarter procedure growth was 26% year-over-year compared to 19% for the first quarter of 2022, and 18% last quarter. In the U.S., first quarter 2023 procedure growth was 26% year-over-year compared to 16% for the first quarter of 2022 and 18% last quarter. Q1 growth continue to be driven by strong growth in procedures within general surgery. Specifically, growth was led by cholecystectomy, bariatrics, hernia repair and other foregoing procedures.

Outside of the U.S., first quarter procedure volume grew 28% compared with 25% for the first quarter of 2022 and 18% last quarter. First quarter 2023 OUS procedure growth was driven by continued growth in general surgery and gynecology categories, primarily from colon resection and hysterectomy. Growth in urology continue to be solid, led by kidney procedures along with continued double-digit growth in prostatectomy.

In Europe, we experienced strong growth in U.K., Germany, Italy and France. In all the regions noted, procedure growth was driven by strong growth in colorectal and hysterectomy. Urology was also solid with particular strength in kidney procedures. Outside of those procedures, in Germany, we also saw a strong growth in hernia repair; and in France, growth in lung resection was also strong.

In Asia, growth beyond urology was also led by general surgery and gynecology procedures. In Japan, growth was led by colon resection, a newly reimbursed procedure in 2022 that provided the most incremental cases this quarter. Growth was also robust in rectal resection and gastrectomy and continued early-stage growth in kidney procedures.

In China, procedures started to recover in February from the impact of COVID, exceeding our expectations for the quarter, but still below prior averages. Growth in urology was solid, in particular with growth in prostatectomy and kidney procedures.

Now turning to the clinical side of our business. Each quarter on these calls, we highlight certain recently published studies that we deem to be notable. However, to gain a more complete understanding of the body of evidence, we encourage all stakeholders to thoroughly review the extensive detail of scientific studies that have been published over the years.

Starting with the clinical study for benign general surgery, Dr. Courtney Collins from Ohio State University Wexner Medical Center, published outcomes comparing robotic versus open retromuscular ventral hernia repairs in older adults using prospectively collected data from the Abdominal Core Health Quality Collaborative, a national hernia specific registry. Published in the Annals of Surgery, over 1,100 patients over the age of 65 were included in a propensity matched analysis with 350 patients in the robotic arm and approximately 750 patients in the open arm. This study reported the median length of stay associated with the robotic assisted approach was one-quarter of the length of stay for patients undergoing an open repair with a one-day stay in the robotic assisted arm and a four-day stay in the open arm. While complication rates were similar between both groups, it was notable that median one-year quality of life scores using the HerQLes Quality of Life survey tool trended favorably for patients in the robotic assisted arm. The authors concluded in part that their results suggests that robotic approach may offer at least short-term benefits to appropriate older patients undergoing retromuscular ventral hernia repair, including shorter length of stay with relatively lower risk of complications, with the important note that surgeon comfort and knowledge of the likely complexity of a repair should always guide operative approach in any patient.

Now turning to a report published in January of this year, Dr. Zeina Amil from the Cleveland Clinic, Florida reported outcomes for robotic-assisted versus laparoscopic resection of T4 rectal cancer in the British Journal of Surgery. This study leveraging data from the National Cancer Database and after a one-to-one propensity score matching compared 470 patients undergoing a minimally invasive resection for non-metastatic T4 rectal cancer with 235 subjects in each of the laparoscopic and robotic-assisted cohorts. Notably, rates of conversions in the robotic-assisted group were approximately half the rate of conversion in the laparoscopic group with 8.9% in the robotic group versus 17.9% in the laparoscopic group. Further analysis demonstrated the risk of conversion to open was 45% lower in the robotic-assisted group when compared to the laparoscopic group. In addition, patients who underwent a robotic-assisted procedure had a one-day shorter length of stay compared to patients in the laparoscopic arm. The authors concluded in part that robotic-assisted resections of T4 rectal cancer were associated with a significantly lower conversion rate and shorter hospital stay than laparoscopic surgery.

