After reports from short sellers claimed growth was slowing at Intuitive Surgical (NASDAQ:ISRG), the company's fourth-quarter performance provided evidence to the contrary. Revenue advanced 23% year over year to $609 million, handily exceeding consensus expectations. Earnings were also better than anticipated, growing 13% year over year to $4.25 per share. Earnings trailed revenue growth due to a substantial increase in the firm's tax rate.
Gross margins fell during the quarter, down approximately 110 basis points year over year and 60 basis points quarter over quarter to 71.9%, but it's hard to complain about the decline when gross margins are so strong. Some of the margin compression resulted in a revenue shift to lower-margin services (a benign mix shift), as well as older da Vinci systems being used as credit against new systems.
We think the increase of service revenues will remain strong as long as the installed base grows; thus it will not be surprising for the company to have a modestly lower overall gross margin going forward. However, average selling prices ticked up by $0.02 million to $1.49 million for new da Vinci systems. The firm sold 175 systems in the quarter compared to 152 systems in the same quarter a year ago, and new accessories drove revenue per procedure 3.5% higher, to $2,050.
SG&A, though up 21% on a constant basis to $148.1 million, fell 30 basis points as a percentage of revenue, to 24.3%, while R&D declined 150 basis points as a percentage of sales, to 6.8%. As a result, Intuitive Surgical's pre-tax operating margin increased 50 basis points to 40.7%, making the firm one of the most profitable companies in our coverage universe.
International expansion remains a tremendous opportunity for Intuitive Surgical. Revenue grew 23% during the quarter to $131 million, thanks mostly to procedure growth and modest system sales increases. Though the U.S. has a healthcare system that incentivizes a cost-savings system like the da Vinci, we think other countries will follow suit. For example, management provided a telling detail on the overall cost savings of a surgical technique called sacrocolpopexy:
Length of stay for the da Vinci group averaged two days as compared to three days for the Open Sacrocolpopexy group. However, 48% of the women treated within the da Vinci group experienced a length of stay of less than 24 hours as compared to just 1% for the women undergoing in Open Sacrocolpopexy. The median direct costs reported for the da Vinci group was $6,668 as compared to $7,804 for the open group. The overall costs reported for the robotics group was $9,725 as compared to $12,485 for the Open Sacrocolpopexy group with similar readmission rates at 30 days post-op. The author stated that while da Vinci sacrocolpopexy took slightly longer to perform than in open sacrocolpopexy, both the direct and indirect cost for the da Vinci Sacrocolpopexy was less than for open sacrocolpopexy.
Overall, we thought Intuitive Surgical's quarter was fantastic. Total procedure growth totaled 25% for the year, and we think the success of the da Vinci system could expand globally, while the company continues to generate strong recurring revenue streams. We continue to hold the firm in the portfolio of our Best Ideas Newsletter.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. ISRG is included in our Best Ideas portfolio. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.