filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of financial condition as of September 30, 2023, and results of operations for the three and nine months ended September 30, 2023, and 2022, should be read in conjunction with management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2022.
This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements relate to expectations concerning matters that are not historical facts. Statements using words such as “estimates,” “projects,” “believes,” “anticipates,” “plans,” “expects,” “intends,” “may,” “will,” “could,” “should,” “would,” “targeted,” and similar words and expressions are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements related to future results of operations, future financial condition, the expected impacts of the COVID-19 pandemic on our business, financial condition, and results of operations, our financing plans and future capital requirements, our potential tax assets or liabilities, and statements based on current expectations, estimates, forecasts, and projections about the economies and markets in which we operate and our beliefs and assumptions regarding these economies and markets. These forward-looking statements are necessarily estimates reflecting the judgment of our management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should be considered in light of various important factors, including, but not limited to, the following: the overall macroeconomic environment, which may impact customer spending and our costs, including the levels of inflation and interest rates; the conflict in Ukraine; the conflict in Israel; disruption to our supply chain, including increased difficulties in obtaining a sufficient supply of materials in the semiconductor and other markets; curtailed or delayed capital spending by hospitals; the impact of global and regional economic and credit market conditions on healthcare spending; the risk that the COVID-19 pandemic could lead to material delays and cancellations of, or reduced demand for, procedures; closures of our facilities; delays in surgeon training; delays in gathering clinical evidence; delays in obtaining new product approvals, clearances, or certifications from the U.S. FDA, comparable regulatory authorities, or notified bodies; diversion of resources to respond to COVID-19 outbreaks; the risk of our inability to comply with complex FDA and other regulations, which may result in significant enforcement actions; regulatory approvals, clearances, certifications, and restrictions or any dispute that may occur with any regulatory body; guidelines and recommendations in the healthcare and patient communities; healthcare reform legislation in the U.S. and its impact on hospital spending, reimbursement, and fees levied on certain medical device revenues; changes in hospital admissions and actions by payers to limit or manage surgical procedures; the timing and success of product development and market acceptance of developed products; the results of any collaborations, in-licensing arrangements, joint ventures, strategic alliances, or partnerships, including the joint venture with Shanghai Fosun Pharmaceutical (Group) Co., Ltd.; our completion of and ability to successfully integrate acquisitions; procedure counts; intellectual property positions and litigation; competition in the medical device industry and in the specific markets of surgery in which we operate; risks associated with our operations and any expansion outside of the United States; unanticipated manufacturing disruptions or the inability to meet demand for products; our reliance on sole and single source suppliers; the results of legal proceedings to which we are or may become a party, including, but not limited to, product liability claims; adverse publicity regarding us and the safety of our products and adequacy of training; the impact of changes to tax legislation, guidance, and interpretations; changes in tariffs, trade barriers, and regulatory requirements; and other risks and uncertainties, including those listed under the caption “Risk Factors.” Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report and which are based on current expectations and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those risk factors described throughout this filing and identified under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, as updated by our other filings with the Securities and Exchange Commission. Our actual results may differ materially and adversely from those expressed in any forward-looking statement, and we undertake no obligation to publicly update or release any revisions to these forward-looking statements, except as required by law.
Intuitive®, Intuitive Surgical®, da Vinci®, da Vinci S®, da Vinci Si®, da Vinci X®, da Vinci Xi®, da Vinci SP®, EndoWrist®, Firefly®, Ion®, Iris®, OnSite®, SimNow®, SureForm®, and SynchroSeal® are trademarks or registered trademarks of the Company.
Overview
As part of our mission, we believe that minimally invasive care is life-enhancing care. We are committed to advancing minimally invasive care through a comprehensive ecosystem of products and services. This ecosystem includes systems, instruments and accessories, learning, and services connected by a digital portfolio that enables precision and control, seamless interactions and experiences, and meaningful insights to drive better care.
We bring nearly three decades of experience and technical innovation to our robotic-assisted surgical solutions. While surgery and acute interventions have improved significantly in the past decades, there remains a significant need for better
outcomes and decreased variability of these outcomes across care teams. The current healthcare environment continues to stress critical resources, including the professionals who staff care teams: surgeons, anesthesiologists, nurses, and other staff. At the same time, governments strain to cover the healthcare needs of their populations and demand lower total cost per patient to treat disease. In the face of these challenges, we believe scientific and technological advances in biology, computing, imaging, algorithms, and robotics may offer new methods to solve continued and difficult problems.
We address our customer needs by sharing their goals reflected in the quadruple aim. First, we focus on improving patient outcomes through an ecosystem of advanced robotic systems, instruments and accessories, progressive technology learning pathways, and comprehensive support and program assistance services. Second, we seek to improve the patient experience by minimizing disruption to lives and creating greater predictability for the treatment experience. Third, we seek to improve care team satisfaction by creating products and services that are dependable, smart, and optimized for the care environment in which they are used. Finally, we seek to lower the total cost to treat per patient episode when compared with existing treatment alternatives, providing a return on investment for hospitals and healthcare systems and value for payers.
Open surgery remains the predominant form of surgery and is used in almost every area of the body. However, the large incisions required for open surgery create trauma to patients, typically resulting in longer hospitalization and recovery times, increased hospitalization costs, and additional pain and suffering relative to minimally invasive surgery (“MIS”), where MIS is available. For over three decades, MIS has reduced trauma to patients by allowing selected surgeries to be performed through small ports rather than large incisions. MIS has been widely adopted for certain surgical procedures.
Da Vinci surgical systems enable surgeons to extend the benefits of MIS to many patients who would otherwise undergo a more invasive surgery by using computational, robotic, and imaging technologies to overcome many of the limitations of traditional open surgery or conventional MIS. Surgeons using a da Vinci surgical system operate while seated comfortably at a console viewing a 3D, high-definition image of the surgical field. This immersive console connects surgeons to the surgical field and their instruments. While seated at the console, the surgeon manipulates instrument controls in a natural manner, similar to open surgical technique. Our technology is designed to provide surgeons with a range of articulation of the surgical instruments used in the surgical field analogous to the motions of a human wrist, while filtering out the tremor inherent in a surgeon’s hand. In designing our products, we focus on making our technology easy and safe to use.
Our da Vinci products fall into five broad categories: da Vinci surgical systems, da Vinci instruments and accessories, da Vinci Stapling, da Vinci Energy, and da Vinci Vision, including Firefly Fluorescence imaging systems and da Vinci Endoscopes. We also provide a comprehensive suite of systems, learning, and services offerings. Digitally-enabled for nearly three decades, these three offerings aim to decrease variability by providing dependable, consistent functionality and an integrated user experience. Our systems category includes robotic platforms, software, vision, energy, and instruments and accessories. Our learning category includes educational technology, such as simulation and telepresence, as well as technical training programs and personalized peer-to-peer learning opportunities. Our services category assists and optimizes minimally invasive programs through readiness, on-demand support, consultation for minimally invasive program optimization, and hospitals customized analytics. Within our integrated ecosystem, our focus is to decrease variability in surgery by offering actionable insights, with digital solutions, to take action with the potential to improve outcomes, personalize learning, and optimize efficiency. We take a holistic approach, offering intelligent technology and systems designed to work together to make MIS intervention more available and applicable.
We have commercialized the following da Vinci surgical systems: the da Vinci standard surgical system in 1999, the da Vinci S surgical system in 2006, the da Vinci Si surgical system in 2009, and the fourth generation da Vinci Xi surgical system in 2014. We extended our fourth-generation platform by adding the da Vinci X surgical system, commercialized in 2017, and the da Vinci SP surgical system, commercialized in 2018. The da Vinci SP surgical system accesses the body through a single incision, while the other da Vinci surgical systems access the body through multiple incisions. All da Vinci systems include a surgeon’s console (or consoles), imaging electronics, a patient-side cart, and computational hardware and software. We are in the early stages of launching our da Vinci SP surgical system, and we have an installed base of 158 da Vinci SP surgical systems as of September 30, 2023. We have received FDA clearance for the da Vinci SP surgical system for urologic and certain transoral procedures, and we have received regulatory clearance in South Korea where the da Vinci SP surgical system may be used for a broad set of procedures. In September 2022, we also received regulatory clearance for the da Vinci SP surgical system in Japan for the same set of procedures as can be performed on the da Vinci Xi surgical system in Japan. We plan to seek FDA clearances for additional indications for da Vinci SP over time. We also plan to seek clearances (including for additional indications) in other OUS markets over time. The success of the da Vinci SP surgical system is dependent on positive experiences and improved clinical outcomes for the procedures for which it has been cleared as well as securing additional clinical clearances.
We offer approximately 70 different multi-port da Vinci instruments to provide surgeons with flexibility in choosing the types of tools needed to perform a particular surgery. These multi-port instruments are generally robotically controlled and provide end effectors (tips) that are similar to those used in either open or laparoscopic surgery. We offer advanced instrumentation for the da Vinci X and da Vinci Xi platforms, including da Vinci Energy and da Vinci Stapler products, to
provide surgeons with sophisticated, computer-aided tools to precisely and efficiently interact with tissue. Da Vinci X and da Vinci Xi surgical systems share the same instruments, whereas the da Vinci Si surgical system uses instruments that are not compatible with da Vinci X or da Vinci Xi systems. We currently offer nine core instruments on our da Vinci SP surgical system. We plan to expand the SP instrument offering over time.
Training technologies include our Intuitive Simulation products, our Intuitive Telepresence remote case observation and telementoring tools, and our dual console for use in surgeon proctoring and collaborative surgery.
In 2019, the FDA cleared our Ion endoluminal system, which is a flexible, robotic-assisted, catheter-based platform that utilizes instruments and accessories for which the first cleared indication is minimally invasive biopsies in the lung. Our Ion system extends our commercial offering beyond surgery into diagnostic, endoluminal procedures. The system features an ultra-thin, ultra-maneuverable catheter that can articulate 180 degrees in all directions and allows navigation far into the peripheral lung and provides the stability necessary for precision in a biopsy. Many suspicious lesions found in the lung may be small and difficult to access, which can make diagnosis challenging, and Ion helps physicians obtain tissue samples from deep within the lung, which could help enable earlier diagnosis. In March 2023, we obtained European certification for our Ion endoluminal system and, in September 2023, we received regulatory clearance for the our Ion endoluminal system in South Korea. We plan to seek additional clearances, approvals, and certifications for the Ion endoluminal system in OUS markets over time.
The success of new product introductions depends on a number of factors including, but not limited to, pricing, competition, market and consumer acceptance, the effective forecasting and management of product demand, inventory levels, the management of manufacturing and supply costs, and the risk that new products may have quality or other defects in the early stages of introduction.
Macroeconomic Environment
Uncertainty surrounding macroeconomic and geopolitical factors in the U.S. and globally characterized by the supply chain environment, inflationary pressure, higher interest rates, instability in the global financial markets, significant disruptions in the commodities’ markets as a result of the conflict between Russia and Ukraine and the conflict in Israel, labor shortages, and the introduction of or changes in tariffs or trade barriers may result in a recession, which could have a material adverse effect on our long-term business.