I will now turn to our financial outlook for 2023. Starting with procedures. On our last call, we forecasted full year 2023 procedure growth within a range of 12% to 16%. We are now increasing our forecast and expect full year 2023 procedure growth of 18% to 21%. This range continues to reflect the uncertainty associated with the course of the pandemic and macroeconomic risks. The low-end of the range still assumes continued choppiness with COVID hospitalizations, uncertainty with the timing of the capital quota in China for the remainder of the year, the macroeconomic challenges that could impact hospitals and patient spending, and a moderation in procedures from elevated levels experienced in January and February this year.

At the high end of the range, we assume COVID-related hospitalizations around the world continue to decline throughout 2023, capital quota in China is available and macroeconomic challenges do not impact hospital procedure volumes. The range does not reflect significant material supply chain disruptions or hospital capacity constraints similar to what we experienced at the start of the pandemic.

Turning to gross profit. We continue to expect our 2023 full year pro forma gross profit margin to be within 68% and 69%. Our actual gross profit margin will vary quarter-to-quarter depending largely on product, regional and trade-in mix, and the impact of new product introductions. With respect to operating expenses, on our last call, we forecast pro forma operating expense growth to be between 9% and 13%. We are increasing our estimate and now expect our full year pro forma operating expense growth to be between 11% and 15%. The increased operating expense growth reflects higher variable compensation and other costs related to higher procedure growth performance.

We are also updating our estimate for non-cash stock compensation expense to range between $600 million to $630 million in 2023, a decrease from our previous estimate of $610 million to $640 million. We continue to expect other income, which is comprised mostly of interest income to total between $140 million and $160 million in 2023. With regard to capital expenditures, we continue to estimate a range of $800 million to $1 billion for planned facility construction activities. With regard to income tax, we continue to estimate our 2023 pro forma tax rate to be between 22% and 24% of pre-tax income.

That concludes our prepared comments. We will now open the call to your questions.

Questions and Answers:

Operator

[Operator Instructions] And we will first go to Travis Steed with Bank of America. Please go ahead.

Travis Steed — Bank of America — Analyst

Start out with the 26% procedure growth. Could you just comment a little bit on how much of this is just the better hospital environment, a better procedure environment versus maybe some uptick in share gains from robotics? And a little bit more color on the January, February versus the March. Just curious, do you think this is some kind of temporary catch-up here or some sustained better procedure environment kind of moving forward?

Jamie Samath — Chief Financial Officer

Travis, this is Jamie. I think there are four drivers on the 26%. We do think there’s a little bit of a soft comp on the base period given some impacts from COVID in Q1 of ’22. You have three other drivers. We think there is some backlog effect from patients generally returning to more normalized healthcare routines, given the effect of the pandemic over several years. Included within that is diagnostic pipelines. We see the last year or so of diagnostic pipelines being above pre-COVID levels. Second effect, there is strength in the U.S. in general surgery, particularly benign general surgery. And in our OUS markets, the non-urology side of our procedure categories are growing nicely. We also think that relative to Q4, staffing has improved. It’s not where it was pre-COVID, but I think that’s allowed for some incremental procedures to be performed. We don’t have good estimates as to where the kind of various outperformances between those categories that we described. Market data lags there. Certainly, there is some market share gains, particularly in benign general surgery in the U.S.

What was the second part of your question, Travis?

Travis Steed — Bank of America — Analyst

Just more of the January, February versus the March. I know there was more of an early part of the catch-up. I think you answered part of that versus some sustained better environment here into April?

Gary Guthart — Chief Executive Officer and Member of the Board of Directors

Yes. January in particular was very strong. That also probably reflects in part a little bit of the comp. February continues to be strong, and I’d characterize March as a normalized growth rate. I’m not going to give you the percentage, because I think that can be misleading. Early part of April, it’s difficult to look at just a couple of weeks. But I’d say generally, that’s consistent with what we have seen in March. We have seen some third-party data through end of February just with respect to total U.S. inpatient admissions. And that shows kind of the same trends in terms of the strong January and February.

