Intuitive Surgical Earnings Preview: Revenue Growth Likely To Taper In Q4 After An Exceptionally Strong Q3

Leading surgical robots manufacturer Intuitive Surgical (NASDAQ:ISRG) is scheduled to report its Q4 fiscal 2015 earnings on January 21st. (Fiscal years ending in December.) After an exceptionally strong third quarter, driven by a strong growth in general surgeries segment in the U.S and a rise in international procedures, Intuitive likely saw its revenue growth taper a bit in Q4. In the third quarter, a high proportion of orders for Xi Systems  pushed up the average selling price of daVinci systems from $1.4 million to $1.6 million. We suspect the trend reversed in Q4 as the mix of orders placed for Inuitive’s surgical systems rebalanced towards the norm. However, Intuitive’s future outlook remains promising as the company remains focused on expanding the application of da Vinci systems.

Our price estimate of $500 for Intuitive Surgical is 10% below the current market price.

Expanding The Scope Of da Vinci Surgical Systems To Boost Future Growth

The company is committed to expanding the scope of daVinci Systems in general surgery, especially colorectal surgery and hernia repair. While colorectal cancer is the third most common type of cancer and is fast becoming a dreadful reality for many, hernia repair devices and consumables market is expected to grow at 6.5% to reach $6.1 billion in 2020. Also, Intuitive has a significant growth opportunity in other segments such as cardiothoracic surgeries and lung surgeries, considering that procedural volumes in these segments as a percentage of the total procedural volumes was almost negligible for Intuitive Surgical in 2014. With the aforementioned factors in mind, Intuitive can see a rise in number of procedural volumes by increasing its focus on expanding the applications of da Vinci systems.

As procedure volumes grow, the demand for da Vinci surgical system units will likely increase, as new hospitals and healthcare institutions shift to robotic surgury.  Existing customers could be incentivized to trade-in old machines and add more capacity. The sale of related instruments and accessories will also rise with growth in procedure volumes, as instruments have a limited useful life, after which they need to be replaced.

Cost-Effectiveness And Efficacy Of daVinci Systems Across All Procedures To Play An Important Factor In Future

Intuitive surgical claims that according to a third party health network, da Vinci surgeries helped reduce hospital stay time and complications in hernia repairs, bringing down the overall cost of surgery by $550 as compared to laparoscopy and $700 as compared to open surgery. ^[1] If the efficacy and cost effectiveness of da Vinci system over other methods can be proven for other procedures also, we could expect to see a positive spike in the sales of da Vinci units in future. However, according to some studies, robotic surgeries for ovarian procedures are more costly than conventional alternatives, a factor that can weigh heavily on Intuitive’s sales as gynecologic surgeries constitute a major portion for of procedures for the company. Nevertheless, the same report accepts that despite extra costs the use of robots for such surgeries is on the rise, signalling bright prospects for the adoption of da Vinci systems in future.

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1. Q3 2015Earnings call transcript, Seeking Alpha, October 20, 2015 [↩]