Earnings Preview: Intuitive

Intuitive Surgical (ISRG) is slated to report its fourth quarter and fiscal 2010 results on Thursday, January 20, 2011. The current Zacks Consensus Estimates for the fourth quarter and fiscal year are $2.25 and $8.70, representing an estimated 15.45% and 39.63% annualized growth, respectively.

Third Quarter Recap

Intuitive reported third-quarter 2010 earnings per share of $2.14, beating the Zacks Consensus Estimate of $2.09 and surpassed the year-ago quarter’s figure of $1.64. Excluding $6.3 million of deferred revenues (recognized in the third quarter of 2009), earnings per share for the year-ago quarter would have been $1.55.

Revenues increased 22.9% year over year to $344 million, but fell short of the Zacks Consensus Estimate of $349 million. The year-over-year growth in revenues was driven by higher da Vinci system sales as well as an increase in the number of robotic procedures.

Instrument and accessory revenues were $128 million, up 26.7% year over year. The increase in revenues reflects a 33% growth in total procedures, with growth in hysterectomy procedures volume leading the pack.

Systems revenues amounted to $160 million, up 17.6% year over year. Intuitive Surgical sold 105 systems in the third quarter, up from 86 systems in the year-ago quarter. Service revenues were $57 million, up 29.5% year over year. The growth was driven by a larger installed base of da Vinci Surgical Systems at the end of the quarter.

Estimate Revision Trend


The overall trend in estimate revisions for the fourth quarter has been static over the past 7 days. Of the 15 analysts covering the stock, 2 raised their estimates over the past month while 1 lowered his/her estimate.

A somewhat similar trend was witnessed for 2010 with a single analyst (out of 15) raising his/her estimate accompanied by a solitary downward revision over the last 30 days. The current Zacks Consensus Estimate for 2011 is $10.33, reflecting an estimated 18.75% year-over-year growth.


Given the relative 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 12.74% over the prior four quarters, meaning that it beat the Zacks Consensus Estimate by that measure.

Our Take

We expect a large 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. 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.

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.

However, growth in its mainstay procedure, Prostatectomy, has slowed in the U.S. and other procedures, barring Hysterectomy, have not shown adequate growth. Among other significant risks, pricing pressure is the most critical as austerity measures in Europe 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 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 status as an enabler of robotic minimally invasive surgery. Our Neutral recommendation for the stock is supported by a Zacks #3 Rank (Hold).

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