Travis Steed — Bank of America — Analyst

That’s helpful. And then I wanted to ask about the price increase on I&A. I guess that’s across the board for just the U.S. I assume, but want to clarify that. And the math I was doing is about 150 basis points on margin but the gross margin guide still staying the same at 68% to 69%. So just wanted to make sure I understood the moving parts on the margin side and how you are incorporating that into the overall margin guidance?

Gary Guthart — Chief Executive Officer and Member of the Board of Directors

Yes. So the 5% is in the vast majority of our markets, a couple of smaller markets where local dynamics is such that we have to take a look at that more carefully. That doesn’t go into effect for the full year. That’s in the next couple of months that we will implement there. I think if you look at gross margin impact of the $100 million, depending on where you are modeling revenue, I think you have to do it with and without revenue and gross margin dollars to do the impact to gross margin percentage. I think it’s less than the number that you described. And yes, it is reflected in the gross margin guidance that we have provided. So what you have there is the puts and takes of the Q1 performance or updated outlook for the rest of the year. And then you add in the effect of the price increase.

Travis Steed — Bank of America — Analyst

Great. Thanks, everybody, and I’ll let everybody else pop in.

Operator

And next we’ll go to Robbie Marcus with JPMorgan. Please go ahead.

Robbie Marcus — JPMorgan — Analyst

Well, great. And I just want to say congrats on a great quarter. Maybe if I could ask on placements. The net placements were well above consensus here in the first quarter, really strong showing, flat with last year pretty much despite lower trade-ins. But that comes with your comments that it’s still a fairly tight capital environment. So in a normal environment, how much better do you think you would be doing on placements? And are you seeing an improvement at all in the capital equipment environment? Certainly not holding you back here, but I’m just really curious where you think you could go if the environment was a bit healthier?

Gary Guthart — Chief Executive Officer and Member of the Board of Directors

Yes. I would say the environment is still challenging for hospitals. There is no question that they are encountering relatively significant financial pressures. Generally, we see customers, particularly in the U.S. and Europe, prioritizing their capital investment dollars based on where they see the greatest ROIs and where they have opportunities to gain market share. And so for us, where we see that evidence is in where they start to have procedure growth that means they are out of capacity and they look to invest in da Vinci to expand capacity, given the economic evidence that they have accumulated with the experience of their programs.

Hard to answer your question directly in terms of what would the capital environment be if it were in let’s say normalized times? For us, I think we’re focused on this period on offering customers flexibility in how they acquire capital, meeting them with their financial objectives and serving their objectives and expanding their robotics programs.

Robbie Marcus — JPMorgan — Analyst

Great. And maybe just a quick follow-up. Jamie, as we think about your opex progression through the year, it came in a bit higher than the Street had in first quarter. How should we think about that flowing through the rest of the year? And was there anything or any kind of big quarters that we should be thinking about in our progression through of the year? Thanks a lot.

Jamie Samath — Chief Financial Officer

Yes. I would say roughly depending on where you are in the range, Q2 and Q3 operating expenses should be roughly similar to Q1, and you start to see a less of effect from the payroll tax reset in Q2 and Q3 as those max out, and you should see Q4 seasonally higher.

Robbie Marcus — JPMorgan — Analyst

Great. Great quarter, again. Thanks a lot.

Operator

Next we’ll go to Larry Biegelsen with Wells Fargo. Please go ahead.

Larry Biegelsen — Wells Fargo — Analyst

Good afternoon. Thanks for taking the question. Gary, you have talked about competition potentially lengthening the capital placement cycle. But my question is, if there is an effort by a competitor to discount I&A by 30% or so, how could this impact your procedures? And secondly, Gary, why is this the right time to increase price in I&A? And I had one follow-up.

