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Intuitive Surgical (ISRG) Up on Q3 Earnings & Revenue Beat


Shares of Intuitive Surgical Inc. ISRG surged almost 0.7% to close at $721.73 following impressive quarterly results. The da Vinci system maker posted adjusted earnings of $5.39 per share in the third quarter of 2016, crushing the Zacks Consensus Estimate by $1.04, courtesy of stellar revenue growth. Also, the figure improved 19.8% on a year-over-year basis.

Revenues increased 15.8% year over year to $682.9 million, driven by higher procedural volume and growth across all business segments. Revenues were higher than the Zacks Consensus Estimate of $648 million as well. Recurring revenues totaled $478 million, representing almost 70% of the revenues in the quarter.

Quarter Highlights

Intuitive Surgical’s performance in the quarter was solid with rising customer adoption of procedures and growth in system placements.

The company announced a strategic tie-up with Shanghai Fosun Pharmaceuticals to develop, manufacture and sell robotic-assisted catheter-based medical devices for cost-effective treatment and diagnosis of lung cancer.

The third quarter was also notable in terms of clinical publications evaluating the da Vinci surgery platform. The company got several publications from the Indiana University, Acibadem University in Istanbul and more.

Procedure Details

Worldwide da Vinci procedure volumes grew approximately 14% year over year, thanks to stellar performances in U.S. general surgery and massive adoption of the system outside the U.S. Notably, the company shipped 134 da Vinci surgical systems, up from 117 in the third quarter of 2015.

In the U.S., increasing adoption of general surgery procedures, stupendous growth in urology procedures worldwide and modest growth in the urology and gynecology drove procedural volumes in the quarter. Additionally, growth in the segments of ventral and inguinal hernia repair, colon resection and lung resection was also encouraging.

Meanwhile, procedure growth in Europe was affected by reduced capital placements, while the same in Germany was reasonably strong.

Also, China, South Korea and Japan witnessed strong procedure growth. In China, half of the year-to-date procedure growth has been registered from categories outside urology. In fact, in South Korea, approximately 60% of the year-to-date procedures came from categories other than urology.

Revenue Details

Instruments and Accessories revenues grew 16.8% to $348 million in the quarter driven by a higher number of procedures and increased sales in stapling and vessel sealing products. Revenues realized per procedure were approximately $1,870 compared with $1,840 in the year-ago quarter.

INTUITIVE SURG Price, Consensus and EPS Surprise

INTUITIVE SURG Price, Consensus and EPS Surprise | INTUITIVE SURG Quote

System sales increased 17.8% to $205 million driven by higher revenues from operating lease activities. Intuitive Surgical placed 134 systems in the quarter, up from 117 in the year-ago quarter. Management at Intuitive Surgical noted that 15 systems were placed under operating lease transactions in the third quarter, compared with 13 systems in the year-ago quarter. At the end of the third quarter, there were 74 systems in the field under operating leases.

Intuitive Surgical generated approximately $4 million of revenues associated with operating leases in the reported quarter, compared with $2 million in the year-ago quarter, and $4 million in the second quarter of 2016.

Coming to Service, the company registered revenues of $130 million, up 11.1% on a year-over-year basis on growth in the installed base of da Vinci systems.

Outside the U.S., the company placed 49 systems compared with 37 in the year-ago quarter and 51 in the first quarter. The company noted that 18 were installed in Europe, 2 in China, 11 in Japan and 18 in other international markets.

Margin Details

Adjusted gross margin expanded 390 basis points (bps) to 71.6% in the reported quarter. However, taking the medical device tax refund, the company reported an adjusted gross margin of about 73.1% buoyed by lower product costs and improved manufacturing efficiencies.

Adjusted operating margin expanded 490 bps to 38.2% owing to lower research and development (R&D) expenses, which as a percentage of revenues, decreased 50 bps on a year-over-year basis. Selling, General and Administrative (SG&A) expenses, as a percentage of revenues, increased 170 bps.

Balance Sheet

Intuitive Surgical had cash, cash equivalents and investments of $4.2 billion as on Jun 30, 2016. The company aims to use this cash for capital allocation programs.


Intuitive Surgical forecasts 2016 procedural volumes in the range of 14% to 15%. The company anticipates system placements outside the U.S. to be unsatisfactory as some of the markets are in early stages of adoption.

The company expects a lower number of lease buyouts in the fourth quarter compared to the previous two quarters.

Meanwhile, Intuitive Surgical projects full-year 2016 adjusted gross profit margin at approximately 71.5% of net revenue, up from the previously guided range of 70% to 71% of net revenue. Notably, margin for the fourth quarter is lower than the just-reported quarter, primarily due to product mix.

Further, the company anticipates a 13% to 14% year-over-year increase in operating expenses in 2016, owing to continuous investments in robotic assisted surgery. The company expects non-cash stock compensation expenses in the band of $170 million to $180 million for 2016 compared with $168 million in 2015.

Per management, for the coming quarters, Intuitive Surgical is going to expand the usage of da Vinci in general and thoracic surgery, colorectal surgery and hernia repair. The company is also expected to gain prominence in the markets of Europe and Asia by enhancing its organizational capabilities.

Our Take

We believe that the growing adoption of Intuitive Surgical’s da Vinci system among physicians for general surgery, oncology, urology and gynecology procedures is a key growth catalyst. Moreover, increasing procedural volumes outside the U.S. present significant growth opportunity to the company.

Further, the joint venture with Shanghai-based Fosun pharma is considered a prudent move. However, we believe that the positive trends are mostly quarter-specific and the company has to make efforts to sustain the momentum.

Zacks Rank & Key Picks

Currently, Intuitive Surgical carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader medical sector are ABIOMED Inc. ABMD, AngioDynamics Inc. ANGO and Glaukos Corporation GKOS. Notably all the companies hold a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

ABIOMED has a long-term expected earnings growth rate of approximately 26.7%. Notably, the stock represents an impressive one-year return of 36.7%.

AngioDynamics has a long-term expected earnings growth rate of 15.00%. The company posted a solid one-year return of 37.6%.

Glaukos Corporation recorded a stellar one-year return of almost 57.2%. Notably, the company posted a positive surprise in the past four quarters, the average being 110.9%.

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