While the supply chain challenges facing us have shown signs of improvement during the first three quarters of 2023, relative to 2022, certain semiconductor materials, specialty metals, and polymers continue to face supply constraints due to various factors, including limited labor availability, equipment shortages, capacity limitations among sub-tier suppliers, and difficulties in sourcing raw materials and component parts to meet demand requirements. Additionally, prices of such materials remain elevated due to increased demand and production-related cost inflation. With higher interest rates, access to credit may become more difficult and any insolvency of our key suppliers, including sole-sourced and single-sourced suppliers, may exacerbate current supply chain challenges. Also, liquidity concerns in the broader financial services industry could result in delayed access or loss of access to our key suppliers’ uninsured deposits or loss of their ability to draw on existing credit facilities involving a troubled or failed financial institution. We are actively engaged in activities to seek to mitigate the impact of any supply chain disruptions on our operations.
Such global shortages in important components have resulted in, and will continue to cause, inflationary cost pressure in our supply chain. To date, these supply chain challenges have not materially impacted our results of operations or ability to deliver products and services to our customers. However, supply constraints with certain materials, many of which may be unavoidable, could delay the timing of finished product deliveries, which could result in deferred or canceled procedures. Additionally, if inflationary pressures in component costs persist, we may not be able to quickly or easily adjust pricing, reduce costs, or implement countermeasures. Additionally, there is continued uncertainty surrounding the impact of any monetary policy changes taken by the U.S. Federal Reserve and other central banks to address the structural risks associated with inflation.
Fluctuations in labor availability globally, including labor shortages and staff burnout and attrition, could also impact our ability to hire and retain personnel critical to our manufacturing, logistics, and commercial operations. We are also highly dependent on the principal members of our management and scientific staff. The loss of critical members of our team, or our inability to attract and retain qualified personnel, could significantly harm our operations, business, and ability to compete.
Many hospitals continue to experience challenges with staffing and cost pressures that could affect their ability to provide patient care; however, the staffing challenges have shown signs of improvement during the third quarter of 2023, relative to the first two quarters of 2023 and to the prior year. Additionally, hospitals are facing significant financial pressure as supply chain constraints and inflation drive up operating costs, higher interest rates make access to credit more expensive, unrealized losses decrease available cash reserves, and fiscal stimulus programs enacted during the COVID-19 pandemic wind down. Hospitals may also be adversely affected by the liquidity concerns in the broader financial services industry that could result in delayed access or loss of access to uninsured deposits or loss of their ability to draw on existing credit facilities involving a troubled or
failed financial institution. As a consequence of the financial pressures and decreased profitability, some hospitals have indicated that they are lowering their capital investment plans and tightening their operational budgets. We believe that these factors have contributed to a softening in our U.S. capital pipeline, and we expect that demand for capital, particularly in the U.S., will continue to be impacted while macroeconomic conditions remain challenging. In addition, as competition progresses in various markets, we will likely experience longer selling cycles and pricing pressures. Any or all of these factors could negatively impact the number of da Vinci procedures performed or the number of system placements and have a material adverse effect on our business, financial condition, or results of operations resulting in failure to achieve our anticipated financial results.
We maintain the majority of our cash and cash equivalents in accounts with major U.S. and multi-national financial institutions, and our deposits exceed insured limits. Market conditions could impact the viability of these institutions. To date, these market conditions and liquidity concerns have not impacted our results of operations. However, in the event of the failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we would be able to access uninsured funds in a timely manner or at all. Any inability to access or delay in accessing these funds could adversely affect our business and financial position.
COVID-19 Pandemic
In early 2022, a resurgence of COVID-19 resulted in a significant increase in infections and hospitalization rates in the U.S. and certain countries in Europe, which, in turn, negatively impacted procedure volumes in January 2022. As infections and hospitalizations started to decrease in February in the U.S. and Europe, we saw a recovery of procedure volumes. In March and during the second quarter of 2022, we also saw a resurgence in COVID-19 cases and increased hospitalizations and government interventions impacting parts of Asia, particularly China, which negatively impacted procedure volumes. In the fourth quarter of 2022, we saw a resurgence in COVID-19 cases in China, which had a significant negative impact on our procedure volumes in the region.
In the first quarter of 2023, the most recent COVID-19 resurgences in China continued to negatively impact our procedure volumes in January 2023. However, in February and March, as infections and hospitalization started to decrease, we saw a recovery of procedure volumes. During the second and third quarters of 2023, we did not experience significant disruptions from COVID-19.
We expect the depth and extent to which the COVID-19 pandemic impacts individual markets to vary based on the availability of vaccinations, personal protective equipment, intensive care units and operating rooms, and medical staff, as well as other government interventions. Additionally, COVID-19 has, and may continue to, contribute to hospital staffing shortages, which impacts hospitals’ ability to provide patient care and, in some cases, results in the deferral of elective surgeries. When COVID-19 infection rates have spiked in a particular region in the past, procedure volumes were often negatively impacted and the diagnoses of new conditions and their related treatments were sometimes deferred. While we believe that there is a backlog of patients that remains to be treated, and that such a backlog has positively contributed to 2023 procedure volumes, it is difficult to determine if and when any remaining backlog of patients will ultimately seek diagnosis and treatment and whether they will be treated through surgery. Based on our experience during the last three years, we do not expect all markets, regions, and procedure types to recover at the same time or at the same pace.
Business Model
Overview
We generate revenue from the placement of da Vinci surgical systems, in sales or sales-type lease arrangements where revenue is recognized up-front or in fixed-payment or usage-based operating lease arrangements where revenue is recognized over time. We earn recurring revenue from the sales of instruments, accessories, and services, as well as the revenue from operating leases. The da Vinci surgical system generally sells for between $0.5 million and $2.5 million, depending on the model, configuration, and geography, and represents a significant capital equipment investment for our customers when purchased. Our instruments and accessories have limited lives and will either expire or wear out as they are used in surgery, at which point they need to be replaced. We generally earn between $600 and $3,500 of instruments and accessories revenue per surgical procedure performed, depending on the type and complexity of the specific procedures performed and the number and type of instruments used. In 2020, we launched our Extended Use Program in the U.S. and Europe, which consists of select da Vinci Xi and da Vinci X instruments possessing 12 to 18 uses compared to the previous 10 uses, with the intention to reduce the cost for customers to treat patients, which in turn reduced our overall instruments and accessories revenue per procedure. We typically enter into service contracts at the time systems are sold or leased at an annual fee between $80,000 and $190,000, depending on the configuration of the underlying system and the composition of the services offered under the contract. These service contracts have generally been renewed at the end of the initial contractual service periods.
We generate revenue from our Ion endoluminal system in a business model consistent with the da Vinci surgical system model described above. We generate revenue from the placement of Ion systems, in sales or sales-type lease arrangements
where revenue is recognized up-front or in fixed-payment or usage-based operating lease arrangements where revenue is recognized over time. We earn recurring revenue from the sales of instruments, accessories, and services, as well as revenue from operating leases. The Ion endoluminal system generally sells for between $0.5 million and $0.6 million. Our instruments and accessories have limited lives and will either expire or wear out as they are used in procedures, at which point they need to be replaced. We typically enter into service contracts at the time systems are sold or leased at an annual fee between $60,000 and $70,000. For the three and nine months ended September 30, 2023, and 2022, Ion’s contribution to revenue and gross margin was not significant.
Additionally, as part of our ecosystem of products and services, we provide a portfolio of learning offerings and digital solutions. We do not currently generate material revenue from these offerings.
Recurring Revenue
Recurring revenue consists of instruments and accessories revenue, service revenue, and operating lease revenue. Recurring revenue increased to $4.9 billion, or 79% of total revenue in 2022, compared to $4.3 billion, or 75% of total revenue in 2021, and $3.4 billion, or 77% of total revenue in 2020.
Instruments and accessories revenue has grown at a faster rate than systems revenue over time. Instruments and accessories revenue increased to $3.52 billion in 2022, compared to $3.10 billion in 2021 and $2.46 billion in 2020. The increase in instruments and accessories revenue largely reflects continued procedure adoption.
Service revenue was $1.02 billion in 2022, compared to $0.92 billion in 2021 and $0.72 billion in 2020. The increase in service revenue was primarily driven by the growth of the base of installed da Vinci surgical systems producing service revenue, as well as the effects of the Customer Relief Program in 2020, which resulted in an $80 million decrease in service revenue. The installed base of da Vinci surgical systems grew 12% to approximately 7,544 as of December 31, 2022; 12% to approximately 6,730 as of December 31, 2021; and 7% to approximately 5,989 as of December 31, 2020.
We use the installed base, number of placements, and utilization of systems as metrics for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Management believes that the installed base, number of placements, and utilization of systems provide meaningful supplemental information regarding our performance, as management believes that the installed base, number of placements, and utilization of systems are an indicator of the rate of adoption of robotic-assisted medical procedures as well as an indicator of future recurring revenue. Management believes that both it and investors benefit from referring to the installed base, number of placements, and utilization of systems in assessing our performance and when planning, forecasting, and analyzing future periods. The installed base, number of placements, and utilization of systems also facilitate management’s internal comparisons of our historical performance. We believe that the installed base, number of placements, and utilization of systems are useful to investors as metrics, because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making, and (2) they are used by institutional investors and the analyst community to help them analyze the performance of our business. The vast majority of installed systems are connected via the internet. System logs can also be accessed by field engineers for systems that are not connected to the internet. We utilize this information as well as other information from agreements and discussions with our customers that involve estimates and judgments, which are, by their nature, subject to substantial uncertainties and assumptions. Estimates and judgments for determining the installed base, number of placements, and utilization of systems may be impacted over time by various factors, including system internet connectivity, hospital and distributor reporting behavior, and inherent complexities in new agreements. Such estimates and judgments are also susceptible to technical errors. In addition, the relationship between the installed base, number of placements, and utilization of systems and our revenues may fluctuate from period to period, and growth in the installed base, number of placements, and utilization of systems may not correspond to an increase in revenue. The installed base, number of placements, and utilization of systems are not intended to be considered in isolation or as a substitute for, or superior to, revenue or other financial information prepared and presented in accordance with GAAP.
Intuitive System Leasing
Since 2013, we have entered into sales-type and fixed-payment operating lease arrangements directly with certain qualified customers as a way to offer customers flexibility in how they acquire systems and expand their robotic-assisted programs while leveraging our balance sheet. These leases generally have commercially competitive terms as compared to other third-party entities that offer equipment leasing. We have also entered into usage-based operating lease arrangements with qualified customers that have committed da Vinci programs where we charge for the system and service as the systems are utilized. We believe that these alternative financing structures have been effective and well-received, and we are willing to expand the proportion of these structures based on customer demand. We include systems placed under fixed-payment and usage-based operating lease arrangements as well as sales-type lease arrangements in our system placement and installed base disclosures. We exclude operating lease-related revenue, including usage-based revenue, and Ion system revenue from our da Vinci surgical system average selling price (“ASP”) computations.
