50% Drop in Revenue Growth for Intuitive Surgical This Year?

by Trefis Team
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Intuitive Surgical’s (NASDAQ:ISRG) revenue grew 65% from $2.7 billion in 2016 to $4.5 billion in 2019, and it is estimated to be $5.0 billion in 2020. While the revenue grew around 20% in 2018 and 2019, the growth rate is likely to slow 0.6x to around 12% in 2020. Intuitive Surgical’s double-digit growth over the past few years has been led by growth in the number of procedures performed. Looking at 2020, the coronavirus crisis will likely impact the company’s sales, as several elective procedures could be cancelled or postponed.

Intuitive Surgical primarily serves the robotic surgical systems market. Its primary device is the da Vinci Surgical System, which helps surgeons perform minimally invasive surgeries through directions from a console. It delivers better postoperative results relative to traditional open surgery. Intuitive Surgical has a significant patent portfolio and currently faces little direct competition in the robotic surgery market.

Among Intuitive Surgical’s business segments, Instruments & Accessories, will likely account for 56% of the company’s total sales in 2020, and it will also be the key to the near term revenue growth. Instruments & Accessories is to Intuitive Surgical, the way ink supplies are to printer companies. With growth in installed base of da Vinci systems, there will be a need for several accessories and tools to go with it, and this drives the segment sales. Note that Instruments & Accessories sales are 2x the size of the total robotic system sales for Intuitive Surgical.

Instruments & Accessories segment is expected to be the single-biggest revenue driver with $2.8 billion in revenues (56% of Total Revenues) in 2020. It will likely be the fastest-growing segment – adding $1.4 billion over 2016-20 (61% of $2.3 billion in incremental revenues). Systems segment will add about $0.6 billion and Services $0.3 billion over 2016-20, representing (27% and 12% of the $2.3 billion in incremental revenue, respectively). Instruments & Accessories has been the key in the company’s 135% stock price appreciation from $210 in early 2017 to around $500 currently (as of April 12). With increased acceptance of minimally invasive procedures performed through robotic surgical platforms, there has been a strong growth in the company’s installed base, which, in turn, has benefited the Instruments & Accessories segment, and Intuitive Surgical managed to grow its adjusted net income margin by 150 basis points and its adjusted EPS by a strong 71% between 2016 and 2019. In our interactive dashboard analysis, ISRG Revenues: How Does Intuitive Surgical Make Money?, we discuss Intuitive Surgical’s business model, followed by sections that review past performance and 2022 expectations.

Intuitive Surgical’s Revenue Growth Pace On Upward Trajectory? Not Anymore

  • Intuitive Surgical’s total revenue grew from $2.7 billion in 2016 to $4.5 billion in 2019.
  • This growth was largely led by its Instruments & Accessories segment, which benefited from increased acceptance of robotic surgical platforms based procedures.
  • However, as we look forward, the revenue growth rate could slow in the near term to low double-digits, with revenues expected to be north of $6.4 billion by 2022.
  • The decline in the pace of revenue growth can be attributed to two factors:
    • 1. In the near term, the current coronavirus crisis will likely result in elective procedures being delayed or canceled.
    • 2. The company will likely face increased competition in the robotic surgical systems over the coming years, as more products receive FDA approval. Medtronic, which acquired Mazor Robotics in 2018, has already made a commercial launch of its FDA approved Mazor Stealth X System.

Instruments & Accessories Is The Fastest Growing Segment For Intuitive Surgical

  • Instruments & Accessories sales grew from $1.4 billion in 2016 to $2.4 billion in 2019.
  • We estimate it to grow to $3.6 billion in 2022, led by higher installed base and higher average spend on instruments & accessories per unit.
  • Intuitive Surgical’s installed base grew from less than 4,000 units in 2016 to over 5,500, led by more procedures being performed on da Vinci systems. It will likely grow to north of 7,400 units in 2022.
  • Average spend on instruments & accessories per unit also increased from $356K in 2016 to $431K in 2019, and it is estimated to grow to $488K in 2022, led by increased demand for robotic platform based procedures.
  • The growing demand for procedures can be attributed to some of the benefits of surgeries performed through robotic platforms. It includes, fewer and smaller incisions, less blood loss, shorter hospital stays, faster recoveries, and fewer scars than traditional open surgery.

Systems Revenue Is On A Rise

  • da Vinci Systems revenue grew from $800 million in 2016 to $1.3 billion in 2019.
  • We estimate it to grow to $1.8 billion in 2022, led by increased higher shipments of da Vinci systems, and growth in average revenue per unit.
  • Total number of systems sold grew from 537 units in 2016 to 1,119 units in 2019, and we forecast it to grow to north of 1,500 units in 2022.
  • Average revenue per da Vinci system declined from $1.49 million in 2016 to $1.20 million in 2019. This trend could continue with average revenue per da Vinci system declining to $1.17 million in 2022.
  • This can partly be attributed to higher proportion of systems sales into price sensitive market segments. Also, there is an impact of trade-in of older systems for newer ones with credit for older system, thereby impacting the average revenue per da Vinci system.

Services Segment Has Seen Slower Growth Compared To Other Segments

  • Intuitive Surgical’s Services revenue grew from $511 million in 2016 to $724 million in 2019.
  • We estimate it to grow to $968 million in 2022, led by higher installed base, and stable average spend on services per unit.
  • Average spend on service has hovered around $130K over the past few years, and we expect it to remain around similar levels with marginal growth over the coming years.
  • Again, Intuitive Surgical’s expansion into price sensitive markets could keep a check on the pricing growth for services. The company garnered 30% of its revenues from outside of the U.S. in 2019, and this figure will likely increase over the coming years.

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