Categories Analysis, Health Care

Intuitive Surgical (ISRG) looks poised for a strong year ahead

In the first quarter of 2023, worldwide da Vinci procedures grew at a faster pace and exceeded the market's forecast

The healthcare industry has been witnessing an increase in demand for robotic-assisted surgical procedures due to their high efficiency and convenience. Intuitive Surgical, Inc. (NASDAQ: ISRG), the company that makes the popular da Vinci systems, this week reported a sharp increase in surgical procedures performed using its flagship robotic system.

The company’s stock gained a whopping 12% after it reported impressive results for the first quarter. Recovering from its recent lows, the stock is once again trading above $300. The sharp increase in procedure volumes and the management’s bullish outlook on full-year procedure growth justify the rally. The positive outcome, which came after a muted performance in the previous quarter, has allayed fears of a slowdown this year.

The COVID Factor

In recent years, the company’s earnings and sales fluctuated significantly, especially after the pandemic outbreak. Elective surgical procedures were deferred for focusing more on COVID care but the trend reversed as the pandemic situation improved, though a full recovery is yet to happen. Currently, high inflation and financial uncertainties could prompt people to postpone non-urgent medical procedures, once again denting demand.

Over the years, the da Vinci robotic surgical suite has evolved into one of the most sophisticated minimally invasive surgical systems. There has been a steady growth in revenues from the sale and maintenance of da Vinci, which is going to be the company’s primary growth driver in the foreseeable future. The problem is if the number of installations drops in a particular period, there would be a corresponding decline in recurring revenues.     

Intuitive Surgical Q1 2023 earnings infographic

The Good and Bad

While Intuitive Surgical is successfully operating in a growing market, it is not insulated from competition as other players, including Johnson & Johnson and Medtronic, are entering this healthcare segment. Though customers wouldn’t prefer dumping da Vinci and switching to new systems initially, competitors might catch up and grab market share in the long run. Meanwhile, the company is busy enhancing its robotic systems with new features and software, while also rolling out new products.  The lingering supply chain disruption and rising logistics costs are the main short-term challenges facing the company, since they can put pressure on margins.

From Intuitive Surgical’s Q1 2023 earnings call:

“Our margins were pressured primarily by charges taken in our stapling line, due to a raw material lot non-conformance that necessitated scrapping instruments. We also experienced lower manufacturing yields during the bring-up of new production lines in our high-volume production facilities to support multi-port accessory and Ion catheter growth. Customer availability was briefly impacted for stapling but has since recovered and we are working on bringing customer stocking levels back to their par levels.”

Results Beat

In the first three months of 2023, double-digit growth in the Services and Instruments & Accessories segments drove up total revenues by 14% to $1.70 billion. Systems revenues, meanwhile, remained unchanged. Worldwide da Vinci procedures grew at an accelerated pace of 26%. At $1.23 per share, adjusted earnings were up 9% year-over-year. The bottom-line growth was restricted by a sharp increase in operating expenses. The company had a total of 7,779 installed bases at the end of the quarter. The results topped expectations, after missing in the December quarter.

Shares of Intuitive Surgical traded up 12% on Wednesday afternoon, extending the post-earnings rally. They have grown 43% in the last six months alone.

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