3 Areas to Watch in Intuitive Surgical, Inc.'s Earnings Release

Investors in Intuitive should hope for procedure growth above all else. Image source: Intuitive Surgical.

The world's largest manufacturer of robotic surgical systems, Intuitive Surgical (ISRG -0.50%) is set to report earnings Tuesday after the market closes. While we Foolish investors don't necessarily believe that one quarter can make or break an investment thesis, quarterly results are the individual puzzle pieces that form the whole picture of where a company is headed.

Investors got a welcome surprise last earnings season when Intuitive reported upbeat numbers, and the stock soared as high as $565 per share in July. Since then, however, the stock has fallen 15%, amidst a broader industry-wide sell-off. Here are the variables most likely to affect the stock over the short, medium, and long term.

For the day traders
Meeting or exceeding expectations is nice, but it's only imperative for day traders. We hope you don't count yourself in that group.

However, as with any stock trading for a rich 32 times free cash flow, large swings can occur after quarterly reports, and it's worth having an idea of why the moves take place. Here's what analysts are expecting tomorrow, along with expectations for the fourth quarter.

Data source: Capital IQ.

Management has recently shied away from offering guidance, so a fourth-quarter outlook may not be included in tomorrow's report.

Over the medium term
Intuitive introduced its newest robotic iteration in 2014, the daVinci Xi. As with most of its newer robots, the machine garnered lower gross margins than its predecessor.

This is, however, common for Intuitive: It takes time to convince customers to pay over $1 million for a new machine, and when orders are low, the company doesn't benefit from economies of scale. As orders pick up, those benefits start to kick in and margins improve.

Over the first two quarters of 2015, sales of daVinci systems have increased by 19%. Look for the company to keep up that pace, and for Q3 sales to eclipse Q2 sales of 118 system sales. Especially in the U.S., systems sales tend to be heavy at the end of the year, as hospitals have a clearer picture for what they can afford to spend from their yearly budgets.

Additionally, keep an eye on gross margins. During the second quarter, they improved 264 basis points to 65.94%. If the company is indeed able to sell more daVinci Xis, this number should continue to expand.

Over the long run
There is no metric more important to Intuitive's long-term investors than growth of procedures. For Intuitive to remain strong and relevant a decade from now, doctors need to continue to find new procedures that benefit both financially and from a medical-outcome standpoint from use of the daVinci.

Intuitive Surgical started out the year predicting that the number of procedures performed with daVinci would grow by 7% to 10% during 2015. However, the company grew this metric by 13% and 14% during the first two quarters of the year, respectively, leading management to up its view to 11% to 13% procedure growth for the year.

I wouldn't at all be surprised to see Intuitive best these expectations as well. Much of the growth has come from the all-encompassing "general surgery" category. Specifically, hernia operations have shown enormous potential, and remain one of the most important procedures for investors to keep an eye on.

As a long-term shareholder myself, growth in procedures will be the key metric I'll be focusing on. And I'll be keeping an ear open on the conference call to get as much color as possible on the performance of the daVinci in hernia repair operations.