The following table summarizes our system placements under leasing arrangements for the years ended December 31, 2022, 2021, and 2020:
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Da Vinci System Placements Under Leasing Arrangements | |||||||||||||||||
| Fixed-payment operating lease arrangements | 276 | 333 | 218 | ||||||||||||||
| Usage-based operating lease arrangements | 216 | 184 | 99 | ||||||||||||||
| Total da Vinci system placements under operating lease arrangements | 492 | 517 | 317 | ||||||||||||||
| % of Total da Vinci system placements | 39 | % | 38 | % | 34 | % | |||||||||||
| Sales-type lease arrangements | 99 | 151 | 115 | ||||||||||||||
| Total da Vinci system placements under leasing arrangements | 591 | 668 | 432 | ||||||||||||||
| Ion System Placements Under Leasing Arrangements | |||||||||||||||||
| Fixed-payment operating lease arrangements | 61 | 43 | 7 | ||||||||||||||
| Usage-based operating lease arrangements | 40 | 7 | 2 | ||||||||||||||
| Total Ion system placements under operating lease arrangements | 101 | 50 | 9 | ||||||||||||||
| % of Total Ion system placements | 53 | % | 54 | % | 35 | % | |||||||||||
| Sales-type lease arrangements | 11 | 7 | — | ||||||||||||||
| Total Ion system placements under leasing arrangements | 112 | 57 | 9 |
Revenue from fixed-payment operating lease arrangements is recognized on a straight-line basis over the lease term, and revenue from usage-based operating lease arrangements is recognized as the systems are used. We generally set fixed-payment and usage-based operating lease arrangement pricing at a modest premium relative to purchased systems reflecting the time value of money and, in the case of usage-based operating lease arrangements, the risk that system utilization may fall short of anticipated levels. Variable lease revenue recognized from usage-based operating lease arrangements has been included in our operating lease metrics herein. Operating lease revenue has grown at a faster rate than overall systems revenue and was $377 million, $277 million, and $177 million for the years ended December 31, 2022, 2021, and 2020, respectively, of which $133 million, $78 million, and $28 million, respectively, was variable lease revenue. As revenue for fixed-payment and usage-based operating lease arrangements is recognized over time, total systems revenue growth is reduced in a period when the number of operating lease placements increases as a proportion of total system placements. Generally, lease transactions generate similar gross margins as our sale transactions.
The following table summarizes our systems installed at customers under operating leasing arrangements for the years ended December 31, 2022, 2021, and 2020:
| Year Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Da Vinci System Installed Base under Operating Leasing Arrangements | |||||||||||||||||
| Fixed-payment operating lease arrangements | 1,018 | 841 | 653 | ||||||||||||||
| Usage-based operating lease arrangements | 665 | 453 | 248 | ||||||||||||||
| Total da Vinci system installed base under operating lease arrangements | 1,683 | 1,294 | 901 | ||||||||||||||
| Ion System Installed Base under Operating Leasing Arrangements | |||||||||||||||||
| Total Ion system installed base under operating lease arrangements | 132 | 61 | 11 | ||||||||||||||
Our exposure to the credit risks relating to our lease financing arrangements may increase if our customers are adversely affected by changes in healthcare laws, coverage and reimbursement, economic pressures or uncertainty, or other customer-specific factors. As a result of these macroeconomic factors impacting our customers, we may be exposed to defaults under our lease financing arrangements. Moreover, usage-based operating lease arrangements generally contain no minimum payments; therefore, customers may exit such arrangements without paying a financial penalty to us.
For some operating lease arrangements, our customers are provided with the right to purchase the leased system at certain points during and/or at the end of the lease term. Revenue generated from customer purchases of systems under operating lease arrangements (“Lease Buyouts”) was $72 million, $96 million, and $52 million for the years ended December 31, 2022, 2021,
and 2020, respectively. We expect that revenue recognized from customer exercises of the buyout options will fluctuate based on the timing of when, and if, customers choose to exercise their buyout options.
Systems Revenue
System placements are driven by procedure growth in most markets. In some markets, system placements are constrained by regulation. In geographies where da Vinci procedure adoption is in an early stage or system placements are constrained by regulation, system sales will precede procedure growth. System placements also vary due to seasonality, largely aligned with hospital budgeting cycles. On an annual basis, we typically place a higher proportion of systems in the fourth quarter and a lower proportion in the first quarter as customer budgets are reset. Systems revenue is also affected by the proportion of system placements under operating lease arrangements, operating lease revenue, Lease Buyouts, product mix, ASPs, trade-in activities, and customer mix. Systems revenue declined 1% to $1.68 billion in 2022. Systems revenue grew 44% to $1.69 billion in 2021. Systems revenue declined 12% to $1.18 billion in 2020.
Procedure Mix / Products
Our da Vinci surgical systems are generally used for soft tissue surgery for areas of the body between the pelvis and the neck, primarily in general, gynecologic, urologic, cardiothoracic, and head and neck surgery. Within these categories, procedures range in complexity from cancer and other highly complex procedures to less complex procedures for benign conditions. Cancer and other highly complex procedures tend to be reimbursed at higher rates than less complex procedures for benign conditions. Thus, hospitals are more sensitive to the costs associated with treating less complex, benign conditions. Our strategy is to provide hospitals with attractive clinical and economical solutions across the spectrum of procedure complexity. Our fully featured da Vinci Xi surgical system with advanced instruments (including da Vinci Energy and EndoWrist and SureForm Stapler products) and our Integrated Table Motion product targets the more complex procedure segment. Our da Vinci X surgical system is targeted toward price-sensitive markets and procedures. Our da Vinci SP surgical system complements the da Vinci Xi and X surgical systems by enabling surgeons to access narrow workspaces.
Procedure Seasonality
More than half of the da Vinci procedures performed are for benign conditions, most notably hernia repairs, hysterectomies, and cholecystectomies. These benign procedures and other short-term elective procedures tend to be more seasonal than cancer operations and surgeries for other life-threatening conditions. Seasonality in the U.S. for procedures for benign conditions typically results in higher fourth quarter procedure volume when more patients have met annual deductibles and lower first quarter procedure volume when deductibles are reset. Seasonality outside of the U.S. varies and is more pronounced around local holidays and vacation periods, which have lower procedure volume. As a result of the factors outlined in the COVID-19 Pandemic section above, including past and potentially future recommendations of authorities to defer elective procedures, historical procedure patterns may be disrupted.
Distribution Channels
We provide our products through direct sales organizations in the U.S., Europe (excluding Italy, Spain, Portugal, Greece, and all Eastern European countries), China (through our Intuitive-Fosun Pharma joint venture), Japan, South Korea, India, Taiwan, and Canada. In the remainder of our OUS markets, we provide our products through distributors.
Regulatory Activities
Overview
Our products must meet the requirements of a large and growing body of international standards that govern the product safety, efficacy, advertising, labeling, safety reporting design, manufacture, materials content and sourcing, testing, certification, packaging, installation, use, and disposal of our products. Examples of such standards include electrical safety standards, such as those of the International Electrotechnical Commission, and composition standards, such as the Reduction of Hazardous Substances and the Waste Electrical and Electronic Equipment Directives. Failure to meet these standards could limit our ability to market our products in those regions that require compliance with such standards.
Our products and operations are also subject to increasingly stringent medical device, privacy, and other regulations by regional, federal, state, and local authorities. After a device is placed on the market, numerous FDA and other regulatory requirements continue to apply. These requirements include establishment registration and device listing with the FDA and compliance with medical device reporting regulations, which require that manufacturers report to the FDA if their device caused or contributed, or may have caused or contributed, to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur.
We anticipate that timelines for the introduction of new products and/or indications may be extended relative to past experience as a result of these regulations. For example, we have seen elongated regulatory approval timelines in the U.S. and Europe.
Clearances, Approvals, and Certifications
We have generally obtained the regulatory clearances, approvals, and certifications required to market our products associated with our da Vinci Surgical Multiport Systems (S, Si, Xi, and X systems) for our targeted surgical specialties within the U.S., South Korea, Japan, and the European markets in which we operate. Since 2021, we have obtained regulatory clearances, approvals, and certifications for the following products:
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In September 2023, we received regulatory clearances in South Korea for our Ion endoluminal system. We expect the introduction of the Ion system in South Korea to be extended as we refine our training pathways in the region and gather local clinical and economic data. In March 2023, we obtained European certification for our Ion endoluminal system. In Europe, we plan to initially focus on the United Kingdom (“UK”) market and on the collection of clinical data in support of our European reimbursement strategy. The Ion system previously received FDA clearance in the U.S. in 2019.
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Following approval in June 2023 by China’s National Medical Products Administration (“NMPA”) for a local version of the da Vinci Xi surgical system, in August 2023, our Intuitive-Fosun Pharma joint venture received a manufacturing license that permits the joint venture to manufacture the da Vinci Xi surgical system for sale to customers in China.
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In April 2023, we obtained FDA clearance for our da Vinci SP surgical system for use in simple prostatectomy procedures. We also obtained FDA clearance for use of the SP surgical system in transvesical approaches to simple and radical prostatectomy.
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In September 2022, we obtained regulatory clearance for the da Vinci SP surgical system in Japan for use in general surgeries, thoracic surgeries (excluding cardiac procedures and intercostal approaches), urologic surgeries, gynecological surgeries, and trans-oral head and neck surgeries.
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In February 2022, we received regulatory clearance in China to market both our 12 mm SureForm 45 Stapler and SureForm 60 Stapler and corresponding reloads.
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In January 2022, we received regulatory clearance in China to market our da Vinci Vessel Sealer Extend with up to 7 mm vascular indications.
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In December 2021, we obtained FDA clearance for our 8 mm SureForm 30 Curved-Tip Stapler and reloads for use in general, thoracic, gynecologic, urologic, and pediatric surgery. We completed initial evaluations of the 8 mm SureForm 30 stapler with certain customers in the U.S. in 2022. The full U.S. product launch is expected to occur in 2024, with other countries to follow. In October 2022, we received regulatory clearance in Japan to market our 8 mm SureForm 30 Curved-Tip and Straight-Tip Stapler instruments and reloads for use in general, thoracic (except for cardiac), gynecologic, and urologic surgery.
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In late 2020 and early 2021, we obtained FDA clearance, European certification, and other regulatory clearances in most of our significant markets to market our Extended Use Instruments.
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In July 2019, we obtained FDA clearance for our SureForm 45 Curved-Tip Stapler and SureForm 45 Gray reload, which round out our SureForm 45 portfolio. We have also obtained European certification for our SureForm 45 Curved-Tip Stapler and SureForm 45 Gray reload. In September 2019, we received regulatory clearance in Japan to market both our SureForm 45 Curved-Tip Stapler and SureForm 45 Gray reload. We received regulatory clearance in South Korea to market our SureForm 45 Curved-Tip Stapler and SureForm 45 Gray reload in June 2021 and July 2021, respectively.