Gary Guthart — Chief Executive Officer and Member of the Board of Directors

Yes. On the first question of what’s real pricing out there, there is a few competitors out there. A couple are trumpeting marketing claims about how much they’re going to reduce I&A pricing. When we see them in tenders, when we actually see what’s written down, we don’t see the marketing claim. So I don’t know that that’s been realized yet or if it’s something do in the future, if they are really going to deliver, I don’t know. But we do have real world evidence of engagement in our OUS markets with most of these competitors. And what we find is that the reality is, we have a very strong portfolio. We can hit multiple price points because we have different systems that can hit it at different places. The other thing that goes on is that it’s more than just whatever a company supplies to get to the total price per procedure. So if a new competitor enters and they have a short procedure set, in other words they don’t have everything you need, the customer will have to go to third parties to fill it out, to finish the case. Often in marketing materials, they don’t make that clear, hey, you got to have more to get the case done. But in a tender, you do, which is, hey, this is all the stuff that it really takes to get a procedure done. So we are feeling pretty good about where we are with regard to our ability to deliver economic value that really matters to our customer. I think that we are having real exchanges with them about what that looks like. So that’s kind of a baseline.

We have been investing in the virtuous cycle, manufacturing capabilities, some of the capital you hear us investing is both facilities and automation, getting our factories in the right places in the world for logistics and for labor. We are doing those things to be able to lower our product costs, increase our quality as we get volume. That has been lumpy. I wish it was smoother, but it’s been a lumpy process for us.

So the timing for us in terms of a price increase is really not about a specific issue. It’s not about a specific competitive issue or scrap. It’s really around looking at the input costs that we are seeing over the last couple of years, and component supply that comes to us from others and labor content, labor costs, and saying, hey, we’re going to have to move a little bit here going forward. That doesn’t diminish the other programs that we have done to make sure we’re bringing value to our customers, extended life instruments and other price points that we can help them with.

Larry Biegelsen — Wells Fargo — Analyst

That’s very helpful. And Gary, just one on Ion. We estimate Ion sales exceeded $140 million last year. It could drive a couple of hundred basis points of revenue growth this year. And thank you for giving the procedure numbers on this call. My question is, when are you going to start to break out Ion revenues? And just maybe talk about the ramp in Europe? Thank you.

Gary Guthart — Chief Executive Officer and Member of the Board of Directors

So the first question of kind of breakouts in your estimates, I’ll let Jamie answer that and I’ll talk a little bit about Europe.

Jamie Samath — Chief Financial Officer

It’s a little early at this point, it’s 2% to 3% of procedures in revenue. I think we want to give it a little more time, get a little more experience in the marketplace, execute some of the commercial activities that we have for the year. When it becomes a bigger portion of the total maybe a year from now, we would look to do some guidance and give greater disclosure.

Gary Guthart — Chief Executive Officer and Member of the Board of Directors

On Europe. This — first year as we go in will be relatively modest in terms of revenue and installs. I think we will start the process. We are excited about some of the sites and clinical trial work that we need to do. We do have to do some evidence generation in Europe. We do want to look at some of the reimbursement capabilities that are going to be important for broader market access. So year one is really about establishing evidence, having the right conversations and building the database so that reimbursement and broader use can be can be deployed.

Larry Biegelsen — Wells Fargo — Analyst

Thank you, Gary.

Operator

And next we’ll go to Jayson Bedford with Raymond James. Please go ahead.

Jayson Bedford — Raymond James — Analyst

Good afternoon. Just a couple of questions. Just on China, I assume there was a backlog built in December and January and part of February. I don’t know if you commented on March trends there. But can you comment on the procedure growth in China in the quarter? And to the extent that you do believe there is a backlog, do you expect a bolus of growth in that geography over the quarter or two?

Brian King — Treasurer and Head of Investor Relations

Hey, Jayson. This is Brian. Good to hear from you. If you recall really at the end of last year, we had highlighted that we saw a significant impact from COVID at the end of the quarter to procedure volumes. And what we saw was that that actually carried over into the beginning of this year. What we were highlighting in our prepared remarks was, we definitely saw an impact in China continue through January, started to see a recovery in February and a bit into March. I guess I would say, overall, I think, procedures in China exceeded our expectations, but it just still was below our overall, say, long run averages over time. So it’s probably all that I could say. Maybe anything beyond that, I couldn’t say if there is anything different in March versus February. It’s just…

Gary Guthart — Chief Executive Officer and Member of the Board of Directors

I would just add, Jayson. There may be still some unmet backlog in China, if there is probably relatively small and is captured within the procedure range that we provided.

