Recurring revenue growth
The beauty of Intuitive's business model resides in its razor-and-blades strategy. Each da Vinci Surgical System that Intuitive sells generates a stream of high-margin recurring revenue from the sale of instruments and accessories used by the surgeons conducting operations. Intuitive also typically enters into annual service contracts that can bring in as much as $170,000 annually per machine.
In all, 71% of Intuitive's revenue -- or $1.9 billion -- was of the recurring variety in 2016, up from 70%, or $1.7 billion, in 2015. These figures should continue their ascent in the coming years as Intuitive grows its installed base of robotic systems and the number of ways in which its machines can be used.
Switching costs and network effects
Intuitive's recurring revenue serves as a steadily growing source of cash that can be used to fund its sizable research and development (R&D) program. These R&D investments help Intuitive to maintain and extend its technological leadership, as well as uncover new procedures for which the da Vinci Surgical System could be used. For example, recent advances have allowed the company to expand into hernia repair and colorectal surgery, in addition to furthering the use of robotics in its core focus areas of urology and gynecology.
Surgeons also help to unearth new-use cases for Intuitive's machines. With more than 4,100 da Vinci Surgical Systems in use throughout the world, and over 4 million procedures performed to date, surgeons have logged countless hours working with Intuitive's machines. This helps to strengthen Intuitive's moat by increasing its customers' switching costs. The large amount of time and capital doctors and hospitals have already spent to become proficient with these robotic systems makes it difficult for them to switch to a competing product.
Additionally, as the number of hospitals that deploy Intuitive's machines grows, so, too, does the number of surgeons who are seeking out new ways to utilize them. In this way, Intuitive Surgical benefits from a network effect of sorts, with each new customer potentially helping to increase the value of Intuitive's products and services for its existing clients. It's a virtuous cycle that should continue to help fuel Intuitive's installation and procedure growth, and, by extension, shareholder returns.
The global medical-robots market will grow to $12.8 billion by 2021, according to research firm MarketsandMarkets, up from $4.9 billion in 2016. That presents a tremendous growth opportunity for Intuitive Surgical, which generated revenue of $2.7 billion last year.
Much of this growth will come from international markets. Two-thirds of Intuitive's installed base of da Vinci systems are located in the U.S., with major markets such as Europe and Asia currently accounting for only 17% and 13%, respectively. Yet system placements during the first half of 2017 jumped 37% in markets outside the U.S. (OUS) compared to 18% domestically. Moreover, OUS procedures grew 25% versus 14% in the United States.
With massive population centers such as China still representing a relatively small portion of Intuitive's revenue and profits, the robotic-surgery leader has long runways for growth still ahead. If Intuitive Surgical can successfully scale its international operations to a size that approaches that of its U.S. business, its stock could continue to reach new highs in the years ahead.