Intuitive Surgical (ISRG +2.40%) is the world's largest robotic-surgery company, and at J. P. Morgan's annual high-profile healthcare conference this week, management unveiled its latest financial results and an updated outlook for its future. The potential for robotic surgery to reduce surgical errors and improve patient recovery times continues to drive its use higher and innovations are expanding the approach to more procedures. Is this disruptive company a stock worth buying?
Firing on all cylinders
As part of its presentation to industry watchers this week, Intuitive Surgical released preliminary fourth-quarter financials that suggest the company's business is humming along nicely.
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In the quarter, sales grew 17% year-over-year to $1.05 billion as procedures using the company's da Vinci surgical system increased by 19%. The company also says it shipped 290 da Vinci systems to hospitals and surgery centers in the quarter, up 34% from the same period last year.
The strong quarter resulted in full-year 2018 sales of $3.72 billion, up 19% from 2017, and total procedures eclipsing 1 million in one year for the first time. Overall, Intuitive Surgical shipped 926 systems in 2018.
The growth in procedures is particularly important to investors because Intuitive Surgical derives a lot of its sales from disposables used in procedures, and those disposables offer higher margins than da Vinci systems. Management didn't provide any preliminary bottom-line figures for the quarter, however, so investors will have to wait until the company reports its audited quarterly and annual financials on January 24, 2019 to find out how much of its top-line growth flowed to earnings.
| Metric | Q4 2018 | YOY % Change for Q4 2018 | FY 2018 | YOY % Change for FY 2018 |
|---|---|---|---|---|
| Revenue | $1.05 billion | 17% | $3.72 billion | 19% |
| Da Vinci shipments | 290 | 34% | 926 | 35% |
| Instrument/accessories sales | $539 million | 18% | $1.96 billion | 20% |
| Systems revenue | $341 million | 20% | $1.13 billion | 21% |
| Services revenue | $167 million | 11% | $635 million | 11% |
Data source: Intuitive Surgical. YOY = year over year.
What the numbers say about the company
The number of procedures done using da Vinci is critical to the company's future success, and fortunately, this figure remains strong. In the fourth quarter, procedures grew 19% year over year, which is similar to the 20% growth reported in the third quarter and 18% growth reported in the second quarter. For the full year, procedures were up 18%, which is at the high end of its guidance of 17% to 18% exiting the third quarter and nicely higher than its guidance of 12% to 15% exiting Q1 2018.
The company didn't break out U.S.-versus-international procedure growth, so it will be important to see how those figures look when the company reports its full results later this month. In Q3, procedures done in markets outside America grew 23%, outpacing the 19% growth in the United States.
In addition to faster growth in foreign markets, procedures are also benefiting from innovation that's allowing da Vinci to be used in more types of surgeries. In prior quarters, procedure growth has come largely from increasing use in general surgery, particularly hernia repair and colorectal procedures, due to new instruments. The use of da Vinci is more common in urology and gynecology, so those mature markets are growing in line with the rate of diagnosis, rather than because Intuitive Surgical is convincing more surgeons and administrators of da Vinci's advantages over freehand surgery, such as lower complication rates. In Q4, use of da Vinci in general surgery grew 34% year over year. Growth was more muted in urology and gynecology, increasing by 5% and 8%, respectively.
Overall, Intuitive Surgical's double-digit procedure and revenue growth offer a lot for investors to like and little reason to worry earnings per share will fall far shy of industry watchers' outlook, which ranges between $10.93 and $11.50 for the full year 2018. The one ding in the quarter, however, is that average prices for systems, instruments, and accessories slipped 1% from last year.
What management's saying about its future
In the short term, investors should recognize Intuitive Surgical's business is subject to seasonality. Historically, procedure volume tends to dip in the first quarter from the fourth quarter, and the first quarter has been the weakest in terms of da Vinci system sales. Therefore, it could be best to model for a slowdown in growth in Q1, followed by a reacceleration as the year progresses. For the full year, management thinks procedures will increase between 13% to 17% in 2019.
Looking at the longer term, management reports that 21.8 million invasive surgeries are performed in the U.S. alone every year. That suggests there's plenty more room for margin-friendly procedure growth, despite da Vinci's use in over 1 million surgeries in 2018.
Check out the latest Intuitive Surgical earnings call transcript.
