Intuitive Surgical Beats on Higher Revs
Intuitive Surgical (ISRG) reported first quarter 2013 earnings per share of $4.56 beating the Zacks Consensus Estimate of $4.00 while surpassing the year-ago results of $3.50. Net income was $188.9 million (or $4.56 per share), up 31.6% year over year.
Revenues
Intuitive Surgical reported revenues of $611.4 million for the first quarter, up 23% year over year. The results beat the Zacks Consensus Estimate of $581 million.
On a segment basis, the company reported revenues from instruments and accessories of $261.1 million, up 26% year over year, in the first quarter. The growth was driven by a 18% year-over-year increase in da Vinci surgical procedures. The growth in procedures was 20% upon exclusion of the effect of the leap year. Growth in international urology, U.S. gynecology and general surgery procedures was partly offset by a drop in prostatectomy procedures in the U.S.
Revenues from sales of systems were $255.9 million, up 24% year over year. The increase in systems revenue was due to higher sales of 164 da Vinci Systems compared with 140 systems in the year-ago quarter. Service revenue was $94.4 million, up 17% year over year, primarily due to growth in the base of da Vinci Surgical systems.
Margins
Intuitive Surgical enjoyed a gross margin of 71% in the reported quarter, down from 71.9% the year-ago quarter. The company reported operating expenses of $183.1 million in the quarter, up about 12.6% year over year. The increase was due to growth in selling, general and administrative expense (up 13.9%) and research and development expenditure (up 8.3%).
Operating income was $251 million, or about 41% of sales, in the reported quarter compared with $193 million, or 39% of sales, in the prior-year quarter.
Balance Sheet
Intuitive Surgical exited 2013 with cash, cash equivalents and investments of $3,116 million, up 6.7 year over year.
Outlook
Intuitive Surgical modified its procedure growth rate to the lower end of 20% to 23% from 20% to 23% earlier. The company expects revenues to grow at the higher end of 16% to 19% for 2013 from 16% to 19% earlier. Operating income continues to be forecast in a band of 38% to 39% of sales for 2013.
We expect a number of procedures that are currently completed either in an open surgical manner or with laparoscopy to be eventually replaced by da Vinci surgery, as robotic surgery becomes the standard of care in many instances. The company enjoys a virtual monopoly in robotic surgery with little competition.
Intuitive Surgical’s recurring revenue stream continues to be robust and provides a shield against cyclicality of revenues, arising from the sale of discretionary capital equipment to hospitals. However, we believe that until the global economy recovers fully, the stock may come under pressure as investors ponder whether lingering macro economic uncertainty weakens hospitals’ commitment to buy high-cost robotic systems.
The pace of adoption of robotic surgery may therefore be lumpy and growth in usage require acceptance from patients and training to medical practitioners. Intuitive competes with Accuray Inc. (ARAY) in certain niches.
Our rating factors in the attractive growth prospects of the company, given da Vinci system’s leading status as an enabler of robotic minimally invasive surgery. The installed base of the company continues to grow as hospitals feel compelled to upgrade their technology.
The stock carries a Zacks Rank #3 (Hold). Align Technology Inc. (ALGN) and The Cooper Companies Inc. (COO) carry Zacks Rank #2 (Buy) and are expected to do well.
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