Robots aren't as common in hospitals as waiting rooms are, but there are certainly a lot of robots out there now. You can thank Intuitive Surgical (NASDAQ: ISRG) in large part. Over 4,100 of the company's da Vinci robotic surgical systems are used throughout the world.
The use of the da Vinci system in performing multiple types of procedures has helped Intuitive Surgical become the leader in robotic surgical systems. It's also generated tremendous revenue and earnings for the company through the years. But exactly how does Intuitive Surgical make most of its money?
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Intuitive Surgical sells its da Vinci systems for somewhere between $500,000 and $2.5 million per system, depending on the model, configuration, and other factors. With such a high price tag for da Vinci, you might think that the company makes most of its money from system sales. But that's not the case.
In 2016, system sales generated $792 million, or 29% of total revenue. However, Intuitive Surgical's biggest moneymaker was the sale of instruments and accessories, which accounted for over half of the company's total revenue. Service revenue made up another 19% of total revenue. A whopping 71% of Intuitive's revenue, therefore, comes from recurring sources.
Intuitive Surgical basically has a high-tech razor-and-blades business model. It makes money on the da Vinci system (analogous to the razor), but the really big bucks are made from selling the equivalent of blades for a razor -- instruments and accessories for da Vinci. Those instruments and accessories for da Vinci wear out as they're used in surgeries and need to be replaced, just as razor blades become dull and must be replaced.
The company also generates substantial revenue from providing services to customers. Intuitive Surgical usually signs customers to service contracts when the da Vinci system is initially sold. These contracts can range from $80,000 to $170,000 annually, depending on the system configuration and specific services included in the contract.
Types of procedures
Another of way of looking at how Intuitive Surgical makes most of its money is by the surgical procedures for which da Vinci is used. The company provides more detail on procedures performed in the U.S. Here's how procedure volumes compared in 2016.
Gynecology is Intuitive Surgical's top market for da Vinci. The primary surgical operations performed in gynecology are hysterectomies for both cancer and benign conditions, and sacrocolpopexy (surgical repair of pelvic organ prolapse).
However, Intuitive Surgical is seeing more growth in areas other than gynecology. General surgery procedures for which da Vinci is used include hernia repair, colorectal procedures, and cholecystectomy (surgical removal of the gall bladder). Urology procedures include prostatectomy and partial nephrectomy (surgical removal of a kidney). The da Vinci system is also used for removal of tumors in patients' heads and necks, lobectomies (surgical removal of a lobe of the lung), and heart mitral valve repair.
Intuitive Surgical doesn't provide specific revenue totals by type of procedure. However, the procedure volumes can serve as a proxy for the ballpark percentage of revenue each procedure type generates.
We've looked at how Intuitive Surgical makes most of its money, but where does the company make its money? The quick answer is: the U.S. Roughly 73% of Intuitive's total revenue in the first half of 2017 stemmed from the U.S., with 27% coming from outside of the U.S. However, less than 73% of total da Vinci systems are installed in the U.S.
Around 35% of da Vinci systems are installed outside of the U.S. But Intuitive Surgical doesn't make that percentage of its total revenue from outside of the U.S. Why? Utilization of da Vinci systems are higher in the U.S. The resulting higher number of procedures performed drives more recurring revenue for Intuitive Surgical.
Looking to the future
There are three trends for Intuitive Surgical that are easy to predict. First, recurring revenue from instruments, accessories, and services will become an even bigger part of total revenue. That's inevitable as Intuitive Surgical's installed base grows.
Second, Intuitive Surgical will generate significant revenue growth from new procedures. This is exactly what the company has indicated that it wants to do, particularly with growth in general surgical procedures. The reality is that most of the top procedures performed in the U.S. still aren't done with the da Vinci system.
Third, the international market will become a greater opportunity for Intuitive Surgical. Again, this one is something of a no-brainer. There are more people living in other countries and more surgical procedures performed that are candidates for da Vinci.
However, there's one other likely future change that could present some challenges for Intuitive Surgical. Currently, Intuitive Surgical enjoys a near-monopoly in its field. Other companies, though, are stepping up to the plate. Medtronic (NYSE: MDT) could be the most threatening. The large medical device company anticipates launching its own surgical robot system next year.
Still, Intuitive Surgical has a solid head start on potential rivals. Customers that have already purchased da Vinci systems aren't likely to change after making such a large investment. I expect Intuitive Surgical will keep on making lots of money for a long time to come.
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Keith Speights has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Intuitive Surgical. The Motley Fool owns shares of Medtronic. The Motley Fool has a disclosure policy.