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In June 2019, we obtained European certification for our da Vinci Endoscope Plus for the da Vinci Xi and da Vinci X surgical systems in Europe. Following the CE mark, in July 2019, we obtained FDA clearance for our da Vinci Endoscope Plus. We have also received regulatory clearances in South Korea and Japan to market our da Vinci Endoscope Plus in December 2019 and May 2020, respectively. In March 2022, we received regulatory clearance in China to market our da Vinci Endoscope Plus.
Refer to the descriptions of our new products that received regulatory clearances, approvals, or certifications in 2023, 2022, and 2021 in the Recent Product Introductions section below.
In June 2023, the China National Health Commission published the 14th five-year plan quota for major medical equipment to be sold in China on its official website (the “2023 Quota”). Under the 2023 Quota, the government will allow for the sale of 559 new surgical robots into China, which could include da Vinci surgical systems as well as surgical systems introduced by others. As of September 30, 2023, including systems that were sold in prior quarters, we have placed 66 da Vinci surgical systems under the 2023 Quota, and we believe that 15 system quotas are no longer available; therefore, 478 surgical robots should still be available for sale under the 2023 Quota. Future sales of da Vinci surgical systems under this and any previously published open quotas are uncertain, as they are open to other medical device companies that have introduced robotic-assisted
surgical systems and are dependent on hospitals completing a tender process and receiving associated approvals. Also, our ability to track the number of systems that could be sold under these quotas in the future will be limited by provincial and national agencies making such information publicly available.
Since 2022, several provinces, including the Hunan Provincial Healthcare Security Administration, have implemented significant limits on what hospitals can charge patients for surgeries using robotic surgical technology, including soft tissue surgery and orthopedics. These limits have significantly impacted the number of procedures performed and have impacted our instruments and accessories revenue in those provinces. As of the date of this report, these limits have not had a material impact on our business, financial condition, or results of operations, as only a small portion of our installed base in China is currently located in the impacted provinces. Companies providing robotic surgical technology, including our joint venture in China, have been meeting with Chinese government healthcare agencies to discuss these developments and to provide feedback. We cannot assure you that additional provincial or national healthcare agencies and administrations will not impose similar limits, and we expect to continue to face increased pricing pressure, both of which could further impact the number of procedures performed and our instruments and accessories revenue in China.
The Japanese Ministry of Health, Labor, and Welfare (“MHLW”) considers reimbursement for procedures in April of even-numbered years. The process for obtaining reimbursement requires Japanese university hospitals and surgical societies, with our support, to seek reimbursement. There are multiple pathways to obtain reimbursement for procedures, including those that require in-country clinical data/economic data. In April 2012 and April 2016, the MHLW granted reimbursement status for prostatectomy and partial nephrectomy, respectively. Most prostatectomies and partial nephrectomies were open procedures prior to da Vinci reimbursement. Da Vinci procedure reimbursement for prostatectomy and partial nephrectomy procedures are higher than open and conventional laparoscopic procedure reimbursements. An additional 12 da Vinci procedures were granted reimbursement effective April 1, 2018, including gastrectomy, low anterior resection, lobectomy, and hysterectomy, for both malignant and benign conditions, and an additional seven da Vinci procedures were granted reimbursement effective April 1, 2020. An additional eight da Vinci procedures were granted reimbursement effective April 1, 2022, including colon resection. In addition, we received higher reimbursement for da Vinci gastrectomy procedures, as compared to open and conventional laparoscopic procedure reimbursements. The additional reimbursed procedures have varying levels of conventional laparoscopic penetration and will generally be reimbursed at rates equal to the conventional laparoscopic procedures. Given the reimbursement level and laparoscopic penetration for these additional procedures, there can be no assurance that the adoption pace for these procedures will be similar to prostatectomy or partial nephrectomy, given their higher reimbursement, or any other da Vinci procedure.
Recalls and Corrections
Medical device companies have regulatory obligations to correct or remove medical devices in the field that could pose a risk to health. The definition of “recalls and corrections” is expansive and includes repair, replacement, inspections, relabeling, and issuance of new or additional instructions for use or reinforcement of existing instructions for use and training when such actions are taken for specific reasons of safety or compliance. These field actions require stringent documentation, reporting, and monitoring worldwide. There are other actions that a medical device manufacturer may take in the field without reporting including, but not limited to, routine servicing and stock rotations.
As we determine whether a field action is reportable in any regulatory jurisdiction, we prepare and submit notifications to the appropriate regulatory agency for the particular jurisdiction. Regulators can require the expansion, reclassification, or change in scope and language of the field action. In general, upon submitting required notifications to regulators regarding a field action that is a recall or correction, we will notify customers regarding the field action, provide any additional documentation required in their national language, and arrange, as required, the return or replacement of the affected product or a field service visit to perform the correction.
Field actions, as well as certain outcomes from regulatory activities, can result in adverse effects on our business, including damage to our reputation, delays by customers of purchase decisions, reduction or stoppage of the use of installed systems, and reduced revenue as well as increased expenses.
Procedures
We model patient value as equal to procedure efficacy / invasiveness. In this equation, procedure efficacy is defined as a measure of the success of the surgery in resolving the underlying disease, and invasiveness is defined as a measure of patient pain and disruption of regular activities. When the patient value of a robotic-assisted procedure is greater than that of alternative treatment options, patients may benefit from seeking out surgeons and hospitals that offer robotic-assisted medical procedures, which could potentially result in a local market share shift. Adoption of robotic-assisted procedures occurs procedure by procedure and market by market and is driven by the relative patient value and total treatment costs of robotic-assisted procedures as compared to alternative treatment options for the same disease state or condition.
We use the number and type of procedures as metrics for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Management believes that the number and type of procedures provide meaningful supplemental information regarding our performance, as management believes procedure volume is an indicator of the rate of adoption of robotic-assisted medical procedures as well as an indicator of future revenue (including revenue from usage-based operating lease arrangements). Management believes that both it and investors benefit from referring to the number and type of procedures in assessing our performance and when planning, forecasting, and analyzing future periods. The number and type of procedures also facilitate management’s internal comparisons of our historical performance. We believe that the number and type of procedures are useful to investors as metrics, because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making, and (2) they are used by institutional investors and the analyst community to help them analyze the performance of our business. The vast majority of our installed systems are connected via the internet. System logs can also be accessed by field engineers for systems that are not connected to the internet. We utilize certain methods that rely on information collected from the installed systems for determining the number and type of procedures performed that involve estimates and judgments, which are, by their nature, subject to substantial uncertainties and assumptions. Estimates and judgments for determining the number and type of procedures may be impacted over time by various factors, including changes in treatment modalities, hospital and distributor reporting behavior, and system internet connectivity. Such estimates and judgments are also susceptible to algorithmic or other technical errors. In addition, the relationship between the number and type of procedures and our revenues may fluctuate from period to period, and procedure volume growth may not correspond to an increase in revenue. The number and type of procedures are not intended to be considered in isolation or as a substitute for, or superior to, revenue or other financial information prepared and presented in accordance with GAAP.
Our systems and instruments are regulated independently in various countries and regions of the world. The discussion of indications for use and representative or target procedures is intended solely to provide an understanding of the market for our products and is not intended to promote for sale or use any Intuitive product outside of its licensed or cleared labeling and indications for use.
Da Vinci Procedures
The adoption of robotic-assisted surgery using the da Vinci surgical system has the potential to grow for those procedures that offer greater patient value than to non-da Vinci alternatives and competitive total economics for healthcare providers. Our da Vinci surgical systems are used primarily in general, urologic, gynecologic, cardiothoracic, and head and neck surgeries. We focus our organization and investments on developing, marketing, and training products and services for procedures in which da Vinci can bring patient value relative to alternative treatment options and/or economic benefit to healthcare providers. Target procedures in general surgery include hernia repair (both ventral and inguinal), colorectal, cholecystectomy, and bariatric procedures. Target procedures in urology include prostatectomy and partial nephrectomy. Target procedures in gynecology include hysterectomy for both cancer and benign conditions and sacrocolpopexy. In cardiothoracic surgery, target procedures include lobectomy. In head and neck surgery, target procedures include transoral surgery. Not all indications, procedures, or products described may be available in a given country or region or on all generations of da Vinci surgical systems. Surgeons and their patients need to consult the product labeling in their specific country and for each product in order to determine the cleared uses, as well as important limitations, restrictions, or contraindications.
In 2022, approximately 1,875,000 surgical procedures were performed with da Vinci surgical systems, compared to approximately 1,594,000 and 1,243,000 surgical procedures performed with da Vinci surgical systems in 2021 and 2020, respectively. The increase in our overall procedure volume in 2022 reflects the disruption caused by the COVID-19 pandemic in 2022 and 2021, as noted in the COVID-19 Pandemic section above, and was driven by growth in U.S. general surgery, OUS urology, and OUS general surgery (particularly cancer) procedures.
U.S. da Vinci Procedures
Overall U.S. procedure volume with da Vinci surgical systems grew to approximately 1,282,000 in 2022, compared to approximately 1,109,000 in 2021 and approximately 876,000 in 2020. General surgery was our largest and fastest growing U.S. specialty in 2022 with procedure volume that grew to approximately 720,000 in 2022, compared to approximately 588,000 in 2021 and approximately 434,000 in 2020. Gynecologic surgery was our second largest U.S. surgical specialty in 2022 with procedure volume that grew to approximately 341,000 in 2022, compared to approximately 316,000 in 2021 and approximately 267,000 in 2020. Urologic surgery was our third largest U.S. surgical specialty in 2022 with procedure volume that grew to approximately 162,000 in 2022, compared to approximately 153,000 in 2021 and approximately 134,000 in 2020.
OUS da Vinci Procedures
Overall OUS procedure volume with da Vinci surgical systems grew to approximately 593,000 in 2022, compared to approximately 485,000 in 2021 and approximately 367,000 in 2020. Urologic surgery was our largest OUS specialty in 2022 with procedure volume that grew to approximately 316,000 in 2022, compared to approximately 264,000 in 2021 and approximately 215,000 in 2020. General surgery was our second largest OUS specialty in 2022 with procedure volume that
grew to approximately 133,000 in 2022, compared to approximately 101,000 in 2021 and approximately 68,000 in 2020. Gynecology procedures also contributed to OUS procedure growth.
Ion Procedures
The adoption of robotic-assisted bronchoscopy using the Ion system has the potential to grow if it can offer greater patient value than non-Ion alternatives and competitive total economics for healthcare providers.
In 2022, approximately 23,500 biopsy procedures were performed with Ion systems, compared to approximately 7,400 and 1,700 biopsy procedures performed with Ion systems in 2021 and 2020, respectively. The increase in our overall procedure volume in 2022 reflects a larger installed base of approximately 321 systems, an increase of 149% compared to the installed base of approximately 129 systems as of 2021. Currently, the vast majority of Ion biopsy procedures are performed in the U.S.
