Intuitive Surgical Lags on Q1 Earnings - Analyst Blog

Intuitive Surgical Inc. ISRG posted a 41.4% fall in adjusted earnings per share to $2.67 for the first quarter of the year from $4.56 in the same quarter of 2013. With this, the robotic surgical systems maker's earnings lagged the Zacks Consensus Estimate by a wide margin of 67 cents.

Net earnings ebbed 44.8% to $104.3 million from $188.9 million in the 2013-first 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 as well as product liability litigation charges.

The fall in earnings is attributable to lower System sales due to lower procedure volumes, changing hospital capital-spending priorities associated with the implementation of the Affordable Care Act and the anticipation of a new system affecting the healthcare capital-spending decisions.

Total Revenues

As projected by the company, revenues in the quarter dipped 24.0% to $464.7 million, missing the Zacks Consensus Estimate of $512 million. The decline is attributable to the $26 million deferral related to a customer trade-out program as discussed above. Excluding the impact of the trade-out program, revenues were $491 million in the quarter, still reflecting a 20% decline from the prior year on lower System sales.

Operating Income

Operating income was $124.0 million in the quarter, down 77.5% from $251.2 million in the year-ago quarter. With this, operating margin declined significantly by 2,890 basis points to 12.2% from 41.1% in the 2013-first quarter.

Adjusted operating income excluded a pre-tax charge of $67 million in the 2014-first quarter based on estimated costs of resolving a few product liability legal claims against the company.

The legal claims are related to alleged complications from surgeries performed with certain versions of Monopolar Curved Scissors MCS instruments that were associated with a recall in 2013 as well as with a first-generation MCS tip cover that was the subject of a market withdrawal in 2012.
 
Segment Results

Segment-wise revenues tally with the projected figures provided by Intuitive Surgical earlier this month.

Revenues from Instruments and Accessories slid 2.4% to $254.8 million in the quarter from $261.1 million in the prior-year quarter. The decrease is attributed to the fall in instruments and accessories stocking orders on the back of a decrease in system sales and the revenue deferral, partially offset by a 7% increase in procedure volumes, indicating growth in U.S. general surgery procedures and urologic procedures outside the U.S., despite a fall in U.S. gynecologic procedures.

Revenues from Systems plunged 58.6% to $106.0 million compared with $255.9 million in the first quarter of 2013. The drastic fall is attributable to lower system sales in the U.S. and the revenue deferral.

Intuitive Surgical shipped 87 da Vinci Surgical Systems in the 2014-first quarter, including 45 in the U.S. and 42 outside the U.S., nearly half compared with 164 shipped in the first quarter of 2013, including 115 in the U.S. and 49 outside the U.S. The significant 60.9% fall in system sales into the U.S. market was driven by the factors discussed above.

Revenues from Services rose 10.1% to $103.9 million compared with $94.4 million in the first quarter of 2013. The improvement is attributable to continued rise in installed base of da Vinci Surgical Systems.

Financial Position

Intuitive Surgical had cash, cash equivalents and investments of $2,963.6 million as of Mar 31, 2014, up 7.6% from $2,753.9 million as of Dec 31, 2013. Inventories scaled up 3.3% to $185.5 million as of Mar 31, 2014 from $179.6 million as of Dec 31, 2013.

Intuitive Surgical did not repurchase shares in the quarter. As of Mar 31, 2014, the company had 1 billion authorized shares for repurchase.

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. Several reports have revealed that patients suffered complications or injuries owing to the robotic-assisted surgeries.

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). 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 Delcath Systems, Inc. DCTH, Accuray Incorporated ARAY, and IDEXX Laboratories, Inc. IDXX. Delcath Systems sports a Zacks Rank #1 (Strong Buy), while both Accuray and IDEXX Laboratories carries a Zacks Rank #2 (Buy).