Paying Close Attention To Intuitive Surgical

| About: Intuitive Surgical, (ISRG)

Medical device maker Intuitive Surgical (NASDAQ:ISRG) reported strong third quarter results Tuesday after the market close. Revenue surged 20% year-over-year to $538 million, roughly in-line with consensus expectations. Earnings surged 46% year-over-year to $4.46 per share, but after adjusting for a one-time tax benefit, they grew about 16% to $3.54 per share - still slightly better than expected.

The firm's performance was consistently strong across all segments, with Instruments and Accessories growing 24% year-over-year to $218 million. Procedure growth during the quarter was 22% thanks primarily to an increased number of gynecological procedures performed in the US. However, the pace was negatively impacted by a decline in US prostatectomy procedures and slowing growth in Europe. The pressure in procedure demand caused by changes in how to treat prostate cancer is having an impact on the company's European business. Still, the company is poised to add more sales and training staff to accommodate increasing demand for da Vinci general surgery procedures in both Europe and Japan.

Systems revenue grew 17% year-over-year to $199 million, as the firm sold 155 da Vinci Surgical systems compared to 133 systems sold during the same period a year ago. Average selling prices remained flat at $1.48 million, a positive, in our view, as the firm hasn't had to cut prices to stimulate such robust expansion. Revenue realized per procedure jumped to $1,980 from $1,950 during the same period a year ago, though it was down slightly from the $2,020 the firm posted in the second quarter. Services revenue jumped about 23% year-over-year to $88 million. Recurring revenue jumped 24% year-over-year to $306 million and now represents 57% of the total revenue mix. The company's gross margin fell 40 basis points year-over-year to 72.5%, but we view the decline as relatively immaterial.

Going forward, the firm reduced its full year 2012 da Vinci procedure growth outlook to 24%, below the low end of its previous expectation of 25%-27%. Still, the company continues to generate plenty of cash, and we love the firm's business, which has terrific long-term prospects, particularly as robotics becomes a more important part of difficult-to-perform surgical procedures. We think the firm still has some room to grow in the US, and perhaps more importantly, it has a long runway internationally. We hold shares of Intuitive Surgical in the portfolio of our Best Ideas Newsletter. For a read on how we calculate Intuitive Surgical's intrinsic value, please click: A Nearly $700 Price Tag for Intuitive Surgical.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: ISRG is included in the portfolio of our Best Ideas Newsletter.