Intuitive Surgical, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Unaudited results; comparisons are with the corresponding 2009 periods unless otherwise noted. Intuitive Surgical designs, manufactures, and sells da Vinci robotic surgical systems, instruments and accessories, and related service.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $350.7M | $260.6M | $679.3M | $449.0M |
| Gross profit / margin | $256.8M / 73% | $190.2M / 73% | $497.3M / 73% | $318.9M / 71% |
| Operating income / margin | $139.7M / 40% | $99.5M / 38% | $269.4M / 40% | $144.5M / 32% |
| Net income | $88.7M | $62.4M | $174.0M | $90.5M |
| Diluted EPS | $2.19 | $1.62 | $4.31 | $2.32 |
| Operating cash flow | Not stated quarterly | $291.1M | $173.1M |
- Q2 revenue rose about 35%; first-half revenue rose about 51%. Q2 net income increased about 42%, and first-half net income about 92%.
- Q2 product revenue was $295.3M and service revenue $55.4M. Recurring revenue was $182.9M, or 52% of revenue, versus $137.1M, or 53%, in Q2 2009.
- Q2 product gross margin was 75.4%, compared with 74.7%; service gross margin was 61.7%, down from 63.9%. Management attributed product-margin improvement to higher system selling prices, lower material costs, and manufacturing leverage; service-margin pressure reflected higher service costs per system.
- At June 30, cash and cash equivalents were $420.0M; short- and long-term investments were $547.9M and $620.3M. Total cash and investments were $1,588.2M, up from $1,172.0M at December 31, 2009. Current assets were $1,264.1M and current liabilities $243.3M.
- Operating cash flow of $291.1M was offset by $254.2M used in investing and partly offset by $162.8M provided by financing; cash increased $198.6M. Financing included $115.9M from stock issuance and employee stock purchases and a $46.9M excess tax benefit from stock-based compensation.
- No borrowings or debt balance is presented in the balance sheet. Total liabilities were $318.7M at June 30, 2010.
Business changes and operating trends
- The company sold 108 systems in Q2, versus 76 a year earlier; first-half sales were 212 versus 142. The installed base reached 1,571 systems, up from 1,242 at June 30, 2009.
- Q2 procedures grew approximately 36% year over year. Hysterectomy volume exceeded prostatectomy volume, becoming the largest da Vinci procedure category. The company attributed growth to procedure adoption and a larger installed base.
- Of Q2 systems sold, 89 were da Vinci Si models; 15 had dual consoles. Higher system sales and a greater Si mix contributed to system revenue growth. U.S. revenue represented 82% of Q2 revenue, versus 78% a year earlier.
- U.S. hospital capital demand improved, while European economic conditions constrained spending. First-half system sales in Europe were 25, versus 30 in 2009, despite procedure growth.
- Operating expenses rose with organizational expansion, higher sales commissions, stock-based compensation, and R&D investment. First-half stock-based compensation expense was $57.1M, versus $47.3M.
Outlook, risks, and notable items
- Management expected 2010 procedures to grow approximately 35% from about 205,000 procedures in 2009. It provided no revenue or earnings guidance in the supplied filing text.
- Management revised its estimated 2010 effective tax rate to approximately 37%, from 36% at the end of Q1, citing a greater expected share of pretax income from the U.S. Gross unrecognized tax benefits were $75.4M at June 30; related accrued interest was $4.2M.
- Japan had regulatory approval for the da Vinci S, but reimbursement approval remained a focus; management warned that failure to obtain reimbursement or future product approvals could limit demand.
- The filing identifies risks from economic conditions and hospital spending, healthcare reform and reimbursement changes, product development and acceptance, regulatory approvals, competition, manufacturing disruptions, and intellectual-property matters. The 2010 U.S. healthcare law includes a 2.3% medical-device excise tax beginning in 2013, which the company said applies to its products and product candidates.
- Ordinary-course legal matters include product liability, patent, and contract disputes; the company did not expect their resolution to materially harm its business based on information then available.
- Unusual investment item: the company exercised a UBS right to sell auction-rate securities at par; it had $34.4M par value with UBS at June 30 and received the full amount in cash on July 1, 2010. The filing classified auction-rate-security unrealized losses as temporary.
- Revenue accounting for new multiple-element arrangements adopted prospectively in 2010 allocates consideration using relative selling prices, including estimated selling prices for systems. Management said it did not expect material changes to established system estimates, but changes could affect revenue allocation and timing.
Investor verification priorities
- Verify the sustainability and drivers of system sales, procedure growth, and recurring revenue, including the effects of U.S. strength and constrained European capital spending.
- Assess whether the expected 35% procedure growth translates into revenue and earnings growth, and monitor system/service gross-margin trends and rising operating costs.
- Review liquidity and investment quality, including the July 1 auction-rate-security proceeds and remaining Level 3 assets.
- Track the 2010 effective tax-rate estimate, unrecognized tax positions, and the effect of stock-option tax benefits on cash flow and reported earnings.
- Monitor Japan reimbursement, healthcare reform and the 2013 device excise tax, regulatory developments, and ongoing litigation.