Intuitive Surgical Retains Its Growth Momentum In Q2

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ISRG: Intuitive Surgical logo
ISRG
Intuitive Surgical

Robotic surgical system manufacturer Intuitive Surgical (NASDAQ:ISRG) reported another quarter of strong growth in Q2 2015, led by an increase in system placements, higher procedure volumes and continuous global expansion. The company saw a significant decline in its top line as well as bottom line in 2014, on account of rising concerns over the efficacy and cost-effectiveness of its da Vinci systems, as well as changed institutional capital spending priorities by healthcare institutions because of the Affordable Care Act. However, the increasing acceptance of the da Vinci Xi system, which received FDA approval in 2014, has revived Intuitive Surgical’s top line growth in the last few quarters. Going forward, we expect the company to benefit from sales of its new products and growth in the number of procedures performed.

Quick Snapshot of Q2 Earnings

At $586 million, Intuitive Surgical’s Q2 2015 revenue increased 10% quarter on quarter and 14% year on year. Non-GAAP revenue for the quarter, which excludes the impact of prior year Xi trade-in programs, was up 16% from the prior quarter and up 20% year-over-year on a constant currency basis. Non-GAAP gross margins improved from 63.3% in Q1 2015 to 65.9% in Q2 2015. The company’s non-GAAP net income was $173 million, or $4.57 per diluted share, compared with $140 million, or $3.73 per diluted share, for the second quarter of 2014. In addition to the prior year Xi trade-in programs, non-GAAP net income excludes legal claim accruals, stock-based compensation, amortization of purchased IP, and investment impairments. Both revenue and EPS for Q2 2015 beat analyst consensus (as per Thomas Reuters). (Read Earnings Release)

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We currently have a price estimate of $479 for Intuitive Surgical, which is slightly lower than the current market price. We are in the process of updating our model for the Q2 2015 earnings.

See our full analysis for Intuitive Surgical

Procedure Volumes Continue To Improve

Maintaining the growth momentum experienced in Q1 2015, Intuitive Surgical’s Q2 2015 procedures grew nearly 14% annually, with U.S. procedures growing approximately 10% and international procedures growing approximately 27%. The company saw strength in hernia repair, solid growth in colon and rectal resections, continued recovery in prostatectomy procedures, and stable trends in hysterectomies.

We expect procedures to increase going forward, as the company focuses on promoting the use of the da Vinci systems in gynecology and urology procedures worldwide. The total number of procedures performed in 2014 was 570,000. The company previously estimated that procedures would grow 8-11% in 2015. With the increasing adoption of the da Vinci Xi system worldwide, growing U.S. general surgery procedures and worldwide urologic procedures, the company changed its estimates to 11-13% for 2015.

Clearance of da Vinci Xi In Japan Gives Momentum To System Sales

Intuitive Surgical saw increasing market acceptance of the da Vinci Xi system in Q2 2015. The company received FDA clearance for two new surgical systems last year – the da Vinci Xi and da Vinci Sp. In March of this year, it received approval in Japan for the da Vinci Xi system, which was a key factor driving year on year system sales in the quarter. The da Vinci Xi system is aimed at multi-port procedures with better mobility and ease-of-use. It also boasts a better imaging system than previous models.

In Q2 2015, Intuitive Surgical placed 118 systems compared to 96 systems in Q2 2014 and 99 in Q1 2015, with the U.S and Japan accounting for most of the growth in system placements year-over-year. 64% of the systems placed last quarter were da Vinci Xis compared with 52% in Q2 2014, and 76% in Q1 2015. The company also sold more Sis in Q2 2015, compared to the previous quarter, reflecting seven Si system sales under a contract with the Department of Defense, and eight Si system sales in Japan.

The company rounded out its Xi system offering by launching additional EndoWrist instruments in Q2 2015, integrating table motion with Xi, and developing Single-Site for Xi. It recently submitted its 510(k) for software that enables table motion with Xi, and anticipates filing its 510(k) for Xi Single-Site in the second half of the year. It has also broadened the roll-out of its white reload for the da Vinci Xi Stapler. For da Vinci Sp, the dedicated single point of entry architecture, development is progressing with system integration and laboratory testing in progress.

Intuitive Surgical remains focused on expanding the application of the da Vinci system in general surgery (particularly colorectal surgery and hernia repair), and filing out its product line for da Vinci Xi and launching in key markets globally.

2015 Outlook

– Procedure growth within a range of 11% to 13%.

– Second half 2015 pro forma gross profit margin in the range of 67% to 68% of revenue.

 -Pro forma operating expenses to grow in the range of 7% to 10%.

– Non-cash compensation expense to be fairly flat compared to 2015.

– Other income to be between $16 million and $18 million.

– Pro forma income tax rate to be between 28% and 30% of pre-tax income depending primarily on the mix of U.S. and international profits.

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