Recent Business Events and Trends
Procedures
Overall. Total da Vinci procedures performed by our customers grew approximately 19% for the three months ended September 30, 2023, compared to approximately 20% for the three months ended September 30, 2022. Total da Vinci procedures performed by our customers grew approximately 22% for the nine months ended September 30, 2023, compared to approximately 18% for the nine months ended September 30, 2022. The growth in the third quarter 2022 procedure results partially reflect disruption caused by the COVID-19 pandemic in the comparative third quarter 2021 procedure results. The third quarter 2023 procedure growth was largely attributable to growth in U.S. general surgery, OUS urologic surgery, OUS general surgery, and U.S. gynecologic surgery.
U.S. Procedures. U.S. da Vinci procedures grew approximately 17% for the three months ended September 30, 2023, compared to approximately 18% for the three months ended September 30, 2022. U.S. da Vinci procedures grew approximately 20% for the nine months ended September 30, 2023, compared to approximately 15% for the nine months ended September 30, 2022. The growth in the third quarter 2022 procedure results partially reflect disruption caused by the COVID-19 pandemic in the comparative third quarter 2021 procedure results. The third quarter 2023 U.S. procedure growth was largely attributable to growth in general surgery procedures, most notably cholecystectomy and hernia repair procedures. Growth in bariatric procedures slowed during the second and third quarters of 2023, as compared to the growth we have experienced in recent prior quarters. It is unclear whether the slowing growth is a temporary pause as patients evaluate new drug therapies or if growth in U.S. bariatric procedures will continue to slow in future periods. Growth in the more mature gynecologic procedure category was more moderate but continued to exceed our recent historical trends.
OUS Procedures. OUS da Vinci procedures grew approximately 24% for the three months ended September 30, 2023, compared to approximately 24% for the three months ended September 30, 2022. OUS da Vinci procedures grew approximately 27% for the nine months ended September 30, 2023, compared to approximately 24% for the nine months ended September 30, 2022. The growth in the third quarter 2022 procedure results partially reflect disruption caused by the COVID-19 pandemic in the comparative third quarter 2021 procedure results. The third quarter 2023 OUS procedure growth was driven by continued growth in urologic procedures, including prostatectomies and partial nephrectomies, and earlier stage growth in general surgery (particularly colorectal) and gynecologic procedures. The third quarter 2023 OUS procedure growth rate reflects continued da Vinci adoption in European and Asian markets. We saw strong procedure growth in Japan, Germany, and the UK during the third quarter of 2023. We believe that growth in these global markets is being driven by increased acceptance among surgeons and health systems, supported by expanded global evidence validating the clinical and economic value of da Vinci procedures as well as increased surgeon training.
System Demand
We placed 312 da Vinci surgical systems in the third quarter of 2023, compared to 305 systems in the third quarter of 2022. The increase in system placements reflects an increase in demand for additional capacity by our customers as a result of procedure growth. This increase was partially offset by the impacts of a smaller number of third generation da Vinci systems available for trade-in and the macroeconomic challenges impacting our customers. We continue to see our customers challenged by staffing shortages, inflation, debt servicing costs, and other financial pressures, particularly in the U.S. As a result, we expect our customers to continue to be cautious in their overall capital spending. In addition, in July 2023, the Chinese government launched a one-year anti-corruption campaign targeting the healthcare sector. As a result of this anti-corruption campaign, medical device companies, including our Company, have experienced longer timelines in completing the tender process for capital equipment in China. In the third quarter of 2023, the effect of this anti-corruption campaign contributed to fewer systems being placed in China, and we expect tender delays to continue to impact system placements in China in the fourth quarter of 2023. Currently, the extent of the impact of this anti-corruption campaign on our business remains uncertain.
We expect that future placements of da Vinci surgical systems will be impacted by a number of factors: supply chain risks; economic and geopolitical factors; inflationary pressures; rising interest rates; hospital staffing shortages; the impact of the current COVID-19 pandemic, as noted in the COVID-19 Pandemic section above; the hospital response to the evolving healthcare environment; procedure growth rates; hospital consolidation trends; evolving system utilization and point of care dynamics; capital replacement trends, including a declining number of older generation systems available for trade-in transactions; additional reimbursements in various global markets, such as in Japan; the timing around governmental tenders and authorizations, as well as governmental actions impacting the tender process, such as the anti-corruption campaign in China; the timing of when we receive regulatory clearance in our other OUS markets for our da Vinci Xi, X, and SP surgical systems and related instruments; and the market response. Market acceptance of our da Vinci SP surgical system and the nature and timing of additional da Vinci SP regulatory indications may also impact future system placements.
Demand may also be impacted by competition, including from companies that have introduced products in the field of robotic-assisted medical procedures or have made explicit statements about their efforts to enter the field including, but not limited to, the following companies: Asensus Surgical, Inc.; avateramedical GmbH; Beijing Surgerii Robotics Company Limited; CMR Surgical Ltd.; Johnson & Johnson; Medicaroid Corporation; Medtronic plc; meerecompany Inc.; Noah Medical; Shandong Weigao Group Medical Polymer Company Ltd.; Shanghai Microport Medbot (Group) Co., Ltd.; and Shenzhen Edge Medical Co., Ltd.
Many of the above factors will also impact future demand for our Ion system, as we extend our commercial offering into diagnostics, along with additional factors associated with a new product introduction, including, but not limited to, our ability to optimize manufacturing and our supply chain, competition, clinical data to demonstrate value, and market acceptance.
Recent Product Introductions
SureForm 30 Curved-Tip Stapler and Reloads. In December 2021, we obtained FDA clearance for our 8 mm SureForm 30 Curved-Tip Stapler and reloads (gray, white, and blue) for use in general, thoracic, gynecologic, urologic, and pediatric surgery. We designed this instrument to help surgeons better visualize and reach anatomy through a combination of the 8 mm diameter instrument shaft and jaws, 120-degree cone of wristed articulation, and the curved tip. As it fits through the 8 mm da Vinci surgical system instrument cannula, the stapler allows different angles for surgeons to approach patient anatomy. Consistent with our other SureForm staplers, the 8 mm SureForm 30 Curved-Tip Stapler integrates SmartFire technology, which makes automatic adjustments to the firing process as staples are formed and the transection is made. The technology makes more than 1,000 measurements per second, helping achieve a consistent staple line. We completed initial evaluations of the 8 mm SureForm 30 stapler with certain customers in the U.S. in 2022. The full U.S. product launch is expected to occur in 2024, with other countries to follow. In October 2022, we received regulatory clearance in Japan to market our 8 mm SureForm 30 Curved-Tip and Straight-Tip Stapler instruments and reloads for use in general, thoracic (except for cardiac), gynecologic, and urologic surgery.
Third Quarter 2023 Operational and Financial Highlights
*•*Total revenue increased by 12% to $1.74 billion for the three months ended September 30, 2023, compared to $1.56 billion for the three months ended September 30, 2022.
*•*Approximately 567,000 da Vinci procedures were performed during the three months ended September 30, 2023, an increase of 19% compared to approximately 475,000 da Vinci procedures for the three months ended September 30, 2022.
*•*Approximately 14,500 Ion procedures were performed during the three months ended September 30, 2023, an increase of 125% compared to approximately 6,500 Ion procedures for the three months ended September 30, 2022.
*•*Instruments and accessories revenue increased by 23% to $1.07 billion for the three months ended September 30, 2023, compared to $0.87 billion for the three months ended September 30, 2022.
*•*Systems revenue decreased by 11% to $379 million for the three months ended September 30, 2023, compared to $426 million during the three months ended September 30, 2022.
*•*During the three months ended September 30, 2023, we placed 312 da Vinci surgical systems compared to 305 systems during the three months ended September 30, 2022.
*•*As of September 30, 2023, we had a da Vinci surgical system installed base of approximately 8,285 systems, an increase of 13% compared to the installed base of approximately 7,364 systems as of September 30, 2022.
- Utilization of da Vinci surgical systems, measured in terms of procedures per system per year, increased 6% relative to the third quarter of 2022.
*•*During the three months ended September 30, 2023, we placed 55 Ion systems compared to 50 systems during the three months ended September 30, 2022.
*•*As of September 30, 2023, we had an Ion system installed base of approximately 490 systems, an increase of 93% compared to the installed base of approximately 254 systems as of September 30, 2022.
*•*Gross profit as a percentage of revenue was 66.9% for the three months ended September 30, 2023, compared to 67.6% for the three months ended September 30, 2022.
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Operating income increased by 17% to $466 million for the three months ended September 30, 2023, compared to $399 million during the three months ended September 30, 2022. Operating income included $157 million and $139 million of share-based compensation expense related to employee stock plans and $12.6 million and $8.2 million of intangible asset-related charges for the three months ended September 30, 2023, and 2022, respectively.
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As of September 30, 2023, we had $7.52 billion in cash, cash equivalents, and investments. Cash, cash equivalents, and investments increased by $0.78 billion, compared to $6.74 billion as of December 31, 2022, primarily as a result of cash provided by operating activities, proceeds from stock option exercises and employee stock purchases, and unrealized gains on interest bearing debt securities classified as available for sale, partially offset by cash used in capital expenditures, share repurchases of $0.35 billion, and taxes paid related to net share settlements of equity awards.
