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Intuitive Surgical (ISRG - Analyst Report) reported fourth quarter and 2012 earnings per share of $4.25 and $15.98, respectively, beating the Zacks Consensus Estimates of $4.03 and $14.84, respectively, while surpassing the corresponding year-ago results of $3.75 and $12.32.

Net income was $174.9 million (or $4.25 per share), up 15.7% year over year.

Revenues

Intuitive Surgical reported revenues of $609.3 million and $2,178.8 million for the fourth quarter and 2012, respectively, up 22.6% and 24% year over year. The results beat the Zacks Consensus Estimates of $584 million and $2,154 million, respectively.    

On a segment basis, the company reported revenues from instruments and accessories of $253.8 million, up 29% year over year, in the fourth quarter. The growth was driven by a 25% year-over-year increase in da Vinci surgical procedures. Growth in gynecology and general surgery procedures was partially offset by a decline in prostatectomy procedures in the U.S.

Revenues from sales of systems were $264.9 million, up 18% year over year. The increase in systems revenue was due to higher sales of 175 da Vinci Systems compared with 152 systems in the year-ago quarter. Service revenue was $90.6 million, up 20% year over year, primarily due to growth in the installed base of da Vinci Surgical systems.

Margins

Intuitive Surgical enjoyed a gross margin of 71.9% in the reported quarter, down from 73.1% the year-ago quarter. The company reported operating expenses of $189.8 million in the quarter, up about 16.2% year over year. The increase was due to growth in selling, general and administrative expense (up 21.4%) while research and development expenditure was almost flat.

Operating income was $248.1 million, or about 41% of sales, in the reported quarter compared with $199.5 million, or 40.0% of sales, in the prior-year quarter.

Balance Sheet

Intuitive Surgical exited 2012 with cash, cash equivalents and investments of $2,920.5 million, up 34.5% year over year. It remains a zero debt company.

Outlook

Intuitive Surgical expects procedure count to increase by 20% to 23% for 2013 propelled by general surgery and gynecology procedures in the domestic market and overseas prostatectomy procedures. The company expects revenues to grow in the range of 16% to 19% for 2013 with higher sales in the fourth quarter than in the first quarter. Operating income is expected in a band of 38% to 39% of sales for 2013.

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 Surgical’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.

Our rating factors in the attractive growth prospects of the company, given da Vinci system’s leading status as an enabler of robotic minimally invasive surgery. The installed base of the company continues to grow as hospitals feel compelled to upgrade their technology.

Intuitive Surgical currently carries a Zacks Rank #2 (Buy). Cantel Medical Corp. and Cyberonics Inc. (CYBX - Analyst Report) are Zacks Rank #1 (Strong Buy) stocks which are expected to do well.

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