Intuitive Surgical, Inc. — Q1 2010 Form 10-Q
Period: Three months ended March 31, 2010; unaudited. Intuitive Surgical designs, manufactures, and markets da Vinci robotic surgical systems, instruments and accessories, and related services. Its business combines system sales with recurring instrument, accessory, and service revenue.
Financial performance
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total revenue | $328.6 million | $188.4 million |
| Gross profit / margin | $240.5 million / 73% | $128.7 million / 68% |
| Operating income / margin | $129.7 million / 39% | $45.0 million / 24% |
| Net income | $85.3 million | $28.1 million |
| Diluted EPS | $2.12 | $0.72 |
| Operating cash flow | $115.6 million | $90.1 million |
- Product revenue was $278.0 million; service revenue was $50.6 million. Systems revenue was $155.3 million and instruments and accessories revenue was $122.7 million. Recurring revenue totaled $173.3 million, or 53% of revenue.
- Product gross margin was 75.5%, versus 69.6%; service gross margin was 60.3%, versus 63.4%. SG&A was $82.8 million and R&D was $28.0 million.
- Cash and cash equivalents were $313.6 million; short- and long-term investments were $1,081.9 million. Cash and investments totaled approximately $1,395.5 million, up about $223.5 million from year-end. Current assets were $1,019.5 million and current liabilities were $173.8 million.
- Total liabilities were $246.6 million; the balance sheet reports no debt balance. The filing identifies no material change in market risk.
- Investing cash outflow was $147.6 million, mainly net investment purchases and $16.2 million of capital expenditures and acquired intellectual property. Financing provided $124.7 million, primarily from stock option exercises and employee stock purchases; no shares were repurchased in the quarter.
Changes versus the prior comparable period
- Revenue increased 74%, operating income increased to $129.7 million from $45.0 million, and net income rose to $85.3 million from $28.1 million. Management attributed growth to procedure adoption, higher system sales, and expansion of the installed base.
- Systems sold increased to 104 from 66; 80 of the Q1 2010 systems were da Vinci Si. The installed base reached 1,482, versus 1,171 a year earlier.
- Procedures grew 37%. Instruments and accessories revenue increased to $122.7 million from $79.6 million; service revenue rose 29% to $50.6 million.
- Q1 2009 revenue was affected by $20.1 million deferred for da Vinci Si upgrade offers, including $18.0 million of system revenue and $2.1 million of accessory revenue. This makes reported year-over-year growth comparisons less directly comparable. The company adopted revised multiple-deliverable revenue accounting prospectively from January 1, 2010, allocating revenue using relative selling prices and estimated selling prices where other evidence is unavailable.
Outlook, commentary, and risks
- Management anticipated approximately 35% growth in total 2010 procedures versus approximately 205,000 procedures in 2009. The filing gives no specific full-year revenue or earnings guidance.
- Management expected recurring revenue to become a larger share of total revenue, continued substantial R&D investment, and future increases in R&D expense. It cautioned that Q1 results are not indicative of full-year results.
- Seven systems were sold in Japan during Q1 following regulatory approval; management did not expect that sales pace to continue through 2010 and was focused on obtaining appropriate reimbursement. Lack of reimbursement or future regulatory approvals could constrain demand.
- Healthcare reform legislation enacted in March 2010 creates a 2.3% medical-device excise tax beginning in 2013. Management said the effects of the legislation, including possible reimbursement, procedure-volume, and profit impacts, were uncertain.
- Other disclosed risks include hospital capital-spending conditions, product adoption and competition, regulatory approvals and restrictions, healthcare policy, and intellectual-property or product-liability disputes. The company described legal matters as ordinary-course proceedings and did not expect them to have a material adverse effect based on information then available.
- Investment risks include auction-rate securities with failed auctions. The company classified related unrealized losses as temporary; valuation of these Level 3 securities and a related put option relies on unobservable assumptions, including liquidity, cash flows, and UBS’s ability to repurchase securities. Gross unrecognized tax benefits were $73.1 million at March 31, 2010.
Key facts for investors to verify
- How much reported growth reflects increased procedures and system demand versus the $20.1 million Q1 2009 revenue deferral and other comparison effects.
- Whether procedure growth, system placements, and recurring revenue support management’s approximately 35% 2010 procedure-growth outlook.
- The assumptions and recoverability of Level 3 auction-rate securities and the related UBS put option.
- The potential effects of healthcare reform, reimbursement changes, and the 2013 medical-device excise tax.
- How the new estimated-selling-price allocation affects the timing and mix of revenue in future periods.