Intuitive Surgical Q3 Preview: New Accessories May Lift Revenues But Margin Expansion Likely To Be Muted

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ISRG: Intuitive Surgical logo
ISRG
Intuitive Surgical

Surgical devices manufacturer Intuitive Surgical (NYSE:ISRG) is scheduled to report its third quarter earnings on October 20th. [1] The company’s revenues are likely to benefit from the new Endowrist Staplers, which received clearance in Europe and Asia in July. [2] It also received clearance in Japan earlier this year, which benefited its non-US placements in the second quarter. The trend is likely to continue in the third quarter due to softer prior period comparable placements. However, the gross margin could be lower due to worsened currency headwinds in the third quarter and the lower margin associated with sales of new territories.

Our price estimate of $500 for Intuitive Surgical is about 10% higher than its current market price.

See our complete analysis for Intuitive Surgical here

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New Accessories and Clearances May Boost Revenues

Intuitive Surgical’s new Endowrist Staplers are a first-of-its-kind device that provide “fully wristed articulation”. [2] These staplers round out the company’s Xi system offering and their successful adoption could lift Intuitive Surgical revenues of its Instruments and Accessories segment. Instruments and Accessories currently account for 45% of Intuitive Surgical’s valuation. We forecast average annual Instrument and Accessory Spend per Surgical System to expand from $328,000 in 2014 to $351,000 by 2022.

Sales of surgical systems could benefit from the clearance for Xi systems received in Japan earlier this year. In the second quarter, the company placed 13 systems compared to five a year earlier. Since the clearance was received only in late March, sales of surgical systems may pick up further in the third quarter due to relatively longer selling cycles in the country. [3]

Revenues from services are also likely to see a moderate expansion year over year due to the expanding installed base. However, average service revenue per installed unit is likely to remain stable compared to the previous year unless the company drastically raises prices to counter currency headwinds.

Margin Expansion May Be Minimal at Best, Negative At Worst

Intuitive Surgical’s gross margin fell to 68.0% in the second quarter, compared to 69.2% in the same period previous year. The contraction was attributed to the impact of adverse currency movements and the higher mix of new products, which carry lower margins. This trend is expected to continue in the third quarter and may even be worse. Currency headwinds are expected to worsen in the second half of the year, which could drag margins down even further. The company’s focus on productivity improvements and cost savings yielded limited benefits in the second quarter and may provide some respite in the third quarter also. Over the long term, Intuitive Surgical expects the gross margin to stabilize at 67% to 68%. [3]

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Notes:
  1. Intuitive Surgical Investor Relations []
  2. Intuitive Surgical Press Release, July 14, 2015 [] []
  3. Intuitive Surgical Fiscal 2015 Second Quarter Earnings Call Transcript, Seeking Alpha, July 21, 2015 [] []