Late in January, surgical robot-maker Intuitive Surgical (ISRG 0.94%) reported earnings that proved it is back on solid ground after having a rough two-year run. We've already covered the company's earnings statement from 30,000 feet, but we Fools think it's important to really get to know our investments.
As such, I recently read through Intuitive's conference call as well, and there were five big takeaway messages that any investor in the company needs to know. Here's what I found out.
The new Xi is popular
For the first time in a number of years, Intuitive Surgical came out with a completely new surgical platform in 2014, dubbed the daVinci Xi, seen below.
Intuitive's Xi machine has proven to be a hit with hospitals. Source: Intuitive Surgical.
According to company CFO Marshall Mohr, the Xi is now the primary capital purchase for hospitals: "137 systems were placed in the third quarter [and] 97 of the systems placed in the fourth quarter were Xis."
In other words, over 70% of those buying surgical robots from daVinci were buying Xis. That's up from 52% and 53% during the second and third quarters of 2014, respectively. This is a very important trend to see, as a failure to see the adoption rate rise would've been a deathblow to the company, as it would have indicated unwillingness on hospitals' parts to invest in the company's newest technology.
But it doesn't bring in as much money
Intuitive Surgical is a razors-and-blades play. Although its daVinci systems cost over $1 million, it is from the recurring revenue for parts and services that the company really makes its money.
Having said that, it's still important to pay attention to the "razors" themselves. Mohr said that, "Globally, our system ASP [Average Selling Price] of $1,550,000 increased relative to the ASP for the fourth quarter of last year of $1,460,000." Usually, you'd look at this and think, "That's great, they're selling their robots for more."
But that isn't the case with Intuitive. Last year, most system sales were from the older models. With the Xi in the mix, net profit margins actually went down. Mohr explained this by saying, "Our lower margin percentage [...] reflects a high mix of Xi systems."
That's OK if it helps drive adoption in general surgery
In the end, lower margins for the Xi will be a moot point if they lead to greater procedure volume. The Xi offers surgeons unmatched dexterity, visualization, and four-quadrant access.
Previously, the vast majority of procedures performed with daVinci were in gynecology and urology. Those two markets are quickly becoming saturated, and Intuitive management understands that if it's going to be a leader in robotic surgery in the future, its robots need to be able to help in other arenas as well.
So far, that seems to be happening. As CEO Dr. Gary Guthart explained, while overall procedure growth for the year was 9%, "General surgery growth was approximately 33% for the year comprised of strong growth in da Vinci colorectal surgery, hernia repair and in other general surgery procedures."
Management has spent lots of time detailing the growth potential in helping make hernia surgery more cost-effective with better outcomes for patients. Investors should keep an ear open for what management has to say about hernia procedure growth in future quarters.
That growth won't happen overnight
But if investors are expecting overall procedure growth to reach anywhere near that 33% mark in 2015, they need to temper their expectations. Management no longer provides revenue guidance, but it does provide guidance for procedure growth.
Calvin Darling, Intuitive's Senior Director of finance said that, "During 2015, we anticipate full year procedure growth within a range of 7% to 10%." He was also quick to point out that investors need to understand that Intuitive's business is typically back-weighted to the end of the year. That's because hospitals have a better idea of what they can spend on, and individuals are looking to use up their benefits before the new year begins.
Management is taking the long-view
At first, it might seem a little silly for a company that's projecting procedure growth of just 8.5% to be trading for 31 times earnings. But perhaps the most important quote from the company's conference call helps explain this.
Darling said: "We believe it is fundamentally early days for computer assisted surgery and we will continue to make investments to pursue significant growth opportunities." If you're a long-term investor (we're talking decades, not days), that's music to your ears. There's no telling where this technology could be 30 years from now, but its potential helps explain why Wall Street is willing to pay up for this stock.
