Don't Fret About Intuitive Surgical, Inc.'s Lower Gross Margins

By Markets Fool.com

Intuitive Surgical's two-part fourth-quarter earnings release concluded Thursday with the income portion of the profit-loss statement. You'll recall that the robotic surgery company released preliminary revenue and procedure numbers last week so it could discuss the numbers at the big J.P. MorganHealthcare Conference.

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To recap:

  • Adjusted revenue increased 4% year over year in the fourth quarter.
  • The 137 da Vinci systems placed in the fourth quarter was fairly similar to the 138 systems placed in the year-ago quarter.
  • Procedures performed on the company's robots increased 10% year over year in the fourth quarter, bringing 2014's procedure growth to 9% over 2013.
  • The increase in procedures helped grow fourth-quarter sales of instruments and accessories by 5% year over year; the slower growth relative to procedures appears to be due to stocking and nothing to be worried about.

Basically, there's nothing in the year-over-year comparisons to get too excited about, but investors can take solace in that the fourth-quarter numbers were a substantial improvement over previous quarters of 2014. For example, the aforementioned 137 systems placed trumped the 87, 96, and 111 systems placed in the three prior quarters.

The bottom line

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Source: Intuitive Surgical.

Despite revenue growth, fourth-quarter adjusted income decreased 4.7% year over year from $193 million last year to $184 million in the recently completed quarter. Earnings per share were down only 1.2% year over year to $4.92 per share thanks to a share buyback last year that reduced the denominator in earnings-per-share calculation.

The culprit in the reduced earnings was a lower gross margin caused by the introduction of the new da Vinci Xi system. Gross margins on product sales slipped from 69.5% in the year-ago quarter to just 65.2% in the fourth quarter of 2014. Heading into 2015, it doesn't appear we'll see much of a rebound in margins, as the company will be hurt negatively by changes in foreign currency exchange rates that will negatively affect margins when foreign sales are translated back into U.S. dollars.

Looking ahead
Despite the lower margins, the rapid adoption of the Xi systems -- 97 in the fourth quarter, compared with 50 and 59 in the second and third quarter, respectively -- is a good sign for the future growth. There are certain procedures that can only be performed on the Xi because the robot's arms can reach into all four quadrants of the torso. Increased procedures result in more accessory sales and, as the machines reach capacity, result in sales of a second Xi system at the hospital. Rinse and repeat.

Speaking of going after new procedures, Intuitive Surgical is working on its next-generation system, called the da Vinci Sp, a single-port system that allows all the instruments to enter a single opening, potentially a natural opening, and reach far into the body. In addition to new procedures, the machine could also reduce scarring and recovery time of current procedures.

The Sp system is slated to begin customer testing this year, with the final design that could be submitted to regulatory authorities for approval after their feedback is incorporated.

The article Don't Fret About Intuitive Surgical, Inc.'s Lower Gross Margins originally appeared on Fool.com.

Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Intuitive Surgical and owns shares of the company. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.