No Huge Surprises From Intuitive Surgical, Inc., but a Solid Quarter Nonetheless

By Brian Stoffel Markets Fool.com

For stock nerds like myself, all of the fun of Intuitive Surgical's (NASDAQ: ISRG) quarterly release this Tuesday was gone. That's because the robotic surgery specialist decided to release preliminary results back on Jan. 11before presenting at the industry's most important healthcare conference. It turns out that little changed between then and now. But that's not bad news. Indeed, the release offered much good news for investors.

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Image source: Intuitive Surgical.

Intuitive Surgical results: The raw numbers

Before diving too deep into the details, let's take a look at where Intuitive Surgical currently stands based on some raw year-end figures.

Metric

2015

2016

Year-Over-Year Change

Revenue

$2.4 billion

$2.7 billion

13%

Non-GAAP EPS

$19.27

$22.32

16%

Procedures

652,000

753,000

15%

Data source: Intuitive Surgical.

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Arguably the most important of these three was the jump in procedure growth. Over a long enough time frame, this is where investors can check and see if Intuitive is continuing to provide minimally invasive solutions in ever more operations that help better patient outcomes.

Procedure growth continues to boom

If we look at the growth curve in procedures over the years, there's no question where the expansion is coming from: U.S. general surgery.

Procedure Growth at Intuitive Surgical
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Data source: Intuitive Surgical.

Between 2012 and 2016, the number of daVinci procedures performed has grown from 435,000 to 753,000 annually. Of that, U.S. general surgery has provided almost half of the growth, while international procedures have contributed another third.In effect, urological and gynecological procedures have been Intuitive Surgical's bread and butter, while U.S. general surgery and international adoption have been the growth drivers.

While management doesn't break down procedure numbers within "U.S. general surgery," it has repeatedly stated that hernia operations are the biggest contributor to volume growth. Investors should be encouraged, then, by the fact that on the latest conference call, Director of Finance Calvin Darling said 1 million annual hernia operations in the United States could eventually become candidates for robotic surgery. That's about the same addressable market that I predicted last February.

And here's the thing: There were only 186,000 general surgery procedures last year in total, of which hernia is but a part. Even if Intuitive one day captures just half of this hernia field, it would increase the total number of annual procedures by over 40%.

On the international side, CEO Gary Guthart said that while overall placements of the daVinci Xi system were slow, the installed base was used to perform far more procedures in 2016, with figures up 24% on the year. During the fourth quarter specifically, he said thatJapan and Europe saw a jump in utilization of daVinci for neurology and thatChina and Korea had increases in several different areas of surgery.

New buyback program

The company also announcedan accelerated buyback program that could be completed within the next month. As part of the program, Intuitive will use $2 billion in cash on hand to retire roughly 2.4 million shares immediately. The company would still have $1 billion in cash to use on buybacks when it was deemed appropriate moving forward.

That means that roughly 6% of the company's almost 40 million shares could disappear overnight. Currently, Intuitive has brought in $22.32 in (non-GAAP) earnings per share over the past year. But after the buyback is complete, this could bump up to as much as $23.74. It would also cause its P/E ratio to drop from 31 to 29, assuming the stock trades for the same value when the extra 2.4 million shares are retired.

Looking ahead

As he did last year, Guthart laid out four broad goals that the company hopes to accomplish in 2017.

  1. Increase adoption in U.S. general surgery, including colorectal and hernia procedures
  2. Continue penetration into Asian markets while driving procedure growth in Europe
  3. Develop new platforms for surgeons to use, especially the Single Port (Sp) solution that should be coming to market within the next year
  4. Provide financing to support scientific studies to validate the efficacy of the daVinci in improving patient outcomes

Anyone who was an Intuitive shareholder during the onset of the Affordable Care Act remembers that many hospitals were nervous about allocating money to spend on splashy purchases back then. When one analyst asked what the effect of the law's repeal might have on hospitals' purchases, Guthart didn't offer cautious optimism:

Our sense here is that utilization probably won't change very much. We don't have a crystal ball. On the capital placement side: highly uncertain for us. We don't know. Early indications are that it's pretty stable, but depending on how policy ultimately is implemented, that uncertainty may roll through some capital planning processes for some of our customers.

But moving forward, the company remains very positive. Procedures are expected to grow between 9% and 12%, though management is famous for lowballing these estimates and then blowing them out of the water.

The company's decision to increase spending by as much as $80 million in the next year also speaks to both its reinvestment for the Sp platform and its efforts to increase sales internationally.

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Brian Stoffel owns shares of Intuitive Surgical. The Motley Fool owns shares of and recommends Intuitive Surgical. The Motley Fool has a disclosure policy.