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Intuitive Surgical Earnings Fall but Beat Expectations

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Intuitive Surgical Inc. (ISRG - Free Report) posted a 24.1% fall in adjusted earnings per share to $3.03 for the second quarter of the year from $3.99 in the same quarter of 2013. However, the robotic surgical systems maker’s earnings beat the Zacks Consensus Estimate of $2.76.

Net earnings ebbed 30.3% to $113.6 million from $162.9 million in the 2013-second quarter. The adjusted figures excluded the impact of deferral of revenues related to a customer trade-out program for their recently purchased da Vinci Si Surgical Systems with the company’s recently announced da Vinci Xi Surgical System, product liability litigation charges, amortization of intangible assets, and impairment of investment.

Total Revenues

Revenues in the quarter dipped 11.5% to $512.2 million. The decline is attributable to lower revenues in the Instruments and Accessories, and Systems segments. Excluding the impact of the trade-out program, revenues were $506.5 million in the quarter, reflecting a broader 12.4% decline from the prior year quarter. In the quarter, global procedures grew 9% over the prior year.

Margins and Expenses

Adjusted gross profit fell 16.0% to $342.8 million in the quarter while gross margin decreased 290 basis points (bps) to 67.7%.

Adjusted operating expenses were $155 million in the quarter, up nearly 2.0% from $152 million for the second quarter of 2013. The increase was attributable to higher commissions associated with higher revenues and costs associated with new product launches.

Adjusted operating income dipped 31.4% to $153.9 million while adjusted operating margin declined 840 bps to 30.4% from the prior year quarter.

Segment Results

Revenues from Instruments and Accessories slid nearly 1.0% to $261.9 million in the quarter from $264.5 million in the prior-year quarter. The decrease is attributed to lower instrument and accessory stocking orders associated with lower system unit sales and timing of customer orders, partially offset by higher (roughly 9%) da Vinci procedure volumes. Higher procedure volume was driven by growth in U.S. general surgery procedures and international urologic procedures.

Revenues from Systems plunged 33.4% to $143.7 million compared with $215.9 million in the second quarter of 2013. The drastic fall is attributable to lower system sales in the U.S. and international markets.

Intuitive Surgical shipped 96 systems (including 50 units of the recently launched da Vinci Xi system) during the quarter, compared with 143 in the same quarter last year.

In the U.S., Intuitive Surgical sold 61 systems in the 2014-second quarter compared with 90 systems in the second quarter of 2013. Outside the U.S., the company has shipped 35 systems in the quarter, compared with 53 in the second quarter of 2013.

Revenues from Services rose 8.7% to $106.6 million compared with $98.1 million in the second quarter of 2013. The improvement reflected growth in the installed base of da Vinci Surgical Systems.

Financial Position

Intuitive Surgical had cash, cash equivalents and investments of $2,043.3 million as of Jun 30, 2014, down 25.8% from $2,753.9 million as of Dec 31, 2013. Inventories scaled up 12.7% to $202.4 million as of Jun 30, 2014 from $179.6 million as of Dec 31, 2013.

During the quarter, Intuitive Surgical repurchased 2.5 million shares under the Accelerated Share Repurchase (ASR) program for $1.0 billion.

Guidance

Previously, Intuitive Surgical estimated procedure growth of 2 to 8% for the full year 2014 over approximately 523,000 procedures performed in 2013. The company now expects higher procedure growth between 5 and 8% for the year.

Intuitive Surgical expects operating expenses to continue to ramp in the second half of the year due to international expansion, particularly in Japan and Europe, and new product launches. The company expects operating expenses to grow between 10 and 13% over 2013.

Our Take

Intuitive Surgical continues to be affected by stiff hospital capital spending environment. The company’s robotic surgical systems came under fire in the past due to several incidents that raised doubts about the robotic surgical technology.

However, Intuitive Surgical is optimistic about its new da Vinci Xi Surgical System, which has been approved by the U.S. Food and Drug Administration (FDA) and received the CE Mark in Europe.

The company had revealed that the new and improved robotic system has longer instrument shafts enabling greater reach for surgery. The robotic arms of the system are also smaller and thinner and have a new joint design that improves their range of motion.

Currently, Intuitive Surgical retains a Zacks Rank #3 (Hold). Some better-ranked scrips in the medical instruments industry include Accuray Incorporated (ARAY - Free Report) , Heartware International Inc. , and IDEXX Laboratories, Inc. (IDXX - Free Report) . All of these carry a Zacks Rank #2 (Buy).




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