Jayson Bedford — Raymond James — Analyst

Okay. And just another quick clarification question. The supply challenges impacted margins. Was there an impact on revenue in the quarter? I’m just curious how long it will take to replenish the normal inventory levels at the customer level?

Jamie Samath — Chief Financial Officer

Yes. There was not an impact to revenue that I’d highlight in Q1. It was really just the gross margin impact of about 100 basis points that we highlighted. With respect to inventory, if I just look at the big picture, we have been trying to replenish energy targets for each of our critical parts for some time. We have been supply constrained for a good portion of the pandemic. Inventory health improved in Q1 relative to Q4, but we still have a number of parts where we have to get to our target levels and that will probably take us over the course of the rest of the year.

Gary Guthart — Chief Executive Officer and Member of the Board of Directors

Just a note, supply chain shocks through the last couple of years depleted inventory. Now we are building it back up. And given some of the lack of smoothness, we are probably holding a little more inventory than we would. In more smooth times, that a little additional inventory increases E&O risk at some point. So we saw that in this quarter. We will work through it this year, but I think that risk still exists a little bit as inventory levels are higher than they were the last two, three years as we recover.

Jayson Bedford — Raymond James — Analyst

Thank you.

Operator

And next we’ll go to Richard Newitter with Truist Securities. Please go ahead.

Richard Newitter — Truist Securities — Analyst

Hi, thanks. Congrats on the quarter. Two quick ones on SP. I think you had said that SP procedures grew 37% in the quarter. If you could just remind us kind of how that stacked up for the last two quarters? And then the second one on SP, just the new indication there for BPH, how significant is that and maybe just talk a little bit about how expansive that is for you? And then I have one follow-up.

Gary Guthart — Chief Executive Officer and Member of the Board of Directors

Yes. I’ll let Jamie take the trend data and I can talk about BPH.

Jamie Samath — Chief Financial Officer

The ’22 procedure growth rate for SP I think.

Gary Guthart — Chief Executive Officer and Member of the Board of Directors

Looks like Brian is looking it up. I’m going to do the second question first and then Brian is going to come back and save the day. On BPH, so there are a lot of different treatments for BPH. It’s a quite common condition. At smaller prostate sizes, when it’s caught earlier, there are pharmacologic approaches. There are some minimum invasive in-office approaches. Those tend to delay further onset, they don’t tend to cure. So folks over time fail out. And as they fail out of those other procedures, surgery becomes increasingly important. SP, our early days looks to be quite interesting. It’s a minimally invasive approach. It can deal with advanced stage disease that we think other approaches are not handling well at all. And so as we get involved, I think that’s another arrow in the quiver of an SP urologist. I think that helps them. We are already engaged with those customers and it may give us a lead to participate in a bigger part of that market as time goes on. But back to the trend data, I’ll go back?

Jamie Samath — Chief Financial Officer

Yes, if I just take ’22 as a whole SP procedures grew 38%. So relatively consistent.

Richard Newitter — Truist Securities — Analyst

Great. And just on the benign procedure commentary, there was such an enormous step-up particularly in the U.S. I appreciate easier comps. But were the benign procedures that potentially saw a little bit of disproportionate lift this quarter confined just to general surgery benign procedures or was it also inclusive of benign GYN? I’m just trying to get a sense for kind of where this procedure strength really derived.

Brian King — Treasurer and Head of Investor Relations

Relative to trend lines, we saw benign strength in GYN also. So benign GYN growth rates were higher than we have seen in recent times and higher than long-term trend rates. And we think that speaks to kind of this backlog of patients return to normal healthcare routines, et cetera. That’s part of what’s reflected in those growth rates.

Richard Newitter — Truist Securities — Analyst

Thank you.

