Intuitive Surgical Inc.ISRG reported adjusted earnings of $5.89 per share, up 19.7% on a year-over-year basis on significant revenue growth and margin expansion. Including stock-based compensation, adjusted earnings came in at $5.09 per share, compared to $4.19 in the year-ago quarter.
Revenues increased 12.6% year over year to $676.5 million, driven by higher procedural volume and growth across all segments. The company continues to benefit from a lean cost structure as evident from the improvement in margins. Revenues were much higher than the Zacks Consensus Estimate of $655 million.
Adjusted gross margin expanded 250 basis points (bps) to 68.2% in the reported quarter buoyed by lower inventory charges as well as improved manufacturing efficiency. However, these were partially offset by an unfavorable product mix. The company's newer products are notably low margin.
Adjusted operating margin expanded 560 bps to 36.8% owing to lower selling, general & administrative expenses (SG&A), which as a percentage of revenues, decreased 290 bps on a year-over-year basis. Research & development (R&D) expenses, as a percentage of revenues, also declined 10 bps.
Worldwide da Vinci procedure volumes grew approximately 15% year over year to 177K. The growth in procedure may be primarily attributed to general surgery procedures in the U.S. and urology.
Per management, procedure growth was observed in most of the geographic regions, including the U.S., Europe, and key markets of China, Japan and Korea. In the reported quarter, U.S. procedure count rose approximately 12%, while international procedures increased roughly 27%.
Instruments and Accessories revenues grew 16% to $325.6 million in the quarter. The year-over-year growth was driven by a higher number of procedures. Revenues realized per procedure were approximately $1,840 which was almost flat year over year.
Systems sales increased 7.8% to $230.7 million on the back of increased unit sales. Intuitive Surgical placed 158 systems in the quarter compared with 137 in the year-ago quarter. Of the total, 72% of the systems were da Vinci Xi.
Globally, system average selling price (ASP) was almost flat at $1.55 million. Hospital financed approximately 17% of the systems installed in the quarter under review, down from 25% in the last quarter. Intuitive Surgical directly financed 20 systems of which 16 were structured as operating leases. Notably, this was the highest number of operating leases placed since the company began its direct leasing program in the second quarter of 2014.
Outside the U.S., the company placed 75 systems compared with 66 in the year-ago quarter and 37 in the last quarter. Intuitive Surgical sold 11 systems in Japan, 13 systems in China, 8 systems in Italy and 7 in Brazil. Markets outside the U.S. are still in the early stages of adoption, hence system placements remained sluggish.
Service revenues were up 9.3% to $120.2 million on growth in the installed base of da Vinci Surgical systems.
Intuitive Surgical gained international regulatory clearances throughout 2015. The company added 45 millimeter Xi stapler to its product portfolio in the first quarter of 2015, while Harmonic Curved Shears and a second set of instruments were introduced in the second quarter.
In the second half of 2015, Intuitive Surgical submitted its 510(k) filing for 30 millimeter stapler for Xi, single site instrument kit for Xi as well as other Xi accessories.
This month, the company received FDA clearance for integrated Xi table motion technology.
Intuitive Surgical had cash, cash equivalents and investments of $3.4 billion as of Dec 31, 2015, as compared with $3.1 billion as of Sep 30, 2015. During full-year 2015, the company bought back approximately 366K shares.
Intuitive Surgical forecasts 2016 procedural volumes in the range of 9% to 12%. System placements are expected to remain slothful, particularly in international markets as several of these markets are in premature stages of adoption.
Management expects 2016 gross margin in the range of 68% to 69.5%. The company expects gross margin to fluctuate on a quarter-to-quarter basis due to product and regional mix.
Management expects operating expenses in 2016 to increase by 9%-13% on a year-over-year basis, as the company continues to invest in the betterment of robotic assisted surgery.
We believe that growing adoption of Intuitive Surgical's da Vinci system among physicians for general surgery, oncology, urology and gynecology procedures is a key growth catalyst. Moreover, increasing procedural volumes outside the U.S. presents significant growth opportunity for the company.
However, we believe the positive trends are quarter-specific and the company has a long way to go in order to sustain momentum. These include continuing growth in the U.S. as well as international procedural volume, particularly in China, Japan and Europe.
Reimbursement trends will be key deciding factors behind the adoption of da Vinci systems in countries like Japan. Favorable reimbursement will help Intuitive Surgical fast penetrate the market.
Zacks Rank & Other Key Picks
Currently, Intuitive Surgical carries a Zacks Rank #1 (Strong Buy).
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