It's been a tumultuous two years for shareholders of Intuitive Surgical (NASDAQ:ISRG), parent company of the daVinci surgical robotic system. Shares of the company fell almost 40% during 2013 alone, and investors are hoping for better days ahead.
Intuitive reported results for the third quarter this week, and the market largely yawned. Revenue was up 10%, as was procedure volume, while earnings per share were actually down -- though that was largely due to a one-time benefit last year.
Beyond the headlines, however, there are some crucial details investors need to be aware of. After listening to the company's conference call, these are what I consider to be the three most salient takeaways.
Hysterectomies are still down in the U.S.
Two years ago, gynecology procedures -- with hysterectomies making up the majority -- performed inside the United States accounted for a whopping 39% of all procedures carried out with daVinci worldwide. Then, the company faced some noticeable headwinds: Studies questioned the cost-effectiveness of robotic surgery, and leading professionals voiced likewise concern.
As management made clear on the conference call, the company's utility in the field is still declining, though it may finally be showing signs of stabilization.
"Trends present in prior quarters in gynecology continued with stable trends in hysterectomy for malignant conditions combined with the slight decline in benign hysterectomy versus prior year," said CEO Gary Guthart.
One ray of hope may come from Intuitive's newest innovation: the Single-Site Needle Wristed Driver. The instrument helped single-site hysterectomy procedures show a significant gain, though the overall number of single-site hysterectomy procedures is still very small.
Margin contraction was largely due to one-time charges
One of the big reasons Intuitive's stock didn't pop after beating analyst estimates is because margins contracted more than expected. During the second quarter, gross margins stood at 67.2%; that number contracted to 65.6% during the third quarter.
Most of that contraction, said CFO Marshall Mohr, came from one-time events that don't represent long-term trends: "I will attribute three quarters of that to unusual items in the quarter: the stapler stop use [...] a scope recall and then we had some cost associated with our acquisition of [...] the Japanese distribution business and the accounting around that.
Over the long term, the acquisition of the Japanese distribution business should be a good move. What investors really need to watch is the frequency with which product recalls occur. Of course, no company plans on having problems with their products, but healthcare investors need to remain vigilant that these "one-time" events don't become too commonplace.
Growth continues in general surgery
I have long maintained that the key to future growth for Intuitive Surgical lies in its ability to expand its base of surgical procedures. Traditionally, gynecology and urology procedures have made up the vast bulk of procedures. In America, the company may be reaching saturation in those two categories.
That's why I was very excited to hear this tid-bit from Guthart: "Looking more closely at the United States, growth in general surgery lead the way with [...] the procedure category, our second largest behind gynecology. General surgery procedure growth was broad-based, including conol resection, rectal resection and hernia repair."
During last quarter's conference call, Guthart spent considerable time talking about the opportunity in hernias. Based on his comments this week, it appears that growth in the procedure continues to increase at a healthy pace.
Just as importantly, it seems Intuitive's newest robot, the Xi -- which has enhanced mobility and visualization -- is resonating with doctors outside of the gynecology core. Guthart said, "Urologist, colorectal surgeons and general surgeons have been the main proponents for Xi System purchases to date."
For long-term investors -- like myself -- this is key. While short-term concerns like product recalls and resistance to large capital purchases in the face of the Affordable Care Act could hold the company back over the next few quarters, long-term trends are considerably better.
For every additional procedure where Intuitive proves that daVinci's use provides better patient outcomes, the opportunity for recurring revenue snowballs. Looking ahead, I hope to see this growth in general surgery continue, and I will be paying particularly close attention to what management thinks 2015 could be like when it comes to hernia procedures in the United States.
Brian Stoffel owns shares of Intuitive Surgical. The Motley Fool recommends Intuitive Surgical. The Motley Fool owns shares of Intuitive Surgical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.