1,111 Reasons to Love This Company

Intuitive Surgical (Nasdaq: ISRG  ) is pretty much synonymous with robotic surgery. The company is just about the only one selling expensive robots that help surgeons perform surgeries more accurately.

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 (NYSE: PG  ) , which practically gave away razor handles to customers to get them to buy razor blades, plenty of companies use an installed base to drive recurring sales of other products.

Company

Installed Base

Recurring Sales

Hewlett-Packard (NYSE: HPQ  )

Printers

Ink cartridges

Microsoft (Nasdaq: MSFT  )

Xbox

Video games

Mattel

Barbie

Clothes and shoes, which my daughter just has to have

Apple (Nasdaq: AAPL  )

iPod

MP3s at iTunes

Sirius XM Radio (Nasdaq: SIRI  )

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 (Nasdaq: NFLX  ) subscription could qualify here. While there's no installed base per se, the inertia to get off your butt and cancel acts as a barrier to switching to a different product or service.

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.

More Foolishness:

Find out why Intuitive Surgical has been recommended several times by the Motley Fool Rule Breakers newsletter. Click here to grab a free 30-day trial subscription and get the latest issue as well as access to the archives. 

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Microsoft is an Inside Value recommendation. Netflix and Apple are Stock Advisor recommendations. The Fool owns shares of Procter & Gamble.The Fool's disclosure policy has been installed for quite a while.


Read/Post Comments (2) | Recommend This Article (26)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 07, 2009, at 12:10 AM, Wildeyes007 wrote:

    Hi :

    When I first saw Brian's article "1111 reasons" in Yahoo Finance, I didn't even bother to read it.

    Reason :

    1) In the last few weeks, when I click on Motley Fools articles in Yahoo Finance, Explorer stops and says there is a problem.

    2) I know it is due to those Motley Fool marketing props and fixing the browser will help. The problem is I have not good in computers and I am in no hurry to fix it, because most Motley Fool articles, in my opinion, are cheerleading articles anyway. I have since changed my reading habits, just ignore Motley Fool, read Investopedia, Street etc etc.

    3) I hope Motley Fool doesn't think this is not serious. Just ask how many people are just like me, already subscribers or potential customers.

    Just my two cents.

    George

  • Report this Comment On February 09, 2009, at 10:18 PM, ayriintuit wrote:

    2,111 Reasons to hateThis Company.

    Employees are paying the price, couldn't stand working there for another minute.

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