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Intuitive Surgical (ISRG - Analyst Report) reported second-quarter 2013 earnings per share of $3.90, missing the Zacks Consensus Estimate of $4.05 per share. However, it surpassed the year-ago results of $3.75 per share.

Net income of this robotic surgery device maker was $159 million, up 3.2% year over year. Results are almost in line with the company’s previously announced disappointing preliminary report.

Revenues

Intuitive Surgical reported revenues of $579 million for the second quarter, up 8% year over year. The results trailed the Zacks Consensus Estimate of $596 million by a large margin. However, it was more or less consistent with the preliminary report.

On a segment basis, the company reported revenues from instruments and accessories of $265 million, up 18% year over year. Growth was driven by an 18% year-over-year increase in da Vinci surgical procedures and healthy adoption of new offerings. Growth in international urology, U.S. gynecology and general surgery procedures was partly offset by a drop in prostatectomy procedures in the U.S.

On the flip side, revenues from sales of systems were $216 million, down 6% year over year and 16% sequentially. The results were affected by weak sales of the company’s da Vinci Surgical Systems. The company managed to sell 143 da Vinci Surgical Systems in the second quarter, compared with 150 in the year-ago quarter. Sales increased everywhere, including Europe, Japan and the rest of the world, except the U.S.

Sales of the da Vinci product decreased in the U.S. (from 124 to 90) due to the ongoing economic pressure to reduce hospital costs and the sluggish growth rate in benign gynecologic surgeries. The decision of healthcare insurers to opt for conservative treatments in outpatient settings led to lower hospital admissions.

Service revenues were $98 million, up 18% year over year, primarily due to growth in the installed base of da Vinci Surgical systems.

Margins

Intuitive Surgical reported gross margin of 70% in the reported quarter, down from 72% in the year-ago quarter. Gross margin declined on account of the newly implemented medical device excise tax, MTS product recall, pricing pressure along with adverse product mix.

The company reported operating expenses of $186.7 million in the quarter, up about 15.9% year over year. The increase was due to growth in selling, general and administrative expense (up 20.3%) and research and development expenditure (up 2.5%).

Operating income was $218.5 million, or about 37.8% of sales, in the reported quarter compared with $225.3 million, or 42.0% of sales, in the prior-year quarter.

Balance Sheet

Intuitive Surgical exited second-quarter 2013 with cash, cash equivalents and investments of $3,027.2 million, up 15.1% year over year. Roughly 0.5 million shares worth $270 million were repurchased during the quarter.

Outlook

Intuitive Surgical significantly lowered its 2013 guidance based on the company’s dismal performance. Due to soft capital sales of the da Vinci system, the company lowered its revenue expectation to flat to 7% for 2013. Previously, ISRG had provided its sales growth guidance in the range of 16% to 19% for 2013. Operating income is forecast in a band of 37% to 38% of sales (earlier 38% to 39%) for 2013.

The company expects procedure growth rate in the range of 15%–18% compared to the previously guided range of 20%–23%. This is mainly due to moderate growth in U.S. benign gynecologic procedures.

Our Take

Intuitive Surgical was deeply affected by the decline in sales of its flagship da Vinci product. This dismal sales performance has become a matter of concern for both the company and investors alike. This is reflected in the company’s Zacks Rank #5 (Strong Sell).

We believe that the company’s products will experience severe headwinds due to the stiff capital spending environment and sluggish benign gynecologic procedures in the U.S. Moreover, a warning letter from the U.S. Food and Drug Administration (FDA) adds to the company’s woes.

While we strongly recommend avoiding this stock, medical stocks such as Globus Medical (GMED - Snapshot Report), MAKO Surgical and Syneron Medical (ELOS - Snapshot Report) are expected to do well. All these stocks carry a Zacks Rank #2 (Buy).
 

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