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Here's How Intuitive Surgical Delivered a Blockbuster Quarter

By Todd Campbell - Apr 20, 2017 at 7:02AM

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The company's sales are soaring as robotic surgery becomes the norm in operating rooms.

Intuitive Surgical's (ISRG 2.53%) first-quarter financials are a great reminder why this is a top-tier stock worth owning in long-term portfolios. The company's sales and profit outpaced industry watchers' forecasts in the quarter, and procedure growth suggests it's still in the early innings for robotic surgery.

It begins with systems

Surgeons are increasingly using the company's da Vinci surgical systems to perform urological and gynecological procedures, and because these systems can reduce complications and improve outcomes, they're beginning to be used in other procedures, too.

Business people jump for joy on a beach.

IMAGE SOURCE: GETTY IMAGES.

In the first quarter, Intuitive Surgical reports that the number of surgeries performed on one of its systems increased 18% from last year. For perspective, there were about 750,000 da Vinci procedures done in 2016, up 15% from 2015.

Because the use of da Vinci systems is becoming standard practice in prostate and certain gynecological procedures, and they're beginning to be used more in procedures such as hernia repair, they're becoming must-own systems for hospital operators.

In the quarter, demand from hospitals translated into the shipment of 133 systems -- at an average $1.46 million apiece -- and booked $153.2 million in systems revenue, up 3.6% from the same quarter in 2016. In the same quarter last year, the company shipped 110 systems.

But the real money is in instruments

There are more than 3,900 da Vinci systems installed at hospitals throughout the world, and all those systems are generating increasingly more demand for high-margin instruments and accessories used in procedures.

The company estimates that each da Vinci system sold generates an average of $1,840 in consumable sales per procedure.

Because of this recurring revenue model, instrument and accessory sales are representing an increasingly larger proportion of total revenue, and that's incredibly good for gross profit.

Last quarter, more systems in place and more procedures performed caused instrument and accessories revenue to jump 18.2% year over year to $380.8 million. Consumable revenue accounted for 56.5% of sales, up from 54.2% of sales in Q1 2016, and as a result, gross margin improved to 72% from 70% in Q1 2016.

And let's not forget service contracts. Unlike system and instrument sales that vary quarter to quarter and are subject to seasonality, service contracts are kicking in more money every quarter because of growth in the installed base. In Q1, services sales increased to $140.2 million from $134.7 million in Q4.

Profit launch

Despite spending more on research to expand da Vinci's addressable market, the company is still delivering impressive bottom-line growth.

Last quarter, pro forma income was $196 million, or $5.09 per share, up from $170 million and $4.42 per share in Q1 2016. That's pretty impressive, considering the company spent $73.5 million on R&D in the quarter, up from $53.2 million in Q1 2016.

Management thinks that procedure growth will clock in between 12% and 14% this year, up from prior expectations for between 9% to 12%, and because of this updated guidance, it wouldn't be shocking to see industry watchers lift their full-year EPS estimates. Currently, they're targeting $23.52 per share this year and $26.60 next year.

Looking ahead

Investments now should provide the company with an opportunity to sell its systems to smaller hospitals, further expanding procedure volume. In addition, R&D that gets da Vincis used more broadly should offer long-term tailwinds to sales and profit.

Investors ought to consider how big the company's opportunity is outside the United States as well. Currently, the U.S. accounts for 65% of da Vinci's installed base, but procedure volume grew fastest outside America, and the number of systems placed in foreign markets jumped to 56 last quarter from 36 a year ago.

Because this company has a big established footprint in the U.S. and growth potential overseas, and because it delivered yet another solid quarter of sales and profit, Intuitive Surgical remains one of my top growth stocks to buy.  

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