On the preliminary results sheet, sales in the quarter were expected to rise 12% year over year to $677 million. 158 da Vinci surgical systems were shipped during these three months, and earnings per share could be expected to beat the $5.00 analyst consensus.
The final revenue figure was right on the money, and no adjustments were made to the system sales volume or number of robotic procedures performed. All preliminary estimates were said to be consistent with the final tally. And adjusted earnings did indeed come in above analyst targets, landing at $5.89 per diluted share.
No surprises so far. But Intuitive Surgical still had some solid news to present. Let's start with some additional figures.
da Vinci by the numbers
First, adjusted net income rose 21.7% to $224 million. Meanwhile, earnings per share only increased by 19.7%. The difference is explained by 2.1% of dilution from freshly printed shares. Intuitive Surgical had been buying back more shares than it printed for a couple of years, but then went back to its old dilutive ways over the last five quarters.
2% annual dilution is a deal breaker for some investors, but many of us can live with even a significant amount of dilution as long as earnings keep rising. In this case, earnings are still rising much faster than sales, which points to widening margins and generally strong profitability. Remember, Intuitive Surgical crushed Wall Street's earnings estimates.
Inventories dropped from $194 million to $168 million -- the lowest level seen since the summer of 2013. That's a sign of fantastic demand for da Vinci machines, shipping the robot bundles out faster than the company can build new ones.
In 2016, Intuitive Surgical isn't planning any major product launches -- the da Vinci XI system has been available for less than two years and the single-port system is even newer. These platforms will continue to carry the load for a few more years.
Indeed, these systems are still being upgraded. In another late Thursday press release, Intuitive Surgical announced that the FDA has cleared a new system for movable operating tables integrated into the da Vinci Xi platform. The table, made by the Trumpf division of Hill-Rom Holdings (NYSE: HRC) gives the surgeon brand new access angles, gravity-assisted exposure of organs, and improved reach within the minimally invasive operation space. Surgical tools will automatically move as the table is adjusted, allowing the surgeon to focus on the procedure rather than worrying about the changing environment.
The company will start promoting these movable table systems immediately, hoping to reap the benefits of a five-year development pact with Hill-Rom. The system has been in use across Europe since the summer of 2015, and the companies seek clearance in other markets worldwide.
Hill-Rom is a much more diverse company, and will neither sink nor swim based on how the market adopts its movable da Vinci tables. That being said, it's an early step in a larger plan to develop high-growth opportunities via R&D partnerships. In a recent earnings call, Hill-Rom COO Carlyn Solomon talked about the "good opportunity in the Trumpf line with some of the corporate partnerships we formed and some of the joint R&D we've done with people like Intuitive Surgical."
Besides marketing improved Xi systems worldwide, Intuitive Surgical is wants to encourage surgeons to consider a range of recently approved procedures. These are mostly in the fields of thoracic surgery (heart and lungs), hernia repair, and colorectal procedures.
The company is still leaving the orthopedic space to traditional open and endoscopic treatments, focusing instead on gynecology, cancer removal, and other internal procedures. In general, the company is serving a minuscule niche of an enormous market, with growth opportunities in every direction.
In 2016, the number of worldwide da Vinci procedures should increase by 9-12%. Revenues should increase according to normal seasonal patterns, but management didn't commit to a specific target range and pointed out that unexpected currency exchange effects can make a big difference. About 25% of Intuitive Surgical's revenues come in from abroad, after all, and that international sales stream is only expected to increase.
The view from the top
"Our strong results reflect expanded use of our products in general surgery and international markets," said Intuitive Surgical CEO Gary Guthart in a press statement. "While robotic-assisted surgery has been growing for years, we believe we are in the early stages relative to our long-term opportunity."
Like I said, the company is taking baby steps and focusing on a very specific set of surgical procedures at this point. There are plenty of unexplored floodgates left to open. 652,000 procedures were completed with da Vinci systems worldwide in 2015. While that's an impressive figure, consider that the U.S. alone sees about 51 million inpatient surgeries each year.
Total knee replacements alone represent a larger market than all of da Vinci 's global reach, and again, that's just in America. Mako Surgical made a living out of serving exactly that niche with robotic tools until Stryker bought that company wholesale for $1.65 billion. Today, Mako's growth prospects sometimes seem like all analysts want to talk about on Stryker's earnings calls.
The point is, Guthart is absolutely right. There's a lot of growth ahead for Intuitive Surgical, as long as the company continues to execute on its opportunities. Right now, the machinery is humming on all cylinders.