Intuitive Surgical (ISRG) reported second-quarter fiscal 2011 earnings per share of $2.91, beating the Zacks Consensus Estimate of $2.71, while exceeding the corresponding year-ago earnings of $2.19. Net income rose 32.4% year over year to $117.4 million. The stock climbed 4.29% in after-hours trading on July 19 to $391, reflecting the forecast-topping results.
Revenues
Intuitive reported revenues of $426 million, up 21% year over year, beating the Zacks Consensus Estimate of $411 million.
On a segmental basis, revenues from systems were $187 million, up 11% year over year. Revenues from instruments and accessories were $172 million, up 35% year over year. The growth was on account of a 30% year-over-year increase in da Vinci surgical procedures. Services contributed $68 million, higher 22% year over year, primarily due to expansion in the installed base of da Vinci Surgical systems.
Margins
Intuitive Surgical reported a drop in gross margin to 72% in the reported quarter compared with 73.2% in the year-ago quarter. It reported operating expenses of $138.5 million in the quarter, up 18.3% year over year. The rise was mainly due to growth in selling, general and administrative expense (up 20.2%) while research and development expenditure climbed 12.2%.
Operating income was $168.1 million, or 39.5% of sales, in the reported quarter, compared with $139.7 million, or 39.8% of sales, in the prior-year quarter.
Balance Sheet
Intuitive Surgical ended the quarter with cash, cash equivalents and investments of $1,822 million, up 14.7% year over year. It remains a zero debt company.
Outlook and Recommendation
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. 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 recovers, the stock may come under pressure 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. Intuitive competes with Accuray Incorporated (ARAY) in certain niches.
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).
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