It was the best of times, it was the worst of times, it was the age of great year-over-year comparisons, it was the age of declining margins.
Intuitive Surgical (ISRG -0.55%) channeled its inner Charles Dickens in the first quarter.
Revenue, adjusted for Xi trade-out offers that were prolific in the year-ago quarter, increased 9% year over year in the first quarter; if you exclude currency changes from the stronger dollar, adjusted revenue broke the double-digit barrier with an 11% year-over-year comparison. Intuitive Surgical shipped 99 da Vinci Surgical Systems, a solid 14% increase from the 87 systems in the year-ago quarter.
In the first quarter, the number of procedures performed on da Vinci systems increased 13% year over year. It's early days, but management highlighted hernia repair as one of the new procedures that can be performed on the new da Vinci Xi System and grow procedures further as prostatectomy and gynecology procedures top out.
Management upped its estimate for 2015 procedure growth to between 8% and 11% up from previous guidance of 7% to 10% announced back in January. Given the 13% increase in the first quarter, the guidance could still be a lowball estimate, as management has been known to do.
It was the season of light, until we get to the darkness of the bottom line
Despite the growth in revenue from system sales and consumables used in the procedures, adjusted earnings decreased 2.9% from the year-ago quarter to $135 million. On a per share basis -- thanks to repurchasing of shares -- adjusted net income was up slightly from $3.54 last year to $3.57 in the most recent quarter. Nothing to get excited about.
You can blame the gross margins for most of the lower adjusted net income. The new Xi systems have a lower gross margin compared with the older models, and since the year-ago quarter didn't have any Xi system sales, the new mix of products had a negative effect on gross margins. The aforementioned changes in foreign exchange rates pushed down prices for products sold outside the U.S., which has a negative effect on the gross margin since many of the costs to make the products are still in dollars. Finally, there were costs associated with product recalls, which further dragged down margins.
Fortunately, two of the three issues -- year-over-year comparisons for Xi product mix and product recall costs -- will start to go away in coming quarters. Headwinds from the stronger dollar will take a little longer to work through the system.
While the Xi gross margin may never reach that of the older model, Intuitive Surgical is working on increasing manufacturing efficiencies to try to lower manufacturing costs. And while the currency exchange rates hurts revenue and gross margins, it helps operating expenses since foreign employees are paid in local currencies. Management is guiding for operating expenses to come in at the lower end of the previous guidance for year-over-year growth in the 7% to 10% range.
Here's hoping the rest of the year is more like A Christmas Carol.
