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Though it's not an official "segment," this surgical procedure has become a big deal.
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The da Vinci Xi System. Image source: Intuitive Surgical.
Intuitive Surgical (ISRG +0.01%) officially has three reporting business segments: sales of daVinci machines, service revenue from maintaining those machines, and recurring revenue from selling instruments used in surgical procedures.
But the real story behind Intuitive's growth -- and by far its best "segment" this year -- goes beyond these tidy definitions. And growth in a single surgical operation is what has investors so excited: the repair of hernias.
Back in July 2014, Intuitive Surgical CEO Gary Guthart said during a quarterly conference call that procedures grew in part because of "early growth in hernia repair," adding, "We are very encouraged by this growth, and we'll pursue those opportunities in coming quarters."
Director of finance Patrick Clingan followed Guthart, devoting a great deal of the company's conference call to the promise shown by hernia operations: "Early surgeon feedback on the use of da Vinci for ventral hernia repair has been encouraging," he said. "These surgeons find ease of suturing, and enhanced vision enables a minimally invasive repair that is similar to open surgery."
Intuitive's management doesn't break out how many hernia procedures have been performed. Instead, they're part of a broader category known as "U.S. general surgery" -- a catch-all for everything that's not related to a gynecologic, urologic, cardiothoracic, or head-and-neck procedure. So it's tough to know to what extent hernia procedures have added to the company's growth.
Lacking this specific knowledge, there are two simple ways to show how important hernia operations have been. The first is to look at a simple breakdown of Intuitive's procedures annually over the past five years.
Most of the growth has come from "general surgery." But how do hernia operations fit in?
Here are management's comments on the procedure from select conference calls since May 2014 (emphasis added):
It's obviously impossible to tell if hernia growth will remain the company's biggest story throughout the rest of 2016. Moving forward, there are three variables that will probably play the biggest role in the company's second half of 2016.
First, obviously, is the performance of hernia procedures. There's no sign of a slowdown, but as more and more studies on the procedure come out, we'll get a clearer picture of the efficacy and cost savings of using the daVinci in such cases. In the past, studies have come out that were not in Intuitive's favor, and they had a marked impact on procedure growth.
Second, colorectal procedures have emerged as another strong growth category within "general surgery." Investors should listen closely to the company's conference calls for references to its performance -- as that's usually the only forum for getting a better idea of how it's performing.
Finally, Intuitive still has massive market opportunities abroad. Most revenue comes from within the United States, and management has made it clear that pushing into Europe and Asia is a major priority.
Whether the stock continues its climb or stumbles along the way, the performance of these three subsets will probably explain what's going on.