Intuitive Surgical's Investor Day: Color Me Impressed

I will not rehash any of the financial information that anyone can find at the ISRG website or at the SEC database. This article’s focus is my take on ISRG’s management, their tools, technology, and the chances that anyone else can beat them. Read on...

April 22nd 2009 was Intuitive Surgicals’ investor day. Apart from a rehash of numbers from Q1 2009, and a predictable slate of votes, there was much to be impressed about, and I learned a lot more than I thought I would from the meeting.

It was held in a smaller hotel on El Camino Real in Sunnyvale - not too far away from ISRG’s Headquarters on Kifer - next to the Costco (COST) on Lawrence and Kifer. I counted about fifty people who attended the meeting - including some from the East Coast and Washington State. In fact, there were about three stockholders who were once patients themselves and all of them had only the nicest things to say about DVP [da Vinci Prostatectomy].

I sat in the first row [not knowing that it was reserved for the directors of the company]. When a gentleman told me about that, the CEO Lonnie Smith rushed over, and said “please - no seat is reserved for anyone - sit wherever you want to.” I quipped with a “well, I just got a promotion” - which was hmmm… well received. The important thing is that management has their head screwed on the correct way and has no ego when it comes to superficial things that do not affect the company’s results.

They put the patient FIRST, doctors SECOND, hospitals THIRD, and everything else follows from there. About a third of daVinci sales are outside the US, and the company expects that number to be constant moving forward. It was reassuring to note that the gross margins on disposables is the same both with the UK’s national Health Service, and the United States’ Medicare reimbursement system - meaning that they see more value in a dVP as opposed to paying a few thousand dollars for some disposable sterile tools needed uniquely for every surgery.

ISRG demonstrated the latest daVinci Si - which enables TWO doctors to remotely work on the same patient. It could also be used for training, say a doctor with less experience, while guided by someone who has done several hundred surgeries with daVinci. In fact, both physicians can look at the region of surgery in 3-D and talk to each other. The robots are wired with three channels of data monitoring - per channel. Meaning, say you are using a cauterizer or a scalpel, it is controlled with dual circuits with a third “overseer” making sure that the two circuits that are “doing the job” are doing it right.

ISRG has written a tremendous amount of software to remove the “shake” from a surgeon’s hand, and each hand movement can be set with a multiplier meaning if the factor is set to 0.2 then five inches of movement of the surgeon’s hand moves the robotic arm by an inch - exactly.

In fact, all of us attendees were invited back to the HQ to “play” with the dV Si. It was actually easy, and I could interact with the other “surgeon” and exchange pieces of plastic, and thread rings around cones [basic training on the dV Si I suppose]. It all works brilliantly, and the “wrist” movement of the physician is translated into a wrist movement of the robot.

I came through the exercise impressed. Also, I made a note of the ramp rates of procedures that ISRG wants to be involved in, and the scope of the robot might far exceed what the company initially estimated. But that is a topic for a different day.

Bottom-line:
1. Fantastic management. Focused on what matters, while not giving a hoot about what does not.
2. Has an excellent handle on their financials. Their cash flow will fund their growth for years - even if they choose to expand into newer surgical techniques.
3. The next frontier is dV Hysterectomy.
4. The ramp rates of all of the procedures are following rates that both the company and I expect.
5. Excellent profit margins in both the US and abroad.
6. ISRG has an insurmountable lead in the robotic surgery market [for now]. Sure someone else could beat them, but it will be a decade before that happens.
7. The stock’s valuation though not cheap, is reasonable.
8. For now, the only thing holding the stock back is the ECONOMY, and nobody can do anything about it.
9. Hansen Medical (HNSN), and Luna (LUNA) were mentioned in the meeting, but ISRG is not worried about either company.

Disclosure: No positions in ISRG [yet]. Used to be long ISRG at much higher levels, and sold out when I posted that it was severely overvalued, and opined that a floor on the stock was about $75/share. Needless to say, I was very close.

Comments

[richjoy403:]

Thank you for a view from a unique experience perspective.

Apr 23 09:10 AM

[Fueled By R...:]

Thanks for an interesting article.

Apr 23 10:26 AM

[robert99:]

I nearly pulled the trigger on ISRG in the 80's. Shoulda, woulda, coulda.

Apr 23 12:12 PM

[Hugofukuzef:]

These people are true professionals!

This equity will return to the 150-160 level soon enough!

Good work Lonnie


HUGO

Apr 23 02:51 PM

[lemoneater:]

I appreciate your taking the time to communicate your experience. It sounds like they have a healthier corporate culture than many companies currently in the news. I'm a small shareholder. I only wish that I had gotten more shares!

Apr 24 11:30 AM