Intuitive Surgical (ISRG) — Earnings Review — January 27, 2024
ISRG makes robotic surgical systems to assist surgeons. It trains hospitals on the hardware itself, offers powerful data analytics on key performance indicators (like outcomes), and routinely allows for less invasive surgery overall. It dominates within this niche. Its largest revenue driver is the “da Vinci” system with “Ion” being its newer, faster growth hardware.
Definitions
- Single port & multi-port refer to single or multi-incision procedures.
Demand
As it often does, Intuitive Surgical pre-announced demand metrics for the fourth quarter. For this reason, revenue, hardware placements and procedure growth were all about as expected. da Vinci procedure growth was 21% Y/Y, it placed 415 new da Vinci systems vs. 369 Y/Y and grew its overall da Vinci base to 8,606. Procedures have compounded at a 4-year clip of 17% compared to the 21% growth it delivered this year. That acceleration was due to the unleashing of pent-up demand from global pandemic variants. Recurring revenue is 83% of total sales vs. 79% Y/Y.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Margins
- Missed EBIT estimates by 2.0%.
- Missed 68.6% non-GAAP GPM estimates by 60 bps.
- Beat $1.49 EPS estimates by $0.11. EPS grew by 30.1% Y/Y.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Balance Sheet
- $7.3 billion in cash & equivalents.
- No debt.
- Inventory rose by 37% Y/Y.
- Share count rose by 0.3% Y/Y. It repurchased $416 million in stock in 2023 with $1.1 billion left on its current plan.
2024 Guidance
For 2024, ISRG expects 13%-16% procedure growth. The slowing is related to tough comps from demand unleashing throughout 2023. At the low end, it assumes negative bariatric (weight loss surgery) growth and more China challenges. At the high end, it assumes stable bariatric growth and no new China challenges. It also sees a 67%-68% GPM for 2024. This was essentially in line with expectations. Over the longer term, it sees GPM getting back over 70% as Ion and da Vinci 5 both scale. Furthermore, with supply chain headaches now largely gone, it can and will re-focus on cost optimization vs. ensuring appropriate supply. Growing into extra manufacturing capacity will trim deadweight loss and further help GPM get back to 70%+ over time. That’s the path. Based on current 2024 estimates, ISRG trades for 47x 2024 EBIT, 59x 2024 net income and 66x 2024 FCF. EBIT and net income are expected to grow by 9.3% and 8.9% respectively for next year.
Call & Release Highlights
Demand Context
Utilization of its systems continues to rise. For multi-port, single-port and Ion, it saw 9% Y/Y, 15% Y/Y and 6% Y/Y growth respectively. This powered 2023 procedure growth of 22% Y/Y. Procedure growth for the newer Ion platform was the most rapid at 129% Y/Y. General surgery in the United States as well as general strength in Japan were both called out as highlights. Its mix of offering better patient outcomes, better care team experiences/training, and lower cost per treatment continues to work quite well.
- Multi-port system placements for 2023 rose 5.8% Y/Y to reach 1,313.
- Single-port system placements for 2023 rose by 148% Y/Y to reach 57.
- Ion placements for 2023 rose by 10.9% Y/Y to reach 213. Ion procedure growth reached 108% Y/Y for the quarter. It has 534 total Ion systems placed today.
- Placement growth is not being driven by price cuts as the average selling price of $1.42 million was flat Y/Y.
Notably, weight loss (bariatric) surgery growth continued to decelerate. This is directly related to GLP-1 drugs like Ozempic. Bariatric surgery is a little less than 5% of its total volume today.
Demand for flexible leases and financing was “substantial” during the quarter. Clients are looking to build their portfolios of ISRG’s hardware while minimizing up-front cost and creating a more seamless ability to trade up to newer systems. Leasing was 48% of Q4 placements vs. 42% Y/Y. ISRG gets less revenue upfront from leasing vs. an outright sale, but lifetime value of a leased system is similar to selling it.
Ion Platform
Ion growth was held back by supply issues. It slowed down deployments to “ensure placements went well.” Demand is strong, the backlog is growing and it’s working to quickly resolve these issues. For Q4, this led to Ion system placement falling from 67 to 44 Y/Y.
Costs and Margin Context
Both capital and operating expenses came in around the high end of its annual 2023 guidance. It continued to invest heavily in R&D to support platform and digital tool growth. Product gross margin also worsened Y/Y due to a mix shift towards newer platforms like Ion. ISRG’s margin profile on robotics hardware always starts low with new products and builds from there. Finally, a build in inventory reserves weighed on margins Y/Y as well.
New da Vinci Model
ISRG submitted a 510(K) (FDA clearance application) for its new da Vinci 5 platform. This is set to expand minimally invasive surgical use cases, although the team won’t tell us which use cases will be added. They will after it’s cleared. The new platform has 4x the computer processing power vs. its predecessor along with several other upgrades to systems and materials. It submitted the application in August 2023 following the completion of trials. It did receive a request for more information and is currently responding to inquiries. It’s also working on approval in Korea and Japan.
The launch of this platform will be intentionally slow. It takes time for ISRG to assemble its supply chain and ramp capacity for new hardware. It’s not willing to rush that process and will go only as fast as its supply chain can effectively mature.
International
Like in Q3, anti-corruption efforts and ramping competition in China are weighing on growth there. It expects this to last at least until the second half of this year. The unwinding of its demand backlog there (following Q4 2022 pandemic outbreaks) helped to offset this headwind in 2023. In other China news, it started its da Vinci Xi production. By law, this must be assembled in that nation if it’s to be sold there.
- Through 2025, it plans to open new factories for its da Vinci 5 and more capacity for Ion as well across California and Mexico.
- In India, it continues to see explosive growth off of a small base.
- In Europe, its da Vinci single-port system secured a key CE mark certification for more use cases. Deployments will begin for these new use cases in 2024.
Take
If any of you closely follow my Progyny coverage, this company reminds me of them. A dominant player within a niche small enough to avoid unwanted attention, but large enough to support long term growth. They lead in their industry, continue to build more traction and continue to innovate. This is a boring company in the best of ways. The quarter was very good and the 2024 guidance was roughly as expected. Procedure guidance was a bit light, but ISRG loves to set targets that can be consistently raised throughout the year.
