Much of the drama had already been taken out of Intuitive Surgical's (ISRG +2.41%) fourth-quarter earnings. A little over two weeks ago, the company released preliminary results that sent shares 6.5% higher on the day, with procedure growth again outpacing management's best-case scenario.
This week's official announcement had little new information, with all the key figures being met. That said, the conference call covered two major topics that will surely be important in the year ahead: investments to protect against coming competition, and expansion in Asia.
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Intuitive Surgical earnings: The raw numbers
| Metric | Q4 2017 | Q4 2016 | Year-Over-Year Growth |
|---|---|---|---|
| Revenue | $892 million | $757 million | 18% |
| Non-GAAP earnings per share | $2.54 | $2.03 | 25% |
Data source: SEC filings.
There are a few caveats worth mentioning here. First, on a GAAP basis, the company actually recorded a loss of $0.35 per share, but almost all of that was because of one-time income tax expenses related to the Tax Cuts and Jobs Act that became law in late December.
Intuitive Surgical ended the year with $3.8 billion in cash on hand with no debt. That cash will come in handy as the robotic surgical market gets more crowded in years ahead.
Procedure growth remains strong
Heading into 2017, CEO Dr. Gary Guthart and his team said that investors should expect procedure growth -- the most important metric for gauging the long-term strength of Intuitive Surgical -- would likely grow by 9% to 12%. Throughout the year, results routinely topped those estimates, and management kept nudging the figure higher.
By year's end, procedures had grown by 16% -- with 17% growth shown in the fourth quarter. The key drivers of that growth were the categories that investors should by now be familiar with: U.S. general surgery and international operations.
Data source: SEC filings. Does not include procedures classified as "other," normally constituting 3% of all procedures in a given year.
Commenting on the results, Calvin Darling -- the senior director of finance -- said that "growth was again driven by hernia repair... and continued da Vinci adoption in colorectal procedures."
Intuitive doesn't break out results by specific procedure within the broader U.S. general surgery category, but the continued inclusion of colorectal procedures along with hernia repairs -- which have been a focus for a few years now -- is an encouraging sign that the company may have another major operation on its hands. For the first time, bariatric procedures were also mentioned as a future operation where daVinci could add value for doctors and patients.
On the international front, Darling said, "Growth was driven by the continued adoption of da Vinci prostatectomy with solid contributions from kidney procedures and earlier-stage growth in general surgery and gynecology."
What else happened during the quarter?
- Instrument and accessory revenue -- which closely tracks procedure growth -- was up 18% to $457 million.
- Systems revenue -- or the sales of daVinci robots -- was up 20% to $283 million.
- Service revenue was up 13% to $153 million.
- The company placed 216 daVinci robots, up 33% from the same quarter last year.
- There are now over 4,400 installed daVinci systems worldwide.
Looking ahead
Management spent a great deal of time discussing two topics on the conference call: growth potential in China and Japan, and investments to widen the company's moat to further improve patient outcomes and protect from competition.
In China, the company will continue to be constrained by quotas that the government puts in place for system placements. Guthart believes that there's significant demand from the Middle Kingdom, but with only 38 systems placed in the country, that demand isn't being met. A joint venture within Chinese borders could prove vital, but management is taking a wait-and-see approach.
The case is much the same in Japan, where the government has released a list of 12 procedures for which Intuitive's robot can be used and reimbursements will be sent. But the overall levels of reimbursement have yet to be set, and management is once again taking a cautious approach.
The really interesting thing to hear was talk of competition -- something that's almost never discussed on company conference calls. Said Guthart:
We anticipate the entry of additional competitive systems into some regions of the world over the next several quarters. Customers appreciate choice and it is possible that sales cycles lengthen in some countries as customers evaluate more options.
Our company is anticipating increased competition, and we are focused on understanding the market's needs and selling and delivering products and services today and in the future that meet them.
This is where Intuitive's competitive advantages come into play. With a net cash position of almost $4 billion, Intuitive can pour more into research and development than many smaller competitors. Its installed base of 4,400 machines also has high switching costs, as hospitals have poured millions into the systems, and doctors have devoted much of their lives to using Intuitive's platform.
While competition is something to be aware of, it should not yet be a major concern for investors.
In the year ahead, management predicts that procedures will grow between 11% and 15%. Investors should keep an eye on international growth and the continued emergence of procedures from U.S. general surgery, including hernia, colorectal, and bariatric procedures.
