Intuitive Surgical’s Sales Improve On Growth In da Vinci Systems, Procedure Volumes

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ISRG: Intuitive Surgical logo
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Intuitive Surgical

Intuitive Surgical (NASDAQ:ISRG) surprised the market with better-than-expected Q3 2014 results on Tuesday, reporting year-over-year (y-o-y) growth in overall revenue, da Vinci unit sales as well as procedure volumes. Total revenue grew 10% y-o-y from about $500 million in Q3 2013 to $550 million in Q3 2014. This was over 6% above the analyst consensus compiled by Thomson Reuters. The spike in revenue was attributed to higher da Vinci unit sales and a greater-than-expected rise in total procedures, which increased 10% y-o-y, driven by an 8% rise in U.S. procedures and a 20% rise in international procedures. ((Intuitive Surgical’s CEO Discusses Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Oct 21 2014 )) ((Press Release, Intuitive Surgical, Oct 21 2014))

Reflecting the rise in procedure volumes, sales of the company’s da Vinci systems improved about 6.5% over the previous quarter to about $170 million. Instruments and Accessories revenues grew 14% y-o-y to about $273 million, while Service revenues grew in high single-digits over the prior year quarter to over $108 million. On the cost side, the company’s gross margin in Q3 2014 was 65.6% compared to 67.2% in Q2 2014 and 71.5% in Q3 last year. This decline was attributed to a higher proportion of new products (which have slightly lower margins) in the total sales mix and higher costs due to overall lower production. The company expects its gross margin to decline further in the near term as it focuses on new products such as the da Vinci Xi. However, it expects margins to improve in the long run as production volumes increase and its products gain more acceptance.

We currently have a price estimate of $455 for Intuitive Surgical, which is slightly below the market price.

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See our full analysis for Intuitive Surgical

Market Concerns Impacting Sales

The company’s performance has been negatively impacted in the last few quarters by a number of factors, such as concerns over the efficacy and cost effectiveness of its da Vinci systems, as well as changed institutional capital-spending priorities by healthcare institutions because of the Affordable Care Act and in anticipation of a new da Vinci system. Owing to such uncertainties, the company again did not provide any revenue guidance for the remainder of the year. Going forward, we expect the company to benefit from sales of its new products and growth in number of procedures.

Procedure Volumes Improve

Intuitive Surgical reported a 10% increase in procedures driven by consistent growth in general surgery, urology and colorectal procedures, partially offset by declining gynecology procedures in the U.S. A greater number of procedures generally means a greater number of instruments and accessories, as well as a shorter replacement cycle. Therefore, the number of procedures directly impacts the company’s revenue.

We expect procedures to increase going forward, as the company focuses on promoting the use of da Vinci systems in gynecology and urology procedures worldwide. A focus on rolling out the low cost Single-Site kit of instruments and accessories and expansion of the da Vinci Stapler in the U.S. could also positively impact procedure volumes for the company in the coming quarters. Looking at the improvement in procedure volumes this quarter, Intuitive Surgical adjusted its procedure growth forecast from 5-8% to 8-9% for full year 2014. The total number of procedures performed  in 2013 was 523,000.

New Products Drive System Sales

The company received FDA clearance for two new surgical systems earlier this year- da Vinci Xi and da Vinci Sp. The da Vinci Xi system is aimed at multi-port procedures with better mobility and ease-of-use. It also boasts a better imaging system with 3D and high-definition visuals. In its earnings call, the company reported that out of the 111 da Vinci systems sold in the third quarter this year, 57 were da Vinci Xi models.

In line with expectations, da Vinci Xi’s uptake was slow in the U.S., as implications of the Affordable Care Act on robotic surgery remain unclear and also because the company has yet to come out with all the relevant instruments and accessories for the Xi robotic system. Compared to sales of 41 da Vinci Xi units in the U.S. in Q2 2014, the company recorded only a marginal improvement in Q3 with 43 units. Growth of the new da Vinci system was better in international markets, where unit sales improved from 6 units in Q2 2014 to 14 in the third quarter. We expect this to improve further going forward as the da Vinci Xi recently received approval for sale in new markets including the European Union and Japan.

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