Results of Operations
The following table sets forth, for the periods indicated, certain unaudited Condensed Consolidated Statements of Income information (in millions, except percentages):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | % of Total Revenue | 2022 | % of Total Revenue | 2023 | % of Total Revenue | 2022 | % of Total Revenue | ||||||||||||||||||||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Product | $ | 1,450.8 | 83 | % | $ | 1,297.5 | 83 | % | $ | 4,332.4 | 83 | % | $ | 3,806.3 | 83 | % | |||||||||||||||||||||||||||||||
| Service | 292.9 | 17 | % | 259.9 | 17 | % | 863.4 | 17 | % | 760.9 | 17 | % | |||||||||||||||||||||||||||||||||||
| Total revenue | 1,743.7 | 100 | % | 1,557.4 | 100 | % | 5,195.8 | 100 | % | 4,567.2 | 100 | % | |||||||||||||||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| Product | 489.5 | 28 | % | 421.6 | 27 | % | 1,480.5 | 29 | % | 1,239.9 | 27 | % | |||||||||||||||||||||||||||||||||||
| Service | 87.0 | 5 | % | 83.7 | 5 | % | 263.2 | 5 | % | 242.2 | 5 | % | |||||||||||||||||||||||||||||||||||
| Total cost of revenue | 576.5 | 33 | % | 505.3 | 32 | % | 1,743.7 | 34 | % | 1,482.1 | 32 | % | |||||||||||||||||||||||||||||||||||
| Product gross profit | 961.3 | 55 | % | 875.9 | 56 | % | 2,851.9 | 54 | % | 2,566.4 | 56 | % | |||||||||||||||||||||||||||||||||||
| Service gross profit | 205.9 | 12 | % | 176.2 | 12 | % | 600.2 | 12 | % | 518.7 | 12 | % | |||||||||||||||||||||||||||||||||||
| Gross profit | 1,167.2 | 67 | % | 1,052.1 | 68 | % | 3,452.1 | 66 | % | 3,085.1 | 68 | % | |||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 452.0 | 26 | % | 436.1 | 28 | % | 1,396.8 | 27 | % | 1,245.6 | 27 | % | |||||||||||||||||||||||||||||||||||
| Research and development | 249.4 | 14 | % | 217.1 | 14 | % | 738.7 | 14 | % | 634.9 | 15 | % | |||||||||||||||||||||||||||||||||||
| Total operating expenses | 701.4 | 40 | % | 653.2 | 42 | % | 2,135.5 | 41 | % | 1,880.5 | 42 | % | |||||||||||||||||||||||||||||||||||
| Income from operations | 465.8 | 27 | % | 398.9 | 26 | % | 1,316.6 | 25 | % | 1,204.6 | 26 | % | |||||||||||||||||||||||||||||||||||
| Interest and other income, net | 56.2 | 3 | % | 3.9 | — | % | 126.4 | 2 | % | 7.5 | — | % | |||||||||||||||||||||||||||||||||||
| Income before taxes | 522.0 | 30 | % | 402.8 | 26 | % | 1,443.0 | 27 | % | 1,212.1 | 26 | % | |||||||||||||||||||||||||||||||||||
| Income tax expense | 102.2 | 6 | % | 78.1 | 5 | % | 236.4 | 4 | % | 204.4 | 4 | % | |||||||||||||||||||||||||||||||||||
| Net income | 419.8 | 24 | % | 324.7 | 21 | % | 1,206.6 | 23 | % | 1,007.7 | 22 | % | |||||||||||||||||||||||||||||||||||
| Less: net income attributable to noncontrolling interest in joint venture | 4.1 | — | % | 0.7 | — | % | 14.8 | — | % | 10.3 | — | % | |||||||||||||||||||||||||||||||||||
| Net income attributable to Intuitive Surgical, Inc. | $ | 415.7 | 24 | % | $ | 324.0 | 21 | % | $ | 1,191.8 | 23 | % | $ | 997.4 | 22 | % | |||||||||||||||||||||||||||||||
Total Revenue
Total revenue increased by 12% to $1.74 billion for the three months ended September 30, 2023, compared to $1.56 billion for the three months ended September 30, 2022, resulting from 23% higher instruments and accessories revenue and 13% higher service revenue, partially offset by 11% lower systems revenue.
Total revenue increased by 14% to $5.20 billion for the nine months ended September 30, 2023, compared to $4.57 billion for the nine months ended September 30, 2022, resulting from 22% higher instruments and accessories revenue and 13% higher service revenue, partially offset by 2% lower systems revenue.
Revenue denominated in foreign currencies as a percentage of total revenue was approximately 24% and 25% for the three and nine months ended September 30, 2023, respectively, and 22% and 23% for the three and nine months ended September 30, 2022, respectively. We generally sell our products and services in local currencies where we have direct distribution channels. Foreign currency rate fluctuations, as determined by comparing current period revenue in USD to current period revenue in local currency using the same foreign exchange rates as the prior year same period, net of the impacts from foreign currency hedging, had a favorable impact on OUS total revenue of $8 million and an unfavorable impact on OUS total revenue of $49 million for the three months ended September 30, 2023, and 2022, respectively. Foreign currency rate fluctuations, net of the impacts from foreign currency hedging, had an unfavorable impact on OUS total revenue of $38 million and an unfavorable impact on OUS total revenue of $102 million for the nine months ended September 30, 2023, and 2022, respectively.
Revenue generated in the U.S. accounted for 68% and 66% of total revenue in the three and nine months ended September 30, 2023, respectively, and 70% and 67% of total revenue in the three and nine months ended September 30, 2022, respectively. We believe that U.S. revenue has accounted for the large majority of total revenue due to U.S. patients’ ability to choose their provider and method of treatment, reimbursement structures supportive of innovation and MIS, and our initial investments focused on U.S. infrastructure. We have been investing in our business in the OUS markets, and our OUS procedures have grown faster in proportion to U.S. procedures. We expect that our OUS procedures and revenue will make up a greater portion of our business in the long term.
The following table summarizes our revenue and system unit placements for the three and nine months ended September 30, 2023, and 2022, respectively (in millions, except percentages and unit placements):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Instruments and accessories | $ | 1,071.4 | $ | 871.6 | $ | 3,132.9 | $ | 2,577.2 | |||||||||||||||
| Systems | 379.4 | 425.9 | 1,199.5 | 1,229.1 | |||||||||||||||||||
| Total product revenue | 1,450.8 | 1,297.5 | 4,332.4 | 3,806.3 | |||||||||||||||||||
| Services | 292.9 | 259.9 | 863.4 | 760.9 | |||||||||||||||||||
| Total revenue | $ | 1,743.7 | $ | 1,557.4 | $ | 5,195.8 | $ | 4,567.2 | |||||||||||||||
| U.S. | $ | 1,180.2 | $ | 1,083.0 | $ | 3,432.6 | $ | 3,058.9 | |||||||||||||||
| OUS | 563.5 | 474.4 | 1,763.2 | 1,508.3 | |||||||||||||||||||
| Total revenue | $ | 1,743.7 | $ | 1,557.4 | $ | 5,195.8 | $ | 4,567.2 | |||||||||||||||
| % of Revenue – U.S. | 68% | 70% | 66% | 67% | |||||||||||||||||||
| % of Revenue – OUS | 32% | 30% | 34% | 33% | |||||||||||||||||||
| Instruments and accessories | $ | 1,071.4 | $ | 871.6 | $ | 3,132.9 | $ | 2,577.2 | |||||||||||||||
| Services | 292.9 | 259.9 | 863.4 | 760.9 | |||||||||||||||||||
| Operating lease revenue | 127.1 | 97.5 | 361.8 | 273.7 | |||||||||||||||||||
| Total recurring revenue | $ | 1,491.4 | $ | 1,229.0 | $ | 4,358.1 | $ | 3,611.8 | |||||||||||||||
| % of Total revenue | 86% | 79% | 84% | 79% | |||||||||||||||||||
| Da Vinci Surgical System Placements by Region | |||||||||||||||||||||||
| U.S. unit placements | 159 | 175 | 457 | 511 | |||||||||||||||||||
| OUS unit placements | 153 | 130 | 498 | 384 | |||||||||||||||||||
| Total unit placements* | 312 | 305 | 955 | 895 | |||||||||||||||||||
| *Systems placed under fixed-payment operating lease arrangements (included in total unit placements) | 70 | 59 | 212 | 192 | |||||||||||||||||||
| *Systems placed under usage-based operating lease arrangements (included in total unit placements) | 93 | 54 | 246 | 146 | |||||||||||||||||||
| Da Vinci Surgical System Placements involving System Trade-ins | |||||||||||||||||||||||
| Unit placements involving trade-ins | 62 | 71 | 189 | 235 | |||||||||||||||||||
| Unit placements not involving trade-ins | 250 | 234 | 766 | 660 | |||||||||||||||||||
| Ion System Placements** | 55 | 50 | 169 | 125 | |||||||||||||||||||
| **Systems placed under fixed-payment operating lease arrangements (included in total unit placements) | 17 | 19 | 49 | 50 | |||||||||||||||||||
| **Systems placed under usage-based operating lease arrangements (included in total unit placements) | 10 | 8 | 39 | 17 |
Product Revenue
Three Months Ended September 30, 2023
Product revenue increased by 12% to $1.45 billion for the three months ended September 30, 2023, compared to $1.30 billion for the three months ended September 30, 2022.
Instruments and accessories revenue increased by 23% to $1.07 billion for the three months ended September 30, 2023, compared to $0.87 billion for the three months ended September 30, 2022. The increase in instruments and accessories revenue was primarily driven by approximately 19% higher da Vinci procedure volume and higher pricing for instruments and accessories, partially offset by customer buying patterns. The third quarter 2023 U.S. da Vinci procedure growth was approximately 17%, driven by growth in general surgery procedures, most notably cholecystectomy and hernia repair procedures, as well as moderate growth in the more mature gynecologic procedure category. The third quarter 2023 OUS da Vinci procedure growth was approximately 24%, driven by continued growth in urologic procedures, including prostatectomies and partial nephrectomies, and earlier stage growth in general surgery (particularly colorectal) and gynecologic procedures. Geographically, the third quarter 2023 OUS da Vinci procedure growth was driven by procedure expansion in a number of markets with particular strength in Japan, Germany, and the UK.
Systems revenue was $379 million for the three months ended September 30, 2023, compared to $426 million for the three months ended September 30, 2022. The lower third quarter 2023 system revenue was primarily driven by a higher proportion of da Vinci system placements under operating leases (partially offset by more systems placements), lower third quarter 2023 ASPs, and lower sales-type lease revenue, partially offset by higher operating lease revenue.
During the third quarter of 2023, 312 da Vinci surgical systems were placed compared to 305 systems during the third quarter of 2022. By geography, 159 systems were placed in the U.S., 60 in Europe, 72 in Asia, and 21 in other markets during the third quarter of 2023, compared to 175 systems placed in the U.S., 54 in Europe, 64 in Asia, and 12 in other markets during the third quarter of 2022. The increase in system placements was primarily driven by the demand for additional capacity by our customers due to the procedure growth, partially offset by a smaller number of third generation da Vinci systems available for trade-in, the macroeconomic challenges impacting our U.S. customers, and the effect of the anti-corruption campaign in China. As of September 30, 2023, we had a da Vinci surgical system installed base of approximately 8,285 systems, compared to an installed base of approximately 7,364 systems as of September 30, 2022. The incremental system placements reflect continued procedure growth and further customer validation that robotic-assisted surgery addresses their quadruple aim objectives.
The following table summarizes our da Vinci system placements and systems installed at customers under leasing arrangements for three months ended September 30, 2023, and 2022:
| Three Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Da Vinci System Placements Under Leasing Arrangements | |||||||||||
| Fixed-payment operating lease arrangements | 70 | 59 | |||||||||
| Usage-based operating lease arrangements | 93 | 54 | |||||||||
| Total da Vinci system placements under operating lease arrangements | 163 | 113 | |||||||||
| % of Total da Vinci system placements | 52% | 37% | |||||||||
| Sales-type lease arrangements | 11 | 17 | |||||||||
| Total da Vinci system placements under leasing arrangements | 174 | 130 | |||||||||
| Da Vinci System Installed Base under Operating Leasing Arrangements | |||||||||||
| Fixed-payment operating lease arrangements | 1,151 | 967 | |||||||||
| Usage-based operating lease arrangements | 913 | 595 | |||||||||
| Total da Vinci system installed base under operating leasing arrangements | 2,064 | 1,562 | |||||||||
Operating lease revenue, including the contribution from Ion systems, was $127 million for the three months ended September 30, 2023, compared to $98 million for the three months ended September 30, 2022. Revenue from Lease Buyouts was $17.2 million for the three months ended September 30, 2023, compared to $17.4 million for the three months ended September 30, 2022. We expect revenue from Lease Buyouts to fluctuate from period to period depending on the timing of when, and if, customers choose to exercise the buyout options embedded in their leases.
