Intuitive Tops Estimates in 2Q

Intuitive Surgical (ISRG - Analyst Report) reported second quarter earnings per share of $3.75, easily beating the Zacks Consensus Estimate of $3.53 and sailed past the year-ago earnings per share of $2.91. Profit rose 31.9% year over year to $154.9 million.

Revenues

Intuitive Surgical reported revenues of $536.5 million, up 26% year over year, beating the Zacks Consensus Estimate of $521 million.

Revenues were driven by robust sales of da Vinci Surgical Systems and increased adoption of da Vinci surgery procedures.

Segment Analysis

Revenues from instruments and accessories were $223.7 million in the second quarter, up 30% year over year. Revenues increased on the back of da Vinci surgical procedures as well as new product introduction. Rise in gynecological procedures and general procedures in the domestic market and urological procedures in the overseas market contributed to the growth.

Systems revenues came in at $229.4 million in the second quarter, up 23% year over year. The growth was driven by higher sales of da Vinci systems. Intuitive noted that 150 da Vinci Systems were sold in the quarter, compared with 129 systems in the year-ago quarter.

Service revenues rose 23% year over year to $83.4 million, helped by an increase in the installed base of da Vinci systems.

Margins

Gross margin stood at 72% in the quarter, flat with the year-ago period. Intuitive reported operating expenses of about $161.1 million in the quarter, up 16.3% year over year. Selling, general and administrative expenses increased 13.5% to $120.9 million while research and development expenditure climbed 25.6% to $40.2 million.

Operating income amounted to $225.3 million, or about 42% of revenues, in the reported quarter compared with $168.1 million, or 39.5% of revenues, in the prior-year quarter.

Balance Sheet

Intuitive ended the second quarter with cash, cash equivalents and investments of $2,631.2 million, up 44.4% year over year. It remains a zero debt company.

Outlook

For 2012, revenues are forecast to grow in the range of 20% to 23% compared with the earlier guidance of 19% to 21% based on capital sales trend and new product launch. Operating income continues to be projected at about 39% to 40% of net sales. The company continues to expect procedure growth in the band of 25% and 27% for 2012.

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 fully recovers, the stock may come under pressure as investors ponder whether lingering macro economic uncertainty weakens hospitals’ commitment towards investment in 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 for medical practitioners. Intuitive competes with Accuray Incorporated (ARAY - Analyst Report) in certain niches.

We prefer to remain on the sidelines partly due to high valuation, which factors in the attractive growth prospects of the company, despite the da Vinci system’s status as a leading enabler of robotic minimally invasive surgery. We are currently Neutral on the stock, supported by a short-term Zacks #3 Rank (Hold).