What Will Intuitive Surgical Do for an Encore?

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Intuitive Surgical (Nasdaq: ISRG  ) managed just a 10% year-over-year increase in revenue from sales of its da Vinci Surgical Systems in the fourth quarter of last year. And yet its total revenue increased a solid 21%.

Where'd the extra revenue come from? Recurring revenues driven by the installed base. During each surgery performed on a da Vinci machine, the surgeon uses surgical instruments that perform different functions. Each machine also requires repair and preventative maintenance.

There are now 1,752 da Vinci machines driving recurring revenue, which made up 54% of total revenue. Procedures grew 35% year over year in the fourth quarter, which drove the instrument growth -- pretty impressive considering the hard time that other medical device makers like Medtronic (NYSE: MDT  ) and Boston Scientific (NYSE: BSX  ) have had recently.

It's the same business model as Procter & Gamble's (NYSE: PG  ) razors and blades and Hewlett-Packard's (NYSE: HPQ  ) printers and ink carriages. Except Intuitive Surgical isn't giving the da Vinci machines away; they go for $1.4 million a pop.

That high price has led to a slowdown in machine sales during a time when hospitals are a little worried about capital expenditures. But procedure growth can't outpace system sales forever; there's only so much time available in a day to perform surgeries. At some point, the hospital has to buy a second. In the fourth quarter, 40% of customers were repeat buyers.

In order to keep the procedure growth going, Intuitive Surgical will have to move into other types of surgeries. Gynecology makes up nearly half of the procedures performed on a da Vinci, but eventually Intuitive Surgical will saturate that market like it did with prostatectomies. Remember that 35% growth isn't an increase in the number of procedures performed by all doctors; it's the conversion of doctors going from performing traditional surgeries to doing them with the help of a robot.

What will Intuitive Surgical do for an encore? You'll get a chance to ask Intuitive Surgical's CEO Gary Guthart that question and anything else that you'd like to know about the company at a live chat on Wednesday at 2 p.m. ET. Just head to our home page then to join the discussion.

Intuitive Surgical is a Motley Fool Rule Breakers recommendation. Procter & Gamble is a Motley Fool Income Investor pick. The Fool owns shares of Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.

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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 08, 2011, at 11:58 PM, PauvrePapillon wrote:

    That installed base thing along with the service and upgrade revenue is starting to kick in for Accuray (ARAY) as well.

    They booked $4 million in earnings last quarter and added $11 million in positive cash flow off of only six new installs and six units shipped where the distributor is responsible for the install.

    Accuray shares are up almost 50 percent since their last earnings announcement as investors factor in their order backlog and improved margins due in large part to that installed base reaching critical mass.

    So are we off to the races? Well, if you follow the post-IPO development curve right down to the share price, ARAY has taken a very similar path to ISRG.

    They are way up and way over their normal volume since their earnings release so at least a couple of large players figure this one is ready to pop.

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