Earnings Preview: Intuitive

Intuitive Surgical (ISRG - Analyst Report) is slated to report its fourth quarter and fiscal 2011 results on Thursday, January 19, 2012. The current Zacks Consensus Estimates for the fourth quarter and fiscal year are $3.34 and $11.89, representing an estimated 10.7% and 25.57% annualized growth, respectively.

Third Quarter Recap

Intuitive reported third-quarter 2011 earnings per share of $3.05, beating the Zacks Consensus Estimate of $2.76 and surpassing the year-ago quarter’s earnings of $2.14.

Revenues increased 30% year over year to $446.7 million, sailing past the Zacks Consensus Estimate of $416 million. International revenues were $94 million, up 59% year over year. Recurring revenues surged 34% year over year to $248 million and constituted 55% of overall sales. 

On a segment basis, revenues from systems were $199.1 million, up 25% year over year. The growth was on account of sales of 133 da Vinci systems, higher than 105 systems in the year-ago quarter. 

Instrument and accessory revenues were $175.8 million, up 38% year over year. The increase in revenues reflects a 30% growth in total procedures.

Service revenues were $71.8 million, up 25% 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                                              

Agreement

The overall trend in estimate revisions for the fourth quarter has been static (among 13 analysts) over the past 7 days. There was one instance of upward movement and one case of downward drift over the past month.

A somewhat similar trend was witnessed for 2011 with no analyst (out of 14) changing his/her estimate over the past week. There was a solitary case of upward movement accompanied by two downward revisions over the last 30 days.

The current Zacks Consensus Estimate for 2012 is $14.09, reflecting an estimated 18.52% year-over-year growth.

Magnitude

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 days. There was a decline of 1 penny in forecast, for the current quarter, over the past 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 13.89% over the preceding 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. Intuitive competes with Accuray Incorporated (ARAY - Analyst Report) in certain niches.

We prefer to remain on the sidelines partly due to a 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 for the stock is supported by a Zacks #3 Rank (Hold).

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