Business context and reporting period
Intuitive Surgical, Inc. designs, manufactures, and markets da Vinci robotic surgical systems and related instruments, accessories, and services. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017, compared with the corresponding 2016 periods. The da Vinci X launched in the U.S. in May 2017.
Key financial metrics
Amounts are in millions except per-share data, percentages, and system counts.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $756.2 | $670.1 | $1,430.4 | $1,264.6 |
| Gross profit | $527.9 | $470.9 | $994.0 | $875.9 |
| Gross margin | 69.8% | 70.3% | 69.5% | 69.3% |
| Operating income | $257.5 | $245.4 | $449.0 | $424.4 |
| Net income | $221.5 | $184.5 | $401.3 | $320.9 |
| Diluted EPS | $5.77 | $4.71 | $10.42 | $8.25 |
| Operating cash flow | Not reported quarterly | Not reported quarterly | $458.0 | $488.5 |
- Q2 revenue increased 13%; net income increased about 20%. First-half revenue increased 13%; net income increased about 25%.
- Q2 product revenue was $614.2 million and service revenue $142.0 million. Recurring revenue was $539.8 million, or 71% of total revenue, up 15% year over year.
- Q2 instrument and accessory revenue grew 17% to $397.8 million; systems revenue grew 7% to $216.4 million. The company shipped 166 systems versus 130 a year earlier; installed base reached approximately 4,149.
- Q2 operating expenses rose to $270.4 million from $225.5 million, including R&D expense of $84.6 million versus $54.7 million. Service gross margin declined to 69.0% from 73.9%; product gross margin improved to 70.0% from 69.4%.
- At June 30, cash and cash equivalents were $696.5 million; short- and long-term investments totaled $2.727 billion. Combined cash and investments were approximately $3.4 billion, down from $4.8 billion at year-end 2016. Total liabilities were $728.5 million; the balance sheet shows no debt line item.
- First-half investing cash flow was positive $954.5 million, mainly reflecting net investment sales and maturities. Financing cash flow was negative $1.754 billion, primarily from a $2.0 billion accelerated share repurchase. Operating cash flow was $458.0 million.
Material changes versus the prior comparable period
- Global procedure volume grew approximately 16% in Q2 and 17% in the first half. First-half U.S. procedure growth was about 14%; outside the U.S. it was about 25%.
- Revenue growth was led by recurring instruments, accessories, and services, supported by higher procedure volume and a larger installed base. System shipments also increased, though system average selling prices fell: approximately $1.46 million in Q2 versus $1.56 million a year earlier, excluding operating leases.
- R&D spending increased substantially to support a broader development pipeline. Management expects R&D expense to continue increasing.
- First-half operating cash flow declined from $488.5 million to $458.0 million, with working-capital uses including higher receivables, inventory, and prepaid expenses.
- Reported tax rates fell to 17.2% in Q2 and 14.2% for the first half, largely due to the new accounting treatment for employee share-based tax benefits. Those benefits reduced the effective tax rates by 11.4 and 13.5 percentage points, respectively.
Outlook, management commentary, risks, and unusual items
- The filing provides no specific revenue, earnings, or procedure-volume guidance. Management says available cash, investments, and expected operating cash generation should meet liquidity needs for the foreseeable future.
- Management identifies procedure adoption, hospital capital spending, reimbursement, regulatory clearances, competition, and product acceptance as drivers of future demand. China system placements depend on new import authorizations or public-hospital quotas and tender processes; timing is uncertain. Further Japanese procedure reimbursements are also uncertain.
- A first-quarter customer trade-out offer for the da Vinci X resulted in $23.4 million of revenue remaining deferred at June 30. The company anticipated the rights would be substantially resolved before year-end 2017.
- The $2.0 billion accelerated share repurchase materially reduced cash and investments; $991.6 million remained authorized for repurchases at June 30. Final ASR settlement was scheduled by Q4 2017.
- Product-liability settlement charges were $16.0 million for the first half, and accrued liabilities for tolled claims were $32.9 million at June 30. The company says additional losses are reasonably possible but cannot estimate an excess range. A shareholder securities class action and derivative suits remained pending or subject to settlement approval; the company did not expect material adverse effects from these matters.
- The company received $10.0 million from an insurer settlement in June 2017. Separately, Ethicon filed a patent-infringement complaint concerning EndoWrist Stapler instruments on June 30, served July 12; the company could not estimate a loss or range.
- A 2017 accounting change caused excess share-based compensation tax benefits to be recognized in earnings and is expected to increase tax-rate volatility. Adoption of the new revenue standard was planned for Q1 2018, with full retrospective application anticipated; the company expected no material impact but had not completed its assessment.
- The 60%-owned Fosun joint venture was legally formed in Q2 to develop and commercialize catheter-based robotic medical devices. The company expects startup losses and no joint-venture revenue in 2018; successful development, commercialization, and funding are uncertain.
Important facts for investors to verify
- Whether procedure growth, particularly in general surgery and international markets, continues to support recurring revenue and system demand.
- Whether the da Vinci X launch affects system placements, average selling prices, and recognition of the $23.4 million deferred trade-out revenue.
- Whether higher R&D and service repair costs, litigation charges, and tax-benefit volatility change operating margins or reported earnings.
- Whether the accelerated repurchase’s final share settlement and any further buybacks materially affect liquidity and share count.
- Developments in product-liability claims, the Ethicon patent case, shareholder litigation, China authorizations, and the Fosun joint venture.