Tomorrow after the close, MAKO Surgical (Nasdaq: MAKO ) will be stepping up to the earnings plate to take a swing. Will this promising disruptor deliver or fall flat and send investors limping away in need of knee and hip replacements?
Checking MAKO Surgical's pulse
There are plenty of reasons to think that MAKO will deliver a strong quarter, including these 18. The company's worldwide commercial installed base stood at 113 RIO systems at the end of last year, and the company already gave us other juicy operating highlights with systems and procedures. Last year saw 48 RIO systems sold, and MAKOplasty procedures performed nearly doubled to 6,932.
Source: SEC filings.
On top of that, the company expects to see an additional 56-62 RIO systems sold throughout 2012, which would bring the total installed base to between 169 and 175. That growth in the installed base juices up MAKO's recurring revenue streams as procedures similarly gain momentum, and we haven't even seen hip procedure revenue hit yet -- but we will this quarter.
The fourth-quarter procedure volume includes 117 MAKOplasty total hip arthroplasty -- also known as THA -- procedures after the operation was commercially launched in September. This is the first quarter to include THA procedures, so it will be a milestone quarter in its own right.
So we already know that RIO system and MAKOplasty procedure activity is healthy. Now all we need are some dollar digits to back them up. Take a look at a revenue breakdown over the past couple years.
Source: SEC filings.
Procedures and service generate recurring revenue and continue to trend higher as a percentage of sales. On average, analysts are expecting fourth-quarter revenue of $30.7 million, with high and low estimates of $32.8 million and $27 million, respectively. They're also expecting a net loss of $0.14 per share.
That top-line consensus estimate represents 107% revenue growth from last year's $14.8 million in sales, while the bottom-line forecast would nearly slash its quarterly loss by half, compared to the $0.26 per share lost last time around.
A numbers game
How realistic is that revenue expectation? For the past couple years, MAKO has consistently brought in just about $5,000 per procedure. The company already told us that there were 2,258 procedures done in the fourth quarter -- a 97% YOY jump -- which implies roughly $11.3 million in procedure revenue.
RIO systems generate average revenue of nearly $800,000 each, but they have reached almost as high as $850,000 in recent times (including last quarter). There were 18 sold last quarter, of which 16 were actually installed, while the other two were sold to international distributors for demonstration and marketing purposes. Using an optimistic $850,000 per system adds upwards of $15.3 million in revenue.
Service revenue is a bit harder to predict but has been steadily increasing, along with the installed base of systems that need servicing. Last quarter's service revenue totaled $1.6 million, and if we again go with a hopeful estimate of $2 million, that brings our total revenue tally up to $28.6 million.
That approximation shows that the $30.7 million estimate may be a bit of a stretch for MAKO to reach. Estimates aside, it would also represent 93% YOY growth -- hardly anything to be ashamed of.
One more thing
However, there's another piece that could bring MAKO up to the estimate: MAKOplasty THA application sales. There's not a lot of readily available data on how much revenue MAKO brings in from each application sale, since it just started in the third quarter with 12 applications sold.
This figure quickly jumped to 37 MAKOplasty THA applications sold in the fourth quarter, which means that 44% of the domestic commercial installed base is locked and loaded for hip procedures. Hopefully these application sales are bringing in enough revenue to let MAKO beat the Street.
It's hard to talk about MAKO without bringing up Intuitive Surgical (Nasdaq: ISRG ) . The two companies share an almost identical business model, and Intuitive Surgical has delivered four-digit returns to early shareholders, with 54.7% of sales from recurring sources last quarter -- which continues to boggle Wall Street estimates. MAKO is like Intuitive's little brother, and I can't think of a better role model.
MAKO is poised to pop. And not just its revenue pipeline, but its stock, too. Shares have incredibly high short interest, with 12.5 million shares held short in mid-February -- an astounding 30% of the almost 41 million shares outstanding. If MAKO posts upbeat figures and proves them wrong, you can expect them to scramble to buy back shares as they get squeezed out of their bearish bets.
This Rule Breaker is set to disrupt incumbents like Zimmer (NYSE: ZMH ) and Johnson & Johnson (NYSE: JNJ ) , whose own joint replacement offerings may fall by the wayside if MAKO becomes the de facto standard.
Buckle up. It's going to be a wild ride tomorrow, one way or another.
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