Business context and reporting period
Intuitive Surgical designs, manufactures, and markets the da Vinci Surgical System, generating revenue from system sales and recurring sales of instruments, accessories, and service. This unaudited Form 10-Q covers the quarter ended March 31, 2011; comparisons are with the quarter ended March 31, 2010 unless noted.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Total revenue | $388.1 million | $328.6 million; up 18% |
| Product / service revenue | $324.5 million / $63.6 million | $278.0 million / $50.6 million |
| Recurring revenue | $221.0 million; 57% of revenue | $173.3 million; 53% of revenue |
| Gross profit and margin | $278.8 million; 72% | $240.5 million; 73% |
| Operating income and margin | $148.3 million; 38% | $129.7 million; 39% |
| Net income and diluted EPS | $104.1 million; $2.59 | $85.3 million; $2.12 |
| Operating cash flow | $100.3 million | $115.6 million |
| Cash, cash equivalents and investments | $1,757.0 million at March 31, 2011 | $1,608.9 million at December 31, 2010 |
Cash and cash equivalents were $449.8 million; current assets were $1,483.6 million and current liabilities $252.3 million. Total liabilities were $337.4 million. The balance sheet presents no borrowings. Net cash increased $170.0 million in the quarter, including $61.6 million from financing activities; operating cash flow was lower year over year, partly reflecting working-capital uses. Capital expenditures and intellectual-property acquisitions totaled $14.7 million.
Material changes versus the prior comparable period
- Revenue rose 18%, supported by 30% procedure growth, 28% growth in instruments and accessories revenue, and 16 more systems sold (120 versus 104).
- Recurring revenue grew 28% and increased to 57% of sales from 53%. The installed base reached 1,840 systems, versus 1,482 a year earlier.
- Net income increased 22% and diluted EPS rose from $2.12 to $2.59. Operating income grew 14%, slower than revenue.
- Gross margin declined to 72% from 73%; management cited lower system average selling prices and higher first-quarter excess-inventory reserves. System ASP was $1.38 million, affected by trade-ins, currency, and regional mix.
- Operating cash flow fell to $100.3 million from $115.6 million, despite higher net income. Cash and investments increased by $148.1 million from year-end.
Outlook, management commentary, risks and unusual items
The filing provides no quantified full-year revenue or earnings guidance. Management expects recurring revenue to become a larger share of sales, plans continued substantial investment in research and development, and expects to fund future growth from operating cash flow. It believes current cash and investments plus expected product sales will meet liquidity needs for the foreseeable future. Management cautions that first-quarter results are not indicative of full-year or future results.
- Demand depends on procedure adoption, hospital capital spending, economic conditions, reimbursement, regulatory clearances, product development, competition, and manufacturing capacity. Management reported relatively steady recent U.S. system demand and a slower European recovery.
- Following Japan’s earthquake and tsunami, the company observed a significant decline in commercial activity and expects Japanese demand to be further curtailed during the remainder of 2011; it did not expect a material overall revenue impact. Japan accounted for about 1% of 2010 product revenue.
- Single-Site instruments had CE marking and were being sold in Europe, but were not FDA-cleared for U.S. sale; the FDA requested additional clinical information. The Skills Simulator began shipping in Q1, and $1.3 million of related revenue was deferred because products had not shipped by quarter-end.
- A securities class action and consolidated shareholder derivative actions relate to alleged past disclosures. The company reported no accrual because outcomes could not be reasonably estimated, and said it believed resolution was unlikely to materially harm its business or financial position.
- Gross unrecognized tax benefits were $82.8 million, up from $78.9 million at year-end; $78.5 million, if recognized, would reduce the effective tax rate. The Q1 effective tax rate was 32.2%, versus 36.2% a year earlier.
- The company repurchased approximately 35,941 shares for $11.6 million during the quarter. The board had authorized $400 million in repurchases, with approximately $388.5 million remaining at March 31.
Important facts for investors to verify
- Whether procedure growth and recurring revenue can sustain sales growth as system ASP and product gross margin face pressure.
- How working-capital requirements, inventory build, and the planned manufacturing move affect operating cash flow and margins.
- Progress on U.S. clearance for Single-Site, Japanese reimbursement, and adoption of newer products and procedures.
- Developments in the shareholder litigation and the company’s unrecognized tax benefits.
- Actual full-year performance: the filing gives no quantified guidance and expressly cautions that Q1 is not predictive.