Intuitive Surgical Earnings: Q4 Shines Bright In Otherwise Dull Year

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ISRG: Intuitive Surgical logo
ISRG
Intuitive Surgical

Intuitive Surgical (NASDAQ:ISRG) reported weak full year 2014 results Thursday, reporting a year-over-year (y-o-y) decline in overall revenues, net income as well as da Vinci unit sales. However, the company’s consistent improvement in performance over the last couple of quarters is the silver lining that investors should focus on in these results. Although full year revenue was down 6% y-o-y in 2014, fourth quarter results show that overall sales improved 5% y-o-y and 10% over the previous quarter on account of growth across business divisions-Instruments and Accessories, Systems and Services. The spike in quarterly revenue was likely due to higher unit sales of its new da Vinci Xi model and a 10% rise in total procedures. For the full year 2014, procedure volumes grew by 9% y-o-y, driven by a 6% rise in U.S. procedures and a 20% rise in international procedures.

On the cost side, the company’s gross margin in 2014 was 66.3% compared to 70.4% in 2013. This decline can be 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 22 2015))

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

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See our full analysis for Intuitive Surgical

Market Concerns Impacting Sales

The company’s performance was negatively impacted in the last year 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 2014, Intuitive Surgical sold 431 da Vinci units compared to 546 last year and 620 in 2012. Owing to the aforementioned uncertainties, the company did not provide any revenue guidance for 2015. Going forward, we expect the company to benefit from sales of its new products and growth in number of procedures.

da Vinci Xi Drives System Sales

The company received FDA clearance for two new surgical systems last 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 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. Sales in Japan declined from 21 in Q4 2013 to 6 in the recent quarter as customers held off purchases in anticipation of the new da Vinci Xi model.

Procedure Volumes Improve

Intuitive Surgical reported a 10% y-o-y increase in procedure volumes in Q4 and 9% increase in full year 2014, 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 new year. The total number of procedures performed  in 2014 was 570,000.

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