Intuitive Beats Zacks Estimates - Analyst Blog

Intuitive Surgical (ISRG) reported fourth quarter and fiscal 2010 earnings per share of $3.02 and $9.47, respectively, beating the Zacks Consensus Estimates of $2.26 and $8.71, respectively, while surpassing the corresponding year-ago results of $1.95 and $5.93.

Revenues

Intuitive reported revenues of $389 million and $1,413 million for the fourth quarter and fiscal 2010, respectively, up 21% and 34% year over year. The results beat the Zacks Consensus Estimates of $372 million and $1,398 million, respectively.     

On a segment basis, the company reported revenues from instruments and accessories of $151 million, up 33% year over year. The growth was driven by a 35% year over year increase in da Vinci surgical procedures. Revenues from sales of systems were $178 million, up 10% year over year.  Service revenue was $61 million, up 27% year over year, primarily due to growth in the installed base of da Vinci Surgical systems.

Margins

Intuitive Surgical enjoyed a higher gross margin of 72.5% in the reported quarter compared with 72.2% in the year-ago quarter. The company reported operating expenses of $128.4 million in the quarter, up 22.5% year over year. The increase was due to growth in both selling, general and administrative expense (up 21.3%) as well as research and development expenditure (up 26.4%).

Operating income was $153.8 million, or 39.5% of sales, in the reported quarter compared with $128.3 million, or 39.7% of sales, in the prior-year quarter.

Balance Sheet

Intuitive Surgical exited fiscal 2010 with cash, cash equivalents and investments of $1,609 million, up 37.3% year over year. It remains a zero debt company.

Outlook

We expect a large number of procedures that are currently completed either in an open surgical manner or with laparoscopy to be eventually replaced by da Vinci surgery, as robotic surgery becomes the standard of care in many instances. The company enjoys a virtual monopoly in robotic surgery with little competition.

Intuitive's recurring revenue stream continues to grow and provides a shield against cyclicality of revenues, arising from the sale of discretionary capital equipment to hospitals. However, we believe that until the global economy recovers, the stock may come under pressure as investors ponder whether lingering macro economic uncertainty weakens hospitals' commitment to buy high-cost robotic systems.

In the interim, the installed base of Intuitive continues to grow as more hospitals feel compelled to upgrade their technology. In balance, a reasonable valuation is appropriate given such plus points as Intuitive's leading position in robotic surgery, barriers to entry, steady cash flow, sizeable cash balance and absence of debt.

Intuitive Surgical's razor-blade business model ensures recurring revenues even during difficult times. Moreover, its revenues have consistently grown due to the twin reasons of increase in applicable medical procedures and, secondly, hike in the company's installed base. Among significant risks, pricing pressure is the most critical as austerity measures in Europe and elsewhere target hospital capital expenditure as an area of cost savings.

Intuitive signed a licensing pact, on August 17, 2010, with Cardica (CRDC) under which it obtained the exclusive global license to Cardica's intellectual property, related to tissue cutting, stapling and clip appliers for application in the robotics field. Intuitive competes with Accuray (ARAY).

We prefer to remain on the sidelines, until the global markets recover, despite the da Vinci system's leading status as an enabler of robotic minimally invasive surgery. Our Neutral recommendation on the stock is supported by a short-term Zacks #3 Rank (Hold).

 
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