Intuitive Surgical (ISRG) reported favorable first-quarter 2011 results. Earnings per share came in at $2.59, beating the Zacks Consensus Estimate of $2.49 and the year-ago figure of $2.12.
First Quarter Review
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, which represents 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.
We have discussed the quarterly results at length here: Intuitive Outshines Estimates
Agreement – Estimate Revisions
Estimates for fiscal 2011 demonstrate an upward trend, among the majority of analysts, since the announcement of the first quarter results. Out of 16 analysts covering the stock, 8 have raised their estimates, for the current year, over the last 30 days with 2 downward revisions. Likewise, 6 analysts (out of a total of 14) have raised their forecasts for 2012 over the past month with 4 lowering their estimates. Estimates over the past week, however, reflect relative lack of movements.
Magnitude – Consensus Estimate Trend
Positive revisions, coupled with a moderate directional agreement, have led to an increase in annual forecasts for Intuitive Surgical. There has been an increase in estimates by a nickel for 2011, and 6 cents for 2012, over the last 30 days. The current Zacks Consensus Estimate for fiscal 2011 is $11.13, reflecting an estimated 17.49% year-over-year increase.
Intuitive Remains “Neutral”
Intuitive forecasts overall sales growth of 16% to 20% for fiscal 2011. The company continues to expect total procedure count to increase in the range of 25% to 28% year over year from a base of about 278,000 procedures in fiscal 2010.
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’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 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.
Intuitive signed a licensing pact, on August 17, 2010, with Cardica (CRDC) under which it obtained the exclusive global license to Cardica's intellectual property, related to tissue cutting, stapling and clip appliers for application in the robotics field.
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).
About Earnings Estimate Scorecard
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