Intuitive Beats Squarely

Intuitive Surgical ( ISRG - Analyst Report ) reported fourth quarter and fiscal 2011 earnings per share of $3.75 and $12.32, respectively, beating the Zacks Consensus Estimates of $3.34 and $11.89, respectively, while surpassing the corresponding year-ago results of $3.02 and $9.47.

Revenues

Intuitive reported revenues of $496.8 million and $1,757.3 million for the fourth quarter and fiscal 2011, respectively, up 28% and 24% year over year. The results beat the Zacks Consensus Estimates of $483 million and $1,741 million, respectively.

On a segment basis, the company reported revenues from instruments and accessories of $196 million, up 30% year over year, in the fourth quarter. The growth was driven by a 27% year-over-year increase in da Vinci surgical procedures. Revenues from sales of systems were $225 million, up 27% year over year. The increase in systems revenue was due to higher sales of 152 da Vinci Systems compared with 124 systems in the year-ago quarter. Service revenue was $75 million, up 24% year over year, primarily due to growth in the installed base of da Vinci Surgical systems.

Margins

Intuitive Surgical enjoyed a gross margin of 73% in the reported quarter, approximately flat with the year-ago quarter. The company reported operating expenses of $163.4 million in the quarter, up about 27% year over year. The increase was due to growth in both selling, general and administrative expense (up 27.3%) as well as research and development expenditure (up 27%).

Operating income was $199.5 million, or about 40% of sales, in the reported quarter compared with $153.8 million, or 40% of sales, in the prior-year quarter.

Balance Sheet

Intuitive Surgical exited fiscal 2011 with cash, cash equivalents and investments of $2,172 million, up 35% year over year. It remains a zero debt company.

Outlook

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 be robust 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 the high valuation, which factors in the attractive growth prospects of the company, given 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).