Earnings Preview: Intuitive

Intuitive Surgical (ISRG) is slated to report its first-quarter 2011 results on Tuesday, April 19, 2011. The current Zacks Consensus Estimate for the quarter is $2.49, representing an estimated 17.28% annualized growth.

Fourth Quarter Recap

Intuitive reported fourth quarter and fiscal 2010 earnings per share of $3.02 and $9.47, respectively, beating the Zacks Consensus Estimates of $2.26 and $8.71, respectively. Revenues of $389 million and $1,413 million for the fourth quarter and fiscal 2010, respectively, were up 21% and 34% year over year. The results beat the corresponding Zacks Consensus Estimates of $372 million and $1,398 million.

Recurring revenues grew at a brisk pace and constituted just over one-half of sales in fiscal 2010. Instruments and accessories revenues were $151 million in the quarter, up 33% year over year. Worldwide procedures increased 35% in fiscal 2010. The company experienced growth in both existing and new procedures.

Hysterectomy was the primary growth driver and da Vinci Hysterectomy (including both malignant and benign categories) was up by a sharp 59% while Urology continued on a growth trajectory. Emerging procedures (mymectomy, thyroid, head, neck and colorectal) also did well, in 2010, up 47% year over year. Prostatectomy, a leading procedure, stagnated in the U.S.

The company posted total systems revenue of $178 million in the quarter, up 10%. Intuitive sold 124 systems in the fourth quarter versus 110 systems in the year-ago period. The company had an installed base of 1,752 at year end, up 26% year over year.

Services/Training revenue was $61 million in the quarter, up 27% year over year, primarily due to growth in the installed base of da Vinci Surgical systems.

Estimate Revision Trend


The trend in estimate revisions for the first quarter has been static over both the past 7 days and prior month. Of the 16 analysts covering the stock, none raised/lowered his/her estimate over these periods.

The same lack of activity was observed, among 16 analysts, for estimates for fiscal 2011. The current Zacks Consensus Estimate for 2011 is $11.08, reflecting an estimated 17% year over year growth.


Given the lack of estimate revisions, the magnitude of revisions for the forthcoming quarter and fiscal year has hit a plateau over the last 7 and 30 days.

Intuitive Surgical has generated positive surprises in each of the previous four quarters, and we expect the same trend to continue. The company produced an average positive earnings surprise of 17.64% over the prior four quarters, meaning that it beat the Zacks Consensus Estimate by that measure.

Our Take

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.

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 Surgical’s razor-blade business model ensures recurring revenues even during difficult times. Moreover, its revenues have consistently grown due to the twin reasons of increase in applicable medical procedures and, secondly, hike in the company’s installed base. Among significant risks, pricing pressure is the most critical as austerity measures in Europe and elsewhere target hospital capital expenditure as an area of cost savings.

Intuitive signed a licensing pact, on August 17, 2010, with Cardica (CRDC) under which it has obtained the exclusive global license to Cardica’s intellectual property, related to tissue cutting, stapling and clip appliers for application in the robotics field. Intuitive competes with Accuray (ARAY).

We prefer to remain on the sidelines until the global markets recover, 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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