Intuitive Surgical Inc ISRG posted adjusted earnings of $2.54 per share in the fourth quarter of 2017, which beat the Zacks Consensus Estimate of $2.27 and improved 25.1% year over year.
Revenues increased 17.9% year over year to $892.4 million, driven by growth in Instrument & Accessories, Services and Systems segments. Revenues also beat the Zacks Consensus Estimate of $864 million. The stock has a Zacks Rank #3 (Hold).
FY17 at a Glance
Intuitive Surgical reported revenues of $3.12 billion in full-year 2017. The company has three major revenue segments — Instruments and Accessories (52.3% of total revenues), Systems (29.1% of total revenues) and Services (18.6% of total revenues).
Intuitive Surgical, Inc. Price, Consensus and EPS Surprise
Business Highlights
Solid Procedure Trends
Intuitive Surgical posted solid numbers in the quarter, courtesy of rising customer adoption of procedures and growth in system placements. The company outperformed in the Mature and Growth procedures, especially in general and thoracic surgery.
Precisely, fourth-quarter procedures increased approximately 17% on a year-over-year basis. Procedure performance in Asia reflected persistent strength backed by solid growth in China, Japan and Korea. Added to this, growth in prostatectomy procedure volumes lent the company a competitive edge in the broader prostate surgery market in the fourth quarter.
Favorable Study Results
In November 2017, a team of investigators from the University of Southern California, the University of Michigan Ann Arbor, Penn State Health and Intuitive Surgical published a large-scale study titled ‘Robotic-Assisted, Video-Assisted Thoracic and Open Lobectomy: Propensity Matched Analysis of Recent Premiere Data in the Annals of Thoracic Surgery’.The results from this study demonstrated the increase in the number of robotic-assisted lobectomies. Lobectomy can be defined as surgical excision of a lobe or an organ.
In the quarter under review, Intuitive Surgical submitted the 510(k) applications to the U.S. FDA for its 60-millimeter stapler for da Vinci X and Xi platforms.
International Sales
The company has been gaining solid prominence globally. In fact, outside the United States, the company’s procedures improved approximately 21% on a year-over-year basis.
Intuitive Surgical’s system placements included 47 in the Europe and 22 in Japan. Notably, 25 of the 47 systems placed in Europe, were da Vinci X systems. However, as the OUS markets are in early stages of adoption, sales might lag estimates in the region.
Revenue Segments
Instruments & Accessories
Revenues in the segment rose 18% to $457 million in the quarter, on the back of strong procedure growth and increased sales of stapling and vessel sealing products. Revenues realized per procedure were approximately $1,910, flat year over year.
Systems
Sales in the segment increased 20% to $283 million, buoyed by higher system placements and partially offset by lower average selling prices. Coming to the company’s flagship da Vinci surgical platform, Intuitive Surgical shipped 216 systems compared with 163 in the prior-year quarter.
Services
The company registered revenues of $153 million, up 13% on a year-over-year basis and backed by growth in the installed base of da Vinci systems.
Gross Margin
Intuitive Surgical’s adjusted gross margin in the reported quarter expanded 130 basis points (bps) to almost 71% of net revenues. The increase in margins indicates the company’s consistent efforts to lower manufacturing cost.
Notably, management expects margins to fluctuate based on the company’s mix of new products, reduction of product costs and the reinstatement of the medical device tax in 2018.
Financial Update
Intuitive Surgical ended the fourth quarter of 2017 with $3.8 billion in cash, cash equivalents, and investments, in line with the third-quarter figure. Per management, this was offset by a final payment of $274 million associated with the accelerated share repurchase agreement initiated by the company in first-quarter 2017.
Guidance
For 2018, Intuitive Surgical anticipates full year procedure growth within a range of 11% to 15%. Procedure growth is expected to be driven by U.S. general surgery and procedures outside the United States.
Management expects operating expenses to rise in the range of 16-18% in 2018, as the company continues to invest in emerging markets and new technology including computer-assisted surgery.
Gross margin is expected within the range of 70-71.5% of net revenues in 2018.
Incorporating projected impacts of the newly enacted U.S. tax law, Intuitive Surgical expects 2018 income tax rate between 2% and 20% of net pre-tax income.
Bottom Line
Intuitive Surgical exited the fourth quarter on a solid note, beating the Zacks Consensus Estimate on both the counts. Also, the company witnessed impressive procedure performance in Asia. A positive outlook for the upcoming quarters also raises optimism in the stock. Further, incremental spending on product development and higher investments in international markets are likely to boost long-term growth.
However, a surge in operating expenses and the reinstatement of the medical device tax are likely to dampen the company’s bottom line in the upcoming days. Further, the da Vinci Surgical System has a long sale and purchase order cycle which might act as a deterrent. Added to this, cutthroat competition in the niche space is a concern.
Key Picks
A few better-ranked stocks in the broader medical sector are Amedisys AMED, Bio-Rad Laboratories BIO and ABIOMED ABMD.
Amedisys has a long-term expected earnings growth rate of 18.5%. The stock carries a Zacks Rank #2 (Buy).
Bio-Rad Laboratories flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. The company has a long-term expected earnings growth rate of 25%.
ABIOMED has a long-term expected earnings growth rate of 31.5%. The stock carries a Zacks Rank of 2.
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