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We upgrade our rating for Intuitive Surgical (ISRG - Analyst Report) to Outperform. First quarter earnings per share beat the Zacks Consensus Estimate. Recurring revenue continues to grow as a proportion of sales. Recurring revenues moved up 31% year over year and constituted 58% of sales in the most recent quarter.     

Revenue amounted to $495.2 million in the first quarter, up 28% year over year. On a segment-wise basis, the company reported revenues from instruments and accessories of $208 million, up 32% year over year. The growth was driven by a 29% year-over-year increase in da Vinci surgical procedures. The uptick in procedure count mainly emanated from overseas urologic cases as well as domestic gynecologic procedures and general surgery categories.

Revenues from sales of systems were $207 million, up 24% year over year. The increase in systems revenue was due to higher sales of 140 da Vinci Systems compared with 120 systems in the year-ago quarter. Service revenue was $81 million, up 27% year over year, primarily due to rise in the installed base of da Vinci Surgical systems.

The installed base of Intuitive is expanding as more hospitals feel compelled to upgrade their technology. Sustained demand for procedures helped raise cumulative system count by 101 systems to 2,132, as of December 31, 2011, of which 1,548 systems (73%) were based in the U.S.   

Overall, a proper valuation is appropriate given positive factors such as Intuitive’s leading position in robotic surgery, a growing list of emerging procedures, barriers to entry, sizeable cash balance and no debt.

However, we believe that until the global economy recovers fully, and uncertainty about health care reform is removed, the stock may come under temporary periodic pressure as investors evaluate whether these factors weaken hospitals’ commitment to buy high-cost robotic systems. Intuitive competes with Accuray Incorporated (ARAY - Analyst Report) in certain niches.

Our Outperform recommendation is supported by a short-term Zacks #2 Rank (Buy).

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