You'll have to go all the way back to 2013 to find a year when Intuitive Surgical (ISRG 1.34%) didn't deliver a positive return for investors. So far in 2021, the robotic surgical systems pioneer is handily beating the market with shares jumping more than 20%.
This winning streak seems likely to continue after Intuitive announced its third-quarter results following the market close on Tuesday. The company again beat Wall Street revenue and earnings estimates. But the headline numbers are only part of the story. Here are three important things to know from Intuitive's Q3 results.
Image source: Intuitive Surgical.
1. Procedure growth normalizing
Arguably the most critical non-dollar number for Intuitive in each quarterly update is its procedure growth. Procedures drive recurring revenue, which made up 76% of total revenue in the third quarter.
Intuitive's procedure growth has been all over the map since early last year due to COVID-19. In the second quarter of 2020, year-over-year procedure volume fell 19% -- something practically unheard of for the company. Procedure growth was only in the single-digit percentages for the next two quarters.
In the second quarter of this year, though, Intuitive's procedure volume soared 68% year over year. This unusually high level was due mainly to the abnormally low number of procedures in the prior-year period combined with pent-up demand after pandemic-related surgery delays.
Now, procedure growth appears to be normalizing. Intuitive reported year-over-year procedure growth in Q3 of 20%. That's in line with the typical performance prior to the pandemic.
Why is this normalization important? Some investors have worried about the potential impact of the delta variant and the associated rise in COVID-19 cases on Intuitive's performance. While COVID-19 remains a wild card for the company, its Q3 results should reassure jittery shareholders.
2. Operating leases at an all-time high
There's one trend that hasn't been disrupted much at all by COVID-19. Operating leases continue to be popular with customers. Intuitive reported Q3 operating lease revenue of $72.5 million, up 58% year over year and 8% from the previous quarter.
Of the 336 da Vinci systems shipped in Q3, 139 (41%) were under operating leases. The company stated that 18% of its overall install base is now under operating leases -- an all-time high.
In the past, Intuitive's customers primarily paid upfront to buy da Vinci systems. This gave the company an immediate boost to revenue. Operating leases change that dynamic. The company doesn't get to record nearly as much revenue upfront when it ships a system. However, it's able to build longer-term recurring revenue.
This is good for Intuitive because it makes its financial performance steadier. The company can plan more effectively with more of its revenue predictable. It also reduces the chances that Intuitive misses Wall Street estimates. Although these misses really don't matter over the long term, they can cause volatility for the healthcare stock over the short term.
3. A massive cash stockpile
One number that investors should really pay attention to with Intuitive is its massive cash stockpile. The company reported cash, cash equivalents, and short-term investments of $8.2 billion at the end of the third quarter, an increase of $485 million from three months earlier.
There are only a few options for Intuitive with respect to this huge cash position. The company can do nothing. It can reinvest in its business, particularly in research and development. Intuitive could use its cash to make acquisitions and other business development deals. It can buy back shares. The company could also consider offering a dividend.
Intuitive's default option has been to sit on its cash, which is why the company's cash stockpile has grown so large. It's already investing heavily in R&D -- $165.5 million (nearly 12% of sales) in Q3 alone. In the past, Intuitive has bought back shares. The company has also made relatively small bolt-on acquisitions. It hasn't hinted at initiating a dividend program, though.
Sooner or later, Intuitive will probably decide to put more of its cash to work. When the company does so, expect it to use the money in a way that directly rewards shareholders.
