Intuitive Surgical Inc. (ISRG) reported fourth-quarter 2014 adjusted EPS (including stock-based compensation) of $4.18, which steered past the Zacks Consensus Estimate by 75 cents. However, EPS declined 4.1% from the year-ago quarter primarily owing to contraction in gross and operating margins.
Revenues
Revenues (including the impact of the Xi trade-out program) increased 4.3% year over year to $600.8 million, which was much better than the Zacks Consensus Estimate of $585 million. The year-over-year growth was attributable to robust performance across all the business segments.
Instruments and Accessories revenues grew 4.5% to $280 million in the quarter. Global da Vinci procedures grew approximately 10% on a year-over-year basis driven by higher general surgery procedures (up 33%) and worldwide urologic procedures (21%).
Revenues realized per procedure were approximately $1,830, down from $1,930 in the year-ago quarter. The decline can be primarily attributed to unfavorable customer buying pattern (fewer stocking orders) and temporary withdrawal of the da Vinci Si Stapler systems from the market.
The withdrawal resulted from three intraoperative instrument failures, which have however been solved by Intuitive Surgical in the quarter.
Systems revenues increased almost 3% to $211 million. Intuitive Surgical shipped 137 da Vinci Surgical Systems, one less than the number shipped in the year-ago quarter. Sales of da Vinci Xi System moved up to 97 units from 59 units in the previous quarter.
Globally, system average selling price (ASP) increased to $1,550,000, primarily on favorable product mix (higher number of Xi’s). Hospital financed approximately 15% of the systems, down from 27% in the third quarter. Intuitive Surgical directly financed 12 systems of which 5 were structured as operating leases. Through the fourth quarter of 2014, the company entered into 14 operating leases.
Intuitive Surgical placed 71 systems in the U.S. during the quarter compared with 72 systems in the year-ago quarter. Outside the U.S., the company placed 66 systems. The same number of systems was placed in the year-ago quarter.
Among the fourth quarter 2014 lot, 39 systems were placed into Europe, up from 28 in the year-ago quarter. The company also placed 9 systems in Italy, 7 in Turkey and 5 into the Nordic countries. However, placements declined in Japan from 21 to 6, which reflected customers awaiting Xi clearance and reimbursement issues.
Services revenues were up 6.4% to $110 million. The improvement reflected growth in the installed base of da Vinci Surgical Systems.
Margins
Adjusted gross margin contracted 370 basis points (bps) to 65.7% in the quarter, primarily due to unfavorable product mix.
Selling, General & Administrative (SG&A) expenses, as percentage of revenues, increased 100 bps on a year-over-year basis owing to headcount additions and higher incentive compensation. Research & Development expenses, as percentage of revenues, increased 60 bps from the year-ago quarter.
Adjusted operating margin declined 440 bps to 32.6% on a year-over-year basis, primarily owing to a lower gross margin base and higher operating expenses.
Product Updates
During the quarter, Intuitive Surgical re-launched da Vinci Si Stapler and started shipping the product early in the first quarter of 2015. The company also initiated the shipment of Xi Stapler in the first quarter.
In the fourth quarter, Intuitive Surgical launched its Wristed Needle Driver instrument for use with Single Site surgery.
In 2015, Intuitive Surgical plans to submit a 510 (k) for software that allows coordinated table motion with the Xi and 510 (k) for a Xi compatible version of its Single Site instrument.
Balance Sheet
Intuitive Surgical had cash, cash equivalents and investments of $2.5 billion as of Dec 31, 2014 as compared with $2.26 billion as of Sep 30. Notably, during 2014, Intuitive Surgical bought 2.5 million shares for $1 billion.
Guidance
Intuitive Surgical forecasts 2015 procedural volumes in the range of 7% to 10%. The company also apprehends foreign exchange headwinds from the strengthening of the U.S. dollar.
Management expects 2015 gross margin to be more or less in line with the fourth-quarter figure owing to unfavorable product mix and foreign exchange headwinds. Management forecasts operating expense increase in the range of 7% to 10% for full-year 2015, taking into account continued investments being made by the company.
Our Take
We believe that volatile foreign exchange will remain a major headwind for Intuitive Surgical in 2015. Moreover, declining financing from hospitals reflect sluggish spending environment, which will continue to hurt top-line growth. Further, continuing investments on product development, headcount additions and increasing commission will impact profits.
However, growing adoption of Intuitive Surgical’s Da Vinci system among physicians for general surgery, (hernia repair, colorectal), oncology, urology and gynecology procedures is a key growth catalyst in our view. Moreover, increasing procedure volume outside the U.S. also presents significant growth opportunity for the company going forward.
We believe that Intuitive Surgical’s upcoming Xi compatible Da Vinci SP will further expand its product portfolio. Additionally, Intuitive Surgical operates in a niche market with no direct competition, which is a major positive in our view.
Currently, Intuitive Surgical carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the industry are Hologic (HOLX), Inogen (INGN) and Abiomed (ABMD). While Hologic and Inogen sports Zacks Rank #1 (Strong Buy), Abiomed has a Zacks Rank #2 (Buy).
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