Intuitive Surgical Earnings Preview: da Vinci Xi Adoption, International Sales In Focus

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ISRG: Intuitive Surgical logo
ISRG
Intuitive Surgical

Intuitive Surgical (NASDAQ:ISRG) is expected to announce its Q4 and full year 2014 results on Thursday, January 22. In the previous quarter, the company surprised the market with better-than-expected results, 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))

In a press release last week, the da Vinci surgical robot manufacturer reported that in the fourth quarter, it expects total revenue (excluding da Vinci Xi trade-out offers) to increase by 5% y-o-y on growth across divisions – Instruments and Accessories, Systems and Services. The spike in quarterly revenue is likely due to higher unit sales of its new da Vinci Xi model and a rise in total procedures. For the full year 2014, the company expects procedure volumes to have grown by 9% y-o-y, driven by a 6% rise in U.S. procedures and a 20% rise in international procedures. However, the higher procedure volumes towards the end of 2014 could not offset the company’s lackluster performance in the first half of the year. The company announced in its preliminary 2014 earnings release that its full year sales are likely to decline by 6% over the previous year to $2.13 billion.

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. We expect gross margins to decline further in the near term due to higher costs owing to overall lower production and the company’s focus on new products such as the da Vinci Xi and da Vinci Sp (which have slightly lower margins). However, we expect margins to improve in the long run as production volumes increase and its new products gain more acceptance. ((Press Release, Intuitive Surgical, Jan 12 2015))

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We currently have a price estimate of $458 for Intuitive Surgical, which is about 15% below the market price.

See our full analysis for Intuitive Surgical

da Vinci Xi Dominates System 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. In the first nine months of 2014, Intuitive Surgical sold just 294 da Vinci units compared to 408 in the same period in 2013 and 445 in the same period in 2012. However, the preliminary Q4 financial data suggests that its new da Vinci Xi robotic surgical system might just be the answer to the company’s declining system sales.

In the fourth quarter, the da Vinci Xi model dominated system sales figures (97 out of 137, or 71%) and helped the company report a growth of 23% over the previous quarter and almost flat system sales y-o-y. This is also likely the reason that the average selling price of a da Vinci system increased by 6% y-o-y to $1.55 million in the fourth quarter. In terms of the geographical distribution of its da Vinci unit sales, Europe led the way with system sales increasing 39% y-o-y to 39 units, likely because of higher sales of the Xi model, which received CE approval towards the end of June.

Procedure Volumes Improve

Intuitive Surgical estimates procedure volumes to have grown by 9% in 2014 to 570,000, driven by consistent growth in general surgery and urology 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.

Emerging Market Opportunity

Apart from growth in procedure volumes, an important growth opportunity for Intuitive Surgical is expansion into international markets. According to its preliminary Q4 release, markets other than U.S., Europe and Japan contributed a little over 15% of total da Vinci unit sales. This is only marginally higher than about 14% recorded in 2013 even though it is the only market, other than Europe, to have reported a growth in unit sales in the fourth quarter.

A recent report by Grand View Research suggested that the global market for medical robotic systems is estimated to reach almost $18 billion by 2020, from less than $8 billion in 2014. The report also indicateed that the factors likely to drive this growth are the increasing penetration of Information Technology in healthcare, the growing geriatric population and a large unmet demand for such procedures in emerging markets including China, India and Brazil. ((Global medical robotic systems $17,901.5M by 2020, Online TMD.com, Sept 3 2014)) Surgical robots contributed a dominant 65% share of the global medical robotic system market in 2013 and this is expected to continue going forward as market penetration increases and new products are introduced. The aforementioned report also suggested that Asia-Pacific is likely to be the fastest growing region of this market owing to improving disposable incomes, increasing healthcare expenditures and growing awareness about medical procedures.

This is a huge opportunity for Intuitive Surgical to gain a first mover advantage considering that it does not have any formidable competitors on the global stage at present. In the upcoming earnings call, it will be interesting to see how the company plans to capture this huge market in the new year and what issues, such as litigation, it faces in converting those opportunities into sales figures.

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