Shares of Intuitive Surgical Inc. ISRG soared nearly 7.8% ($36.87) in after-hours trading after the da Vinci device maker reported impressive third-quarter 2015 earnings.
Adjusted earnings of $5.24 per share surged 33.7% on a year-over-year basis on significant revenue growth and margin expansion. Including stock-based compensation, adjusted earnings came in at $4.50 per share, well ahead of the Zacks Consensus Estimate of $3.61.
Revenues increased 10.4% year over year to $589.7 million (14% at constant currency or cc) driven by higher procedural volume and growth across all segments. The company continues to benefit from a lean cost structure as evident from the improvement in margins.
Adjusted gross margin expanded 210 basis points (bps) in the reported quarter buoyed by favorable product mix and lower direct product costs.
Adjusted operating margin expanded 490 bps to 33.3% owing to lower selling, general & administrative expenses (SG&A), which as a percentage of revenues decreased 260 bps on a year-over-year basis. Research & development (R&D) expenses, as a percentage of revenues, also declined 20 bps.
Quarter Details
Worldwide da Vinci procedure volumes grew approximately 15% year over year to 162K. Continuing usage in hernia repair, colon and rectal resections, prostatectomy, and hysterectomy were the primary factors driving the upside.
Per management, procedure growth was observed in most of the geographic regions, including the U.S., Europe, and key markets of China, Japan and Korea. In the reported quarter, U.S. procedure count rose approximately 12%, while international procedures increased roughly 28%.
Instruments and Accessories revenues grew 9.3% to $298.1 million in the quarter. The year-over-year growth was driven by a higher number of procedures. Revenues realized per procedure were approximately $1,840, almost flat year over year.
Systems sales increased 3.2% to $174.2 million on the back of increased unit sales and higher average system selling prices. Intuitive Surgical placed 117 systems in the quarter compared with 111 in the year-ago quarter, primarily because of strong demand in the U.S. and Japan. Of the total, 77% of the systems were da Vinci Xi as compared with 53% in the year-ago quarter.
Intuitive Surgical shipped 29 dual console Xis in the reported quarter as compared with 13 in the year-ago quarter.
Globally, system average selling price (ASP) of $1.6 million increased from $1.45 million in the year-ago quarter. Hospital financed approximately 25% of the systems installed in the quarter under review, up from 21% in the last quarter. Intuitive Surgical directly financed 20 systems of which 13 were structured as operating leases.
Intuitive Surgical placed 80 systems in the U.S. during the quarter compared with 72 systems in the last quarter, reflecting growing market acceptance of the da Vinci Xi system and procedure growth.
Outside the U.S., the company placed 37 systems compared with 50 in the year-ago quarter and 46 in the last quarter. Intuitive Surgical sold nine systems in Japan (as compared with 13 in the last quarter) and 19 systems in Europe (22 in the last quarter). However, the company did not sell any system in China during the quarter.
Service revenues were up 3.6% to $117.4 million on growth in the installed base of da Vinci Surgical systems.
Product Updates
Recently, Intuitive Surgical launched integrated table motion for Xi in Europe. The company has also submitted its U.S. 510(k) application. Table motion allows surgeons to interactively use gravity for retraction and eases patient management during da Vinci Xi surgical procedures.
The company submitted 510(k) filing for single site instrument kit for Xi in the third quarter. Another 510(k) application was filed for a 30 millimeter stapler for Xi. This instrument is useful in thoracic surgery and includes various staple sizes like green, blue, white and grey reloads.
Balance Sheet
Intuitive Surgical had cash, cash equivalents and investments of $3.1 billion as of Jun 30, 2015, as compared with $2.9 billion as of Jun 30, 2015. During the quarter, the company bought back approximately 70K shares for $36 million.
Guidance
Intuitive Surgical forecasts 2015 procedural volumes in the range of 13% to 14%, higher than the earlier projection of 11% to 13%.
Management expects fourth-quarter gross margin in the range of 67.5% to 68.5%. The company expects the mix between Xi and Si products to fluctuate on a quarter-to-quarter basis. These along with cost reductions and a growing product portfolio are expected to drive gross margin over the long term.
Rise in operating expense is forecasted toward the lower end of the 7% to 10% range.
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.
However, we believe the positive trends are quarter-specific and the company has a long way to go in order to sustain momentum. These include continuing growth in the U.S. as well as international procedural volume, particularly in China, Japan and Europe.
Reimbursement trends will be key deciding factors behind the adoption of da Vinci systems in countries like Japan. Favorable reimbursement will help Intuitive Surgical fast penetrate the market. The quota system in China for system placement also remains a headwind for Intuitive Surgical.
Zacks Rank & Key Picks
Currently, Intuitive Surgical carries a Zacks Rank #3 (Hold).
Better-ranked medical instrument stocks include Masimo Corp MASI, Mazor Robotics MZOR and MELA Sciences MELA. All the three companies sport a Zacks Rank #1 (Strong Buy).
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