Gary Guthart — Chief Executive Officer and Member of the Board of Directors

At the risk of ream being redundant, I think there is two concepts that are worth stitching together. One of them is that utilization went up 13% in the quarter, procedures per system per year. So folks are using capital more frequently. There was an increase in the benign side. So we are seeing rotation of mix of putting of those procedures onto systems that they own already. That was a big step-up. I think it speaks to how hospitals are thinking about robotic-assisted surgery programs and how they are thinking about capital. And the simple answer is, they are looking to see greater capital productivity out of what they already own, and they see through real world evidence, the ability to look into their own electronic medical record data that, their outcomes are really good with robotic-assisted surgery and their contribution margins are really healthy. So rotations onto those systems are happening. And I think that’s been an acceleration at least in this quarter. So we will see if it holds through the year, but I think it tells you a little bit about the capital environment and it tells you a little bit about the commitment toward robotic-assisted surgery, particularly in higher volume, shorter duration procedures.

Richard Newitter — Truist Securities — Analyst

Thank you.

Operator

Next we go to Matt Taylor with Jefferies. Please go ahead.

Matt Taylor — Jefferies — Analyst

Yes. Thanks for taking the question. So I just wanted to ask one because you had this outperformance in procedures and talked about increased procedure guidance for the year. Could you unpack that at all geographically or just by area? It sounds like general surgery is very strong. But just any more color on expectations for procedure growth in these different geographies with some of the fluctuations that we are seeing or by category would be great?

Jamie Samath — Chief Financial Officer

Yes. I would say, our major international markets, so in Europe, Germany, France, U.K., Italy, in Asia, China, Japan, South Korea, they all performed well in the quarter. They all exceeded our expectations. And what we are seeing within those categories or within those markets is nice growth in non-urology. So hysterectomy, colorectal, thoracic, depending on the market. We are starting to see, albeit early stages, some of those procedures in those markets starting to get into an adoption curve. So I think that we are relatively optimistic on the outlook for those markets. Our expectations are reflected in the procedure guidance range that Brian provided.

Matt Taylor — Jefferies — Analyst

Great. Thanks, Jamie. And just want to follow-up on the kind of the China disruption. How are you seeing that come back now? And are there any other geographies where you are still seeing any notable disruption and any recovery expectations you can provide?

Jamie Samath — Chief Financial Officer

So I think Brian described what happened in Q1. We saw an impact in January in China. It started to recover in February and March. I think that the dynamics in China are relatively choppy, and I think it’s a relatively dynamic market. So rest of the year I think there is relatively hard to predict.

With respect to COVID impacts in the other markets, nothing that I would highlight. I do think that the financial pressures, staffing dynamics have as much of an impact in many of the European as they do in the U.S.

Gary Guthart — Chief Executive Officer and Member of the Board of Directors

Yes. I’ll speak to my perspective on China a little bit. I think it’s a little bit different market for us than other places. One is, earlier questioner asked, do we think there will be a backlog and it will recover? Certainly. As they reopen, there will be a backlog of patients that need to come back to surgery. We are such a tiny part of the overall surgery market. We are so small relative to the total market size given the constraints of the quota that how much of that comes to us and goes somewhere else is going to be hard for us to predict. We are just going to have to live through it. So that’s kind of number one. The second one is, the demand side is really high. The demand for additional systems and for training and patient demand for high-quality MIS is really good. We are waiting on clarity on additional quota, which is throttling the market right now.

So those are the two things that I think have to clear up. We will see patients come back at some rate. Whether they wait to get a robotic surgery in queue or they jump out of queue to get it, in any way that they need to get it? That’s going to be hard for us to know personally. And we will see as the government responds to release of new quota.

Matt Taylor — Jefferies — Analyst

Got you. Thank you, guys.

Operator

And next we go to Drew Ranieri with Morgan Stanley. Please go ahead.

