Intuitive Surgical (ISRG) Tops Q2 Earnings & Sales, Stock Up

Shares of Intuitive Surgical Inc. (NASDAQ:ISRG) surged almost 7% in after-hours trading following another impressive quarterly result. The da Vinci system maker posted adjusted earnings of $5.62 per share in the second quarter of 2016, up 23% on a year-over-year basis on significant revenue growth and margin expansion.

Including stock-based compensation, adjusted earnings came in at $4.86 per share, which crushed the Zacks Consensus Estimate by 65 cents and surged 28.3% from the year-ago quarter.

Revenues increased 14.3% year over year to $670.1 million, driven by higher procedural volume and growth across all segments. Revenues were higher than the Zacks Consensus Estimate of $643 million as well. Recurring revenues totaled $447 million, representing almost 75% of the revenues in the quarter.

Procedure Details

Worldwide da Vinci procedure volumes grew approximately 16% year over year to 176K. Procedures in the U.S. grew approximately 13%, while that outside the U.S. increased about 25%.

Increasing adoption in general surgery procedures in the U.S., continued growth in urology procedures worldwide and modest growth in the U.S. urology and gynecology drove the procedure growth in the quarter.

Management stated that under the general surgery, inguinal hernia repair and ventral hernia repair growth remains strong, while growth in colorectal surgery was solid.

Procedure growth was variable by country in Europe; with strong performance in Germany offsetting a slight sequential decline in the U.K. Procedure growth improved modestly, both in the Nordic countries and France.

In Asia, procedure growth in Japan was solid while growth in Korea was robust and accelerated sequentially. Growth in procedures in China was also strong in the reported quarter.

INTUITIVE SURG Price, Consensus and EPS Surprise

INTUITIVE SURG Price, Consensus and EPS Surprise | INTUITIVE SURG Quote

Revenue Details

Instruments and Accessories revenues grew 14.3% to $339.3 million in the quarter driven by a higher number of procedures. Revenues realized per procedure were approximately $1,810 which decreased slightly on a sequential basis.

System sales increased 15.2% to $202.7 million driven by higher revenues from operating lease activities as well as system average selling price (ASP). Intuitive Surgical placed 130 systems in the quarter, up from 118 in the year-ago quarter.

Management at Intuitive Surgical noted that 15 systems were placed under operating lease transactions in the second quarter, compared with 19 in the first quarter, and 5 systems in the year-ago quarter. At the end of the second quarter, there were 66 systems out in the field under operating leases.

Intuitive Surgical generated approximately $4 million of revenue associated with operating leases in the reported quarter, compared with $1 million in the year-ago quarter, and $4 million in the first quarter 2016.

The company also generated almost $13 million of revenues from lease buyouts compared with $6 million in the first quarter, and $4 million in the year-ago quarter.

Of the total systems placed during the first quarter, 77% were da Vinci Xi as compared to 72% in the preceding quarter.

Globally, system average selling price (ASP) increased to $1.56 million, almost $60,000 higher than the year-ago quarter ASP. The year-over-year growth primarily reflects a higher mix of dual console systems and sales of Table Motion.

Hospital financed approximately 37% of the systems installed in the quarter under review, down from 17% in the last quarter. Intuitive Surgical directly financed 31 systems of which 19 were structured as operating leases.

Outside the U.S., the company placed 51 systems compared with 46 systems in the year-ago quarter and 36 systems in the first quarter. The company noted that 22 were placed in Europe, 4 in China, and 13 in Japan.

Service revenues were up 13.1% to $128.1 million on growth in the installed base of da Vinci Surgical systems.

Margin Details

Adjusted gross margin expanded 410 basis points (bps) to 70.6% in the reported quarter buoyed by lower product and product repair costs, improved manufacturing efficiencies and favorable revenue mix.

Adjusted operating margin expanded 610 bps to 38% owing to lower selling, general & administrative expenses (SG&A), which as a percentage of revenues, decreased 240 bps on a year-over-year basis. Research & development (R&D) expenses, as a percentage of revenues, also decreased 30 bps.

Balance Sheet

Intuitive Surgical had cash, cash equivalents and investments of $4.2 billion as of Jun 30, 2016, as compared with $3.8 billion as of Mar 31, 2016.

Guidance

Intuitive Surgical now forecasts 2016 procedural volumes in the range of 14% to 15%, up from the earlier guided range of 12% to 14%. However, the company expects procedure growth to slow down in the second half of 2016.

Intuitive Surgical noted that its da Vinci Sp (Single port) program is progressing as planned. Management expects first markets for the device to include head and neck surgery, urology and colorectal surgery.

The company now expects fewer lease buyouts and lower upgrade and other system revenue in the third and fourth quarter as compared to the second quarter. Second half 2016 system ASPs will likely be lower than the second quarter driven by product and channel mix.

Management expects 2016 gross margin in the range of 70% to 71%, up from the previously guided range of 69% to 70%. However, gross margin is expected to decline in the second half of 2016.

Further, the company anticipates a 12% to 15% year-over-year increase in operating expenses in 2016, as the company continues to invest in robotic assisted surgery.

Our Take

We believe that growing adoption of Intuitive Surgical’s da Vinci system among physicians for general surgery, oncology, urology and gynecology procedures is a key growth catalyst. Moreover, increasing procedural volumes outside the U.S. presents significant growth opportunity for the company.

Further, the integrated Table Motion has gained significant traction within a short span of time, which will boost top-line growth.

Meanwhile, incremental spending on product development and higher investment on expanding the company’s footprint in international markets (particularly in Europe) are prudent moves that will drive long-term growth.

The company expects to invest in developing imaging products, new kinds of endoscopes and expanding its fluorescence imaging portfolio. However, higher spending can weigh on margins in the near term.

Moreover, we believe the positive trends are quarter-specific and the company has a long way to go in order to sustain the momentum. These include continued growth in the U.S. as well as international procedural volume, particularly in China, Japan and Europe. Notably, markets outside the U.S. are still in the early stages of adoption; hence system placements are expected to remain inconsistent in the near term.

Zacks Rank & Key Picks

Currently, Intuitive Surgical carries a Zacks Rank #4 (Sell).

Better-ranked medical instrument stocks include Abiomed (NASDAQ:ABMD) , Masimo Corp (NASDAQ:MASI) and Mesa Laboratories (NASDAQ:MLAB) . All the three stocks sport a Zacks Rank #1 (Strong Buy).