The da Vinci surgical system ASP, excluding systems placed under fixed-payment or usage-based operating lease arrangements and Ion systems, was approximately $1.40 million for the three months ended September 30, 2023, compared to approximately $1.50 million for the three months ended September 30, 2022. The lower third quarter 2023 ASP was largely
driven by higher pricing discounts and unfavorable geographic mix. ASP fluctuates from period to period based on geographic and product mix, product pricing, systems placed involving trade-ins, and changes in foreign exchange rates.
During the third quarter of 2023, 55 Ion systems were placed compared to 50 systems during the third quarter of 2022. As of September 30, 2023, we had an Ion system installed base of approximately 490 systems, compared to an installed base of approximately 254 systems as of September 30, 2022.
The following table summarizes our Ion system placements and systems installed at customers under leasing arrangements for three months ended September 30, 2023, and 2022:
| Three Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Ion System Placements Under Leasing Arrangements | |||||||||||
| Fixed-payment operating lease arrangements | 17 | 19 | |||||||||
| Usage-based operating lease arrangements | 10 | 8 | |||||||||
| Total Ion system placements under operating lease arrangements | 27 | 27 | |||||||||
| % of Total Ion system placements | 49% | 54% | |||||||||
| Sales-type leases | — | 2 | |||||||||
| Total Ion system placements under leasing arrangements | 27 | 29 | |||||||||
| Ion System Installed Base under Operating Leasing Arrangements | |||||||||||
| Total Ion system installed base under leasing arrangements | 194 | 112 |
Nine Months Ended September 30, 2023
Product revenue increased by 14% to $4.33 billion for the nine months ended September 30, 2023, compared to $3.81 billion for the nine months ended September 30, 2022.
Instruments and accessories revenue increased by 22% to $3.13 billion for the nine months ended September 30, 2023, compared to $2.58 billion for the nine months ended September 30, 2022. The increase in instruments and accessories revenue was primarily driven by approximately 22% higher da Vinci procedure volume and higher pricing for instruments and accessories, partially offset by customer buying patterns and unfavorable foreign currency impacts. The year-to-date 2023 U.S. da Vinci procedure growth was approximately 20%, driven by strong growth in general surgery procedures, most notably cholecystectomy, hernia repair, and bariatric procedures, as well as moderate growth in the more mature gynecologic procedure category. The year-to-date 2023 OUS da Vinci procedure growth was approximately 27%, driven by continued growth in urologic procedures, most notably prostatectomy and partial nephrectomy procedures, and earlier stage growth in general surgery (particularly colorectal) and gynecologic procedures. Both growth rates were impacted by the disruption caused by the COVID-19 pandemic, as noted in the COVID-19 Pandemic section above. Geographically, the year-to-date 2023 OUS da Vinci procedure growth was driven by procedure expansion in a number of markets with particular strength in Japan, Germany, China, and the UK.
Systems revenue decreased by 2% to $1.20 billion for the nine months ended September 30, 2023, compared to $1.23 billion for the nine months ended September 30, 2022. The lower year-to-date 2023 system revenue was primarily driven by lower sales-type lease revenue, lower year-to-date 2023 ASPs, and a higher proportion of da Vinci system placements under operating leases (partially offset by more systems placements), partially offset by higher operating lease revenue.
During the nine months ended September 30, 2023, a total of 955 da Vinci surgical systems were placed compared to 895 systems during the nine months ended September 30, 2022. By geography, 457 systems were placed in the U.S., 237 in Europe, 195 in Asia, and 66 in other markets during the nine months ended September 30, 2023, compared to 511 systems placed in the U.S., 210 in Europe, 152 in Asia, and 22 in other markets during the nine months ended September 30, 2022. The increase in system placements was primarily driven by the demand for additional capacity by our customers due to the procedure growth, partially offset by a smaller number of third generation da Vinci systems available for trade-in along with the macroeconomic challenges impacting our U.S. customers.
The following table summarizes our da Vinci system placements under leasing arrangements for nine months ended September 30, 2023, and 2022:
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Da Vinci System Placements Under Leasing Arrangements | |||||||||||
| Fixed-payment operating lease arrangements | 212 | 192 | |||||||||
| Usage-based operating lease arrangements | 246 | 146 | |||||||||
| Total da Vinci system placements under operating lease arrangements | 458 | 338 | |||||||||
| % of Total da Vinci system placements | 48% | 38% | |||||||||
| Sales-type lease arrangements | 31 | 72 | |||||||||
| Total da Vinci system placements under leasing arrangements | 489 | 410 |
Operating lease revenue, including the impact of Ion systems, was $362 million for the nine months ended September 30, 2023, compared to $274 million for the nine months ended September 30, 2022. Revenue from Lease Buyouts was $53.5 million for the nine months ended September 30, 2023, compared to $55.4 million for the nine months ended September 30, 2022. We expect revenue from Lease Buyouts to fluctuate period to period depending on the timing of when, and if, customers choose to exercise the buyout options embedded in their leases.
The da Vinci surgical system ASP, excluding the impact of systems placed under fixed-payment or usage-based operating lease arrangements and Ion systems, was approximately $1.42 million for the nine months ended September 30, 2023, compared to approximately $1.52 million for the nine months ended September 30, 2022. The lower year-to-date 2023 ASP was largely driven by higher pricing discounts, unfavorable product mix, foreign currency impacts, and unfavorable geographic mix, partially offset by fewer trade-ins. ASP fluctuates from period to period based on geographic and product mix, product pricing, systems placed involving trade-ins, and changes in foreign exchange rates.
The following table summarizes our Ion system placements under leasing arrangements for nine months ended September 30, 2023, and 2022:
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Ion System Placements Under Leasing Arrangements | |||||||||||
| Fixed-payment operating lease arrangements | 49 | 50 | |||||||||
| Usage-based operating lease arrangements | 39 | 17 | |||||||||
| Total Ion system placements under operating lease arrangements | 88 | 67 | |||||||||
| % of Total Ion system placements | 52% | 54% | |||||||||
| Sales-type lease arrangements | 5 | 7 | |||||||||
| Total Ion system placements under leasing arrangements | 93 | 74 |
Service Revenue
Service revenue increased by 13% to $293 million for the three months ended September 30, 2023, compared to $260 million for the three months ended September 30, 2022. The increase in service revenue was primarily driven by a larger installed base of systems producing service revenue.
Service revenue increased by 13% to $863 million for the nine months ended September 30, 2023, compared to $761 million for the nine months ended September 30, 2022. The increase in service revenue was primarily driven by a larger installed base of systems producing service revenue, partially offset by unfavorable foreign currency impacts.
Gross Profit
Product gross profit for the three months ended September 30, 2023, increased by 10% to $961 million, representing 66.3% of product revenue, compared to $876 million, representing 67.5% of product revenue, for the three months ended September 30, 2022. The higher product gross profit for the three months ended September 30, 2023, was primarily driven by higher product revenue, partially offset by lower product gross profit margin. The lower product gross profit margin for the three months ended September 30, 2023, was primarily driven by lower third quarter 2023 system ASPs, an unfavorable product mix, and higher costs related to scrap and components, partially offset by higher pricing for instruments and accessories.
Product gross profit for the nine months ended September 30, 2023, increased by 11% to $2.85 billion, representing 65.8% of product revenue, compared to $2.57 billion, representing 67.4% of product revenue, for the nine months ended September 30, 2022. The higher product gross profit for the nine months ended September 30, 2023, was primarily driven by higher product revenue, partially offset by lower product gross profit margin. The lower product gross profit margin for the nine months ended September 30, 2023, was primarily driven by lower year-to-date 2023 system ASPs, an unfavorable product mix, higher costs related to scrap and components, and increased inventory reserves, partially offset by higher pricing for instruments and accessories.
Product gross profit for the three and nine months ended September 30, 2023, included share-based compensation expense of $22.6 million and $60.3 million, respectively, compared with $22.0 million and $61.0 million for the three and nine months ended September 30, 2022, respectively. Product gross profit for the three and nine months ended September 30, 2023, included intangible assets amortization expense of $3.6 million and $10.1 million, respectively, compared with $5.1 million and $12.4 million for the three and nine months ended September 30, 2022, respectively.
Service gross profit for the three months ended September 30, 2023, increased by 17% to $206 million, representing 70.3% of service revenue, compared to $176 million, representing 67.8% of service revenue, for the three months ended September 30, 2022. The higher service gross profit for the three months ended September 30, 2023, was primarily driven by higher service revenue, reflecting a larger installed base of systems, and higher service gross profit margin. The higher service gross profit margin for the three months ended September 30, 2023, was primarily driven by lower average repair costs and favorable impacts from leveraging volume of repairs.
Service gross profit for the nine months ended September 30, 2023, increased by 16% to $600 million, representing 69.5% of service revenue, compared to $519 million, representing 68.2% of service revenue, for the nine months ended September 30, 2022. The higher service gross profit for the nine months ended September 30, 2023, was primarily driven by higher service revenue, reflecting a larger installed base of systems, and higher service gross profit margin. The higher service gross profit margin for the nine months ended September 30, 2023, was primarily driven by favorable impacts from leveraging volume of repairs.
Service gross profit for the three and nine months ended September 30, 2023, included share-based compensation expense of $7.3 million and $21.3 million, respectively, compared with $6.3 million and $17.7 million for the three and nine months ended September 30, 2022, respectively. Service gross profit for the three and nine months ended September 30, 2023, included intangible assets amortization expense of $0.1 million and $0.5 million, respectively, compared with $0.8 million and $1.2 million for the three and nine months ended September 30, 2022, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include costs for sales, marketing, and administrative personnel, sales and marketing activities, trade show expenses, legal expenses, regulatory fees, and general corporate expenses.
Selling, general and administrative expenses for the three months ended September 30, 2023, increased by 4% to $452 million, compared to $436 million for the three months ended September 30, 2022. The increase in selling, general and administrative expenses for the three months ended September 30, 2023, was primarily driven by higher headcount, resulting in increased fixed and share-based compensation expense as well as higher variable compensation, and higher travel and training expenses, partially offset by lower legal costs.
Selling, general and administrative expenses for the nine months ended September 30, 2023, increased by 12% to $1.40 billion, compared to $1.25 billion for the nine months ended September 30, 2022. The increase in selling, general and administrative expenses for the nine months ended September 30, 2023, was primarily driven by higher headcount, resulting in increased fixed and share-based compensation expense as well as higher variable compensation, and higher travel, training, and marketing expenses, partially offset by lower legal costs.
