Intuitive Surgical
And I do mean expensive -- as in $1.3 million each. Following a year in which hospitals' endowments invested in the stock market were decimated and high net worth donors aren't feeling so charitable, getting hospitals to pony up for expensive machines is going to be challenging for Intuitive Surgical.
But does that mean that revenue will stall this year? Nope. Management is guiding for revenue to increase 15% year over year. The already installed base of 1,111 da Vinci surgical machines will drive sales through the use of consumables.
Bought it, might as well use it
And use it they are. Procedures are expected to grow 35% to 40% this year, which will increase sales of disposable instruments and accessories by 25% to 30%. The discrepancy in the growth rate lies in the fact that one of the quickest-growing procedures -- “benign hysterectomies” -- requires fewer instruments per procedure. Experienced doctors are also becoming more efficient using fewer instruments, lowering the revenue per procedure.
The average da Vinci machine is used about three times per week, so there's still plenty of procedure growth that can happen before growth will stall or hospitals will need to figure out a way to shell out for a second machine. And frankly, the latter seems more likely. Even last quarter, when a lot of sales failed to materialize, 1% of new system sales were to repeat customers, bringing the number of hospitals with more than one da Vinci up to 131.
The installed machines also contribute to revenue through service. The service business doesn't fetch quite as high of a gross margin as the consumables, but it still adds to the bottom line. And every installed machine becomes a potential revenue producer as soon as the warranty expires.
Same ice cream, different flavor
Intuitive Surgical's business model isn't original, but it sure is a good one. Made famous by Gillette, now part of Procter & Gamble
Company |
Installed Base |
Recurring Sales |
---|---|---|
Hewlett-Packard |
Printers |
Ink cartridges |
Microsoft |
Xbox |
Video games |
Mattel |
Barbie |
Clothes and shoes, which my daughter just has to have |
Apple |
iPod |
MP3s at iTunes |
Sirius XM Radio |
Radio listeners |
Subscriptions to the service |
The recurring revenue often happens like clockwork, helping the company's sales when the economy might not be as kind. Even your gym membership or a Netflix
Buy for the future
While Intuitive Surgical is trading at less than a third of its 52-week high, investors shouldn't expect it to bounce back as quickly as it fell. The market is saying that the 15% revenue growth doesn't justify the high earnings multiple that Intuitive Surgical had when it was growing revenue at 60% year over year.
Until the company can show that it can regain that kind of growth trajectory, Intuitive Surgical's stock will remain beaten down. The good news is that the recurring revenue will continue to come in, and Intuitive Surgical thinks it will be able to grow that base by another 335 machines or so this year -- which is 30% growth right there. That means even more recurring revenue. Get enough "razors" out there, and the blades will take care of themselves.
A year from now we'll have 1,446 reasons to love Intuitive Surgical.
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