Key Takeaways From Intuitive Surgical’s Q3’16 Earnings

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ISRG: Intuitive Surgical logo
ISRG
Intuitive Surgical

Intuitive Surgical  (NASDAQ: ISRG) surprised the street again with its solid Q3’16 performance. Increased shipments of da Vinci Systems in U.S. and sustained level of gross margin contributed to the EPS growth. The U.S. market has been flat for some time now. These are still early days in robotic surgery and the broader international markets present a strong opportunity. Over the next quarter, we expect the story to recur as it has last couple of quarters.  But over the medium term, beyond fiscal 2017, we expect more sustained level of shipments growth into international markets.

Our price estimate of Intuitive Surgical is $687, is under update

Revenue Growth And Gross Margins Drive EPS 

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The company reported revenue growth of 16% and non-GAAP EPS growth of 18% on a year-over-year basis. Furthermore, it was able to sustain its high gross margin at around 72% and improve its operating profit on both year-over-year and quarter-over-quarter basis. Going forward we expect the operating margins to come down as the company will need to step up its R&D to tackle competition and bolster its marketing efforts in territories outside U.S.  The table below presents the key performance metrics for the quarter:

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Procedures & International Markets To Drive Growth, Gross Margins May Normalize 

Going into Q4 and beyond, we expect the company to keep growing its revenue at a mid-double digit rate. This will be driven mainly by healthy procedure growth. General surgery, increased use in ventral & inguinal hernia repair,  and the increasing adoption of robotic surgery outside U.S. together will help drive revenue. In China, the company has entered into JV with Fosun Pharmaceutical to develop, manufacture and sell robotic-assisted catheter-based medical devices. We believe the JV will also help Intuitive to improve the marketing for its exiting da Vinci systems. The recurring revenue from instruments & accessories and services come as by-product of increased system adoption. However, we expect gross margins to come down below 70% as the company expands into markets outside of U.S. Furthermore, margins are also dependent on revenue-mix. Over 50% of the revenue comes from instruments & accessories which are recurring in nature and have higher margins as compared to Systems. This will act as cushion against any sharp decline. Our estimate is that over next year gross-margin would be in the range of 68% to 70%.

Expect Increased R&D and Acquisitions

Intuitive Surgical has over $4.5 billion in cash & investments in financial instruments. It is around 16% of the company’s present market capitalization. We expect Intuitive to step up its R&D and carry out some strategic acquisitions going into next fiscal. We do not expect the company to begin dividend payment or share repurchase program anytime soon.

Also Read: Intuitive Surgical’s Potential Future Growth Strategy

Please refer to our complete analysis for Intutitive Surgical for detailed analysis.

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