Earnings Preview: Intuitive

Posted by Erica Brooks

Intuitive Surgical (NASDAQ:ISRG) is slated to report its second-quarter 2011 results on Tuesday, July 19. The current Zacks Consensus Estimate for the quarter is $2.71, representing an estimated 23.87% annualized growth.

First Quarter Recap

Intuitive reported first quarter earnings per share of $2.59, beating the Zacks Consensus Estimate of $2.49 and exceeding the year-ago figure of $2.12. Revenues increased 18% year over year to $388 million, beating the Zacks Consensus Estimate by $9 million.

Recurring revenues grew at a brisk pace and constituted about 57% of sales in the reported quarter, representing one of the highest levels since the inception of the company.

Instruments and accessories revenues were $157 million in the quarter, up 28% year over year. Worldwide procedures increased 30%. The company experienced growth in both existing and emerging procedures. However, prostatectomy stagnated somewhat in the U.S. Revenues per procedure were $1,940, flat on a sequential basis and down about 2% year over year.

The company posted total systems revenue of $167 million in the quarter, up 8%. Intuitive sold 120 systems in the first quarter (of which 110 were cutting-edge da Vinci systems) versus 104 systems in the year-ago period. The company had an installed base of 1,840 at the end of the quarter, up 26% year over year, of which 1,344 systems were based in the U.S.

Services/Training revenues were $64 million in the quarter, up 26% year over year, primarily due to growth in the installed base of da Vinci Surgical systems.

Estimate Revision Trend

Agreement

The trend in estimate revisions for the second quarter has been completely static over the past 7 days and relatively stable over the prior month. Of the 15 analysts covering the stock, none changed their estimates over the past week. There was one upward revision and one revision in the downward direction over the prior month.

A similar dearth of activity was observed for estimates for fiscal 2011. There were no changes in the past week and only one upward revision over the prior month. The current Zacks Consensus Estimate for 2011 is $11.17, representing an estimated 17.92% year over year growth.

Magnitude

Given the general lack of estimate revisions, the magnitude of revisions for the current quarter has hit a plateau over both the last 7 and 30 day timeframes. The magnitude of revisions for the fiscal year also hit a plateau over the past 7 days and gained only a penny over the past month.

Intuitive Surgical has generated positive surprises in each of the previous four quarters, and we expect the same trend to continue. The company produced an average positive earnings surprise of 11.72% over the prior four quarters, meaning that it beat the Zacks Consensus Estimate by that measure.

Our Take

We expect a number of procedures that are currently completed either in an open surgical manner or with laparoscopy to be eventually replaced by da Vinci surgery, as robotic surgery becomes the standard of care in many instances. Besides hysterectomy and prostatectomy where it is already entrenched, Intuitive is gaining traction in a large number of emerging procedures as well. The company enjoys a virtual monopoly in robotic surgery with little competition. Intuitive competes with Accuray (NASDAQ:ARAY) in certain niches.

Intuitive’s recurring revenue stream continues to grow and provides a shield against cyclicality of revenues arising from the sale of discretionary capital equipment to hospitals. However, we believe that until the global economy fully recovers, the stock may come under pressure, at times, as investors ponder whether lingering macro economic uncertainty weakens hospitals’ commitment to buy high-cost robotic systems. The pace of adoption of robotic surgery may therefore be lumpy and growth in usage also requires acceptance from patients and training to medical practitioners.

In the interim, the installed base of Intuitive continues to grow as more hospitals feel compelled to upgrade their technology. In balance, a reasonable valuation is appropriate given such plus points as Intuitive’s leading position in robotic surgery, barriers to entry, steady cash flow, sizeable cash balance and absence of debt.

We prefer to remain on the sidelines partly due to high valuation, which factors in the attractive growth prospects of the company, despite the da Vinci system’s leading status as an enabler of robotic minimally invasive surgery. Our Neutral recommendation on the stock is supported by a short-term Zacks #3 Rank (Hold).