Drew Ranieri — Morgan Stanley — Analyst

Hi. Thanks for taking the questions. Gary, just maybe on placements for a moment. You touched on this earlier. But can you give us any more context specifically in the U.S. of like what you are seeing in terms of capacity expansion versus new accounts, just adopting robotics after 20 years, would just like to hear your perspective there. And I had a follow-up.

Gary Guthart — Chief Executive Officer and Member of the Board of Directors

I’ll kick the first part on expansion into greenfields versus accounts that are already owned to Jamie. I’ll ask you, Jamie, to think a little bit about there’s corporate ownership IDNs and there is hospital level ownership within those IDNs as to whether they had a robotics program or not. So perhaps tease those two apart a little bit.

Jamie Samath — Chief Financial Officer

If you look at maybe a five quarter average Drew in the U.S. about 20-ish percent of the persistent placements are for greenfield accounts. For those greenfield accounts really at hospitals that are part of a regional or national IDN that have not had a robotics program, generally they have a higher mix of benign procedures, benign general surgery in particular. And as the IDN at large is seeing growing economic and clinical evidence for those procedures, particularly on the economic side, they start to establish robotics programs in those greenfield accounts, again as part of an existing IDN that we do business with. If you look at kind of the trend line, last couple of quarters, we have seen a little less greenfield mix in the system placements. I don’t know that that’s a trend. On a five or six quarter basis, it’s relatively stable.

Gary Guthart — Chief Executive Officer and Member of the Board of Directors

Just adding a little bit to your perspective, as we sit with our IDN level customers and talk about this, one of the things that has been really exciting for us is, in the last few years, the ability to analyze carefully with the kind of data we can bring and the kind of data those IDNs have in terms of their electronic medical record, to both understand which hospitals would benefit from robotic programs and what the total profitability is in their hands when they do it. That resolution has gotten a lot better. The quality of those conversations is fantastic. The confidence I think they have to reinvest, because they can see the data in their own hands. Even if, they don’t have it at a particular hospital, somewhere in their network, they have it and they can do that analysis. That has changed the nature of the conversation in the last few quarters, and I think you are starting to see the reflection of that now.

Just time for one more question please.

Drew Ranieri — Morgan Stanley — Analyst

Okay. And Gary just with about 4,700 systems in the U.S. right now, as you are thinking about competition of actually entering the U.S., kind of what are your thoughts on robotic practices being multidisciplinary and robotic systems versus standardization, which has been kind of a key effort of yours over the past several years. Thanks for taking the questions.

Gary Guthart — Chief Executive Officer and Member of the Board of Directors

Thank you. I think that not all customers are the same. There are different customers that have a different mission. Some customers view themselves as wanting to be test sites for anything that comes out and they will do that. Some customers want to be training facilities and as a result, want to be able to train anybody from any setting in all comers. So we are going to see some cross-system sites. But I think that’s different. I think that’s not the majority of the market. I think a lot of the market is going to be interested in great outcomes, high applicability of their systems so that they can be used across multiple procedure categories and serious dependability. These are now being used more frequently. They are a part of everyday surgery for tens of thousands of surgeons now. And I think in that category, the bulk of the market, repeatability, dependability, outstanding outcomes, great access, great regulatory approvals and a lot of confidence in the company that can deliver it. I think those things are going to be assets. And we will see. I don’t have a crystal ball. We will see how it plays out, but so far, so good.

I’ll go ahead and close from here. Thank you. In closing, we continue to believe there is a substantial and durable opportunity to fundamentally improve surgery and acute interventions more broadly. Our teams continue to work closely with hospitals, physicians and care teams in pursuit of what our customers have termed the quadruple aim, better more predictable patient outcomes, better experiences for patients, better experiences for their care teams and ultimately a lower total cost of care. We believe value creation in surgery, in acute care is foundationally human. It flows from respect for and understanding of patients and care teams their needs and their environment.

At Intuitive, we envision a future of care that is less invasive and profoundly better, where diseases are identified earlier and treated quickly so patients can get back to what matters most. Thank you for your support on this extraordinary journey. We look forward to talking with you again in three months.

Operator

[Operator Closing Remarks]