Robust Growth In Procedures, Beneficial Product Mix Drive Intuitive Surgical’s Strong Q3 Performance

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ISRG: Intuitive Surgical logo
ISRG
Intuitive Surgical

Intuitive Surgical (NYSE:ISRG) posted strong third quarter results on October 20th. [1] The company’s revenues benefited from strong international procedure growth and a product mix skewing towards its high-value da Vinci Xi systems. The company’s non-GAAP gross margin improved by over 2 percentage points year-on-year due to higher average selling prices, cost savings, and a favorable prior period comparison. [2] Of the 117 systems placed in the third quarter, 77% were Xi systems, compared with just 53% in the prior year period.

The higher proportion of Xi systems had a beneficial impact on the third quarter performance. If the trend does not persist into the fourth quarter, revenue growth and margin expansion are likely to be sequentially lower.

Snapshot of Intuitive Surgical’s third quarter performance:

  • Non-GAAP revenue expanded by 10% year-on-year and reached $590 million
  • Procedures grew by 15% y-o-y and reached 162,000
  • 117 da Vinci systems placed during the quarter, compared to 111 in the year-ago period
  • Non-GAAP gross margin improved 210 basis points and reached 69.3%
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Our price estimate of $500 for Intuitive Surgical is slightly higher than its current market price.

See our complete analysis for Intuitive Surgical here

Strong Revenue Growth in Q3, Likely to Taper in Q4

Intuitive Surgical’s achieved strong top-line growth across the board in the third quarter. Revenue from Instrument and Accessories grew by 10% year-on-year, helped by 15% y-o-y growth in procedures. Growth in procedures was especially strong in international markets, where procedures expanded by 28% year on year compared to 12% in the U.S.

Additionally, the average selling price of da Vinci surgical systems jumped to $1.6 million from $1.4 million a year ago. The high proportion of Xi systems placed during the quarter pushed up Intuitive Surgical’s average selling price as well as gross margins.

Service revenues continued their steady upward trend in the third quarter, in line with the rapidly expanding installed base of Intuitive Surgical’s da Vinci systems. In the third quarter, Service revenues touched $170 million, a growth of 8% year-on-year.

However, the strong revenue growth may not continue in the fourth quarter because the mix of systems placed varies from quarter to quarter. Further, the year-on-year comparisons are historically unfavorable in Q4 for mature procedure categories such as prostatectomies. [2] Accordingly, the robust revenue growth achieved by the company during the first nine months of fiscal 2015 is likely to taper slightly in the fourth quarter.

Margins Boosted by Product Mix, Favorable Comparison

Intuitive Surgical’s non-GAAP gross margin improved by a commendable 210 basis points year on year in the third quarter, reaching 69.3%. As stated earlier, the primary contributor to the improvement in margin was the outsized proportion of Xi systems in the product mix. The resulting higher average selling price helped boost the company’s margins in the third quarter. Additionally, the year-on-year comparison was favorable due to charges related to the recall of Si staples in 2014. [2]

Going forward, Intuitive Surgical’s non-GAAP gross margin is expected to revert to the historical average of 68%. The company guided fourth quarter non-GAAP gross margin to be in the range of 67.5% to 68.5%.

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Notes:
  1. Intuitive Surgical Investor Relations []
  2. Intuitive Surgical Fiscal 2015 Third Quarter Earnings Call Transcript, Seeking Alpha, October 20, 2015 [] [] []