Selling, general and administrative expenses for the three and nine months ended September 30, 2023, included share-based compensation expense of $71.9 million and $206.6 million, respectively, compared with $68.0 million and $191.0 million for the three and nine months ended September 30, 2022, respectively. Selling, general and administrative expenses for the three and nine months ended September 30, 2023, included intangible assets amortization expense of $0.8 million and $2.5 million, respectively, compared with $1.4 million and $4.6 million for the three and nine months ended September 30, 2022, respectively.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expenses include costs associated with the design, development, testing, and significant enhancement of our products. Our main product development initiatives include multi-port, Ion, and SP platform investments and our digital products and services.
Research and development expenses for the three months ended September 30, 2023, increased by 15% to $249 million, compared to $217 million for the three months ended September 30, 2022. The increase in research and development expenses for the three months ended September 30, 2023, was primarily driven by higher personnel-related expenses, including share-based compensation expense, and higher intangible asset-related charges.
Research and development expenses for the nine months ended September 30, 2023, increased by 16% to $739 million, compared to $635 million for the nine months ended September 30, 2022. The increase in research and development expenses for the nine months ended September 30, 2023, was primarily driven by higher personnel-related expenses, including share-based compensation expense, and other project costs incurred to support a broader set of product development initiatives, including future generations of robotics, Ion and SP platform investments, and digital investments.
Research and development expenses for the three and nine months ended September 30, 2023, included share-based compensation expense of $55.3 million and $157.7 million, respectively, compared with $42.3 million and $117.6 million for the three and nine months ended September 30, 2022, respectively. Research and development expenses for the three and nine months ended September 30, 2023, included intangible asset charges of $8.1 million and $11.0 million, respectively, compared with $0.9 million and $11.9 million for the three and nine months ended September 30, 2022, respectively.
Research and development expenses fluctuate with project timing. Based upon our broader set of product development initiatives and the stage of the underlying projects, we expect to continue to make substantial investments in research and development and anticipate that research and development expenses will continue to increase in the future.
Interest And Other Income, Net
Interest and other income, net, for the three months ended September 30, 2023, and 2022, increased by 1,341% to $56.2 million, compared to $3.9 million for the three months ended September 30, 2022. The increase in interest and other income, net, for the three months ended September 30, 2023, was primarily driven by higher interest income earned due to an increase in average interest rates (despite lower average cash and investment balances), as well as lower foreign exchange losses.
Interest and other income, net, for the nine months ended September 30, 2023, increased by 1,585% to $126.4 million, compared to $7.5 million for nine months ended September 30, 2022. The increase in interest and other income, net, for the nine months ended September 30, 2023, was primarily driven by higher interest income earned due to an increase in average interest rates (despite lower average cash and investment balances), lower foreign exchange losses, and lower unrealized losses on investments resulting from strategic arrangements.
Income Tax Expense
Income tax expense for the three months ended September 30, 2023, was $102.2 million, or 19.6% of income before taxes, compared to $78.1 million, or 19.4% of income before taxes, for the three months ended September 30, 2022. Income tax expense for the nine months ended September 30, 2023, was $236.4 million, or 16.4% of income before taxes, compared to $204.4 million, or 16.9% of income before taxes, for the nine months ended September 30, 2022.
Our effective tax rates for the three and nine months ended September 30, 2023, and 2022, differed from the U.S. federal statutory rate of 21% primarily due to the tax benefits associated with employee equity plans, the effect of income earned by certain overseas entities being taxed at rates lower than the federal statutory rate, and the federal research and development credit benefit, partially offset by U.S. tax on foreign earnings and state income taxes (net of the federal benefit).
Our higher effective tax rate for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, was primarily due to a lower tax rate benefit from excess tax benefits, as discussed below, partially offset by a more favorable jurisdictional earnings mix.
Our provision for income taxes for the three months ended September 30, 2023, and 2022, included excess tax benefits associated with employee equity plans of $22.0 million and $18.1 million, respectively, which reduced our effective tax rate by 4.2 and 4.5 percentage points, respectively. The amount of excess tax benefits or deficiencies will fluctuate from period to period based on the price of our stock, the volume of share-based awards settled or vested, and the value assigned to employee equity awards under GAAP, which results in increased income tax expense volatility.
Our lower effective tax rate for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was primarily due to a more favorable jurisdictional earnings mix, partially offset by a lower tax rate benefit from excess tax benefits, as discussed below.
Our provision for income taxes for the nine months ended September 30, 2023, and 2022, included excess tax benefits associated with employee equity plans of $86.2 million and $80.4 million, respectively, which reduced our effective tax rate by 6.0 and 6.6 percentage points, respectively.
On August 16, 2022, the Inflation Reduction Act was enacted in the U.S. and introduced a 15% alternative minimum tax based on the financial statement income of the CAMT, effective January 1, 2023. There is no impact on our provision for income taxes from the CAMT for the three and nine months ended September 30, 2023.
We file federal, state, and foreign income tax returns in many jurisdictions in the U.S. and OUS. Years before 2016 are considered closed for most significant jurisdictions. Certain of our unrecognized tax benefits could change due to activities of various tax authorities, including evolving interpretations of existing tax laws in the jurisdictions in which we operate, potential assessment of additional tax, possible settlement of audits, or through normal expiration of various statutes of limitations, which could affect our effective tax rate in the period in which they change. Due to the uncertainty related to the timing and potential outcome of audits, we cannot estimate the range of reasonably possible changes in unrecognized tax benefits that may occur in the next 12 months.
We are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. The outcome of these audits cannot be predicted with certainty. Management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. If any issues addressed in our tax audits are resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs.
Net Income Attributable to Noncontrolling Interest in Joint Venture
Net income attributable to noncontrolling interest in Joint Venture for the three months ended September 30, 2023, and 2022, was $4.1 million and $0.7 million, respectively.
Net income attributable to noncontrolling interest in Joint Venture for the nine months ended September 30, 2023, and 2022, was $14.8 million and $10.3 million, respectively.
Liquidity and Capital Resources
Sources and Uses of Cash and Cash Equivalents
Our principal source of liquidity is cash provided by operations and by the issuance of common stock through the exercise of stock options and our employee stock purchase program. Cash and cash equivalents plus short- and long-term investments increased by $0.78 billion to $7.52 billion as of September 30, 2023, from $6.74 billion as of December 31, 2022, primarily as a result of cash provided by operating activities, proceeds from stock option exercises and employee stock purchases, and unrealized gains on interest bearing debt securities classified as available for sale, partially offset by cash used in capital expenditures, share repurchases of $0.35 billion, and taxes paid related to net share settlements of equity awards.
Our cash requirements depend on numerous factors, including market acceptance of our products, the resources we devote to developing and supporting our products, and other factors. We expect to continue to devote substantial resources to expand procedure adoption and acceptance of our products. We have made substantial investments in our commercial operations, product development activities, facilities, and intellectual property. Based on our business model, we anticipate that we will continue to be able to fund future growth through cash provided by our operations. We believe that our current cash, cash equivalents, and investment balances, together with income to be derived from our business, will be sufficient to meet our liquidity requirements for the foreseeable future. However, we may experience reduced cash flow from operations as a result of the risk of a recession along with other macroeconomic and geopolitical headwinds.
See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Form 10-K for the fiscal year ended December 31, 2022, for discussion on the impact of interest rate risk and market risk on our investment portfolio.
Condensed Consolidated Cash Flow Data
The following table summarizes our cash flows for the nine months ended September 30, 2023, and 2022 (in millions):
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | $ | 1,585.5 | $ | 1,052.9 | |||||||
| Investing activities | 684.1 | 796.0 | |||||||||
| Financing activities | (256.1) | (1,608.8) | |||||||||
| Effect of exchange rates on cash, cash equivalents, and restricted cash | 8.7 | 7.9 | |||||||||
| Net increase in cash, cash equivalents, and restricted cash | $ | 2,022.2 | $ | 248.0 | |||||||
Operating Activities
For the nine months ended September 30, 2023, net cash provided by operating activities of $1.59 billion exceeded our net income of $1.21 billion, primarily due to the following factors:
1.Our net income included non-cash charges of $717 million, consisting primarily of the following significant items: share-based compensation of $442 million; depreciation expense and losses on the disposal of property, plant, and equipment of $284 million; changes in deferred income taxes of $(61) million; and deferred commission amortization of $23 million.
2.The non-cash charges outlined above were partially offset by changes in operating assets and liabilities that resulted in $338 million of cash used in operating activities during the nine months ended September 30, 2023. Inventory, including the transfer of equipment from inventory to property, plant, and equipment, increased by $528 million, primarily to address the growth in the business as well as to mitigate risks of disruption that could arise from global supply chain shortages. Refer to Note 4 to the Financial Statements for further details in the supplemental cash flow information. Accrued compensation and employee benefits decreased by $27 million, primarily due to payments of 2022 incentive compensation. The unfavorable impact of these items on cash provided by operating activities was partially offset by a $172 million increase in other accrued liabilities, primarily due to an increase in income taxes payable from the timing of income tax payments as a result of tax relief availed to federally declared disaster areas, partially offset by payments of litigation-related fees, a $38 million decrease in prepaid expenses and other assets increased, primarily due to a decrease in net investments in sales-type leases, and a $28 million increase in accounts payable, primarily due to the timing of billing and payments.
Investing Activities
Net cash provided by investing activities for the nine months ended September 30, 2023, consisted primarily of proceeds from maturities and sales of investments, net of purchases, of $1.32 billion, partially offset by $629 million paid for the acquisition of property, plant, and equipment. We invest predominantly in high quality, fixed income securities. Our investment portfolio may, at any time, contain investments in U.S. treasury and U.S. government agency securities, taxable and tax-exempt municipal notes, corporate notes and bonds, commercial paper, non-U.S. government agency securities, cash deposits, and money market funds.
Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2023, consisted primarily of cash used in the repurchase of approximately 1.5 million shares of our common stock for $350 million and taxes paid on behalf of employees related to net share settlements of equity awards of $155 million, partially offset by proceeds from stock option exercises and employee stock purchases of $252 million.
Capital Expenditures
Our capital expenditures are increasing as we continue to build the Company to supply our customers with highly differentiated products manufactured in highly automated factories to facilitate outstanding performance in product quality, availability, and cost. A significant portion of this investment involves the construction of facilities to expand our manufacturing and commercial capabilities. We have also been vertically integrating key technologies to develop a more robust supply chain and bring important products to market at attractive price points. These investments include increased ownership of our imaging pipelines and investments in strategic instruments and accessories technologies that allow us to serve our customers better. We expect these capital investments to increase significantly in 2023 to a range between $900 million and $1 billion, over half of which will be facilities-related investments. We intend to fund these capital investments with cash generated from operations.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based upon our Financial Statements, which have been prepared in accordance with GAAP. The preparation of these Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. On an ongoing basis, we evaluate our critical accounting estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no new or material changes to the critical accounting estimates discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, that are of significance, or potential significance, to the Company.
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