Friday, February 02, 2007

Color on quarter: Intuitive Surgical (NASDAQ:ISRG)

Several firms are commenting on Intuitive Surgical (NASDAQ:ISRG) after the co issued Q4 results and 2007 guidance last night:

- Deutsche Bank notes the co reported another solid quarter placing 50 systems and provide guidance significantly above their and Street consensus. The outlook remains increasingly promising with not only da Vinci prostatectomies expected to increase by 50% in 2007 but da Vinci hysterectomies are expected to grow a significant 150%. Firm believes this bodes well for the future growth of robotic surgery and reiterates Buy rating. Target remains at $140.

The primary driver to the growth versus firm's initial estimates is the launch of a new vision system (higher ASP), greater system utilization, and higher service revenue. Partially offsetting the top line upside is a slightly lower gross margin (higher initial COGS of the video system), and greater investment into the sales force and R&D. Net/net, both firm's top and bottom line estimates have moved up.

Penetration of da Vinci's two primary markets, prostatectomy and hysterectomy continue unabated with 2007 procedure growth in prostatectomy expected at 50% (almost 50% penetration) and hysterectomy at 150% (approx. 5% penetration). This bodes well for future system purchases as utilization has traditionally been a leading indicator.

- Piper Jaffray notes ISRG placed 50 systems to customers this quarter, compared to 42 last quarter and 40 last year. The new S system accounted for 47 units and 16 systems were sold to repeat customers. Intuitive just launched a new high definition visualization system at a list price of
$120,000, for the S system. The new system will help keep ASPs high and will stimulate more expensive disposable tool purchases. However, it will hurt margins for most of 2007 as the components are expensive.

ISRG beat its goals for prostatectomy and hysterectomy procedure penetration. Piper believes that more than 8,000 daVinci prostatectomies (DVP) were performed in the quarter and approximately 26,000 for all of 2006. The company expects to grow this volume by over 50% in 2007. Firm believes that about 1,300 hysterectomies were performed in the quarter and about 4,000 for the year. The company expects this number to grow over 150% in 2007.

ISRG will not be delivering much operating leverage in 2007, as it plans to expand its operating expenses at the same rate as forecasted revenue growth and margins are shrinking due to the new HD system. The company is investing in a new European HQ in Switzerland which will help lower the tax rate in 2008 and beyond. Operating leverage should resume in 2008 with lower tax rates and infrastructure costs behind it.

Revenue growth guidance of 35% was in line with 2007 consensus. Piper is raising their estimates to 38% revenue growth from 35% in 2007, and raising EPS to $2.62 from $2.50. They are holding their 2008 revenue growth assumption to 35% off a bigger base and raising EPS estimate to $4.03 from $3.33. Maintains Outperform and $130 tgt.

- Bear Stearns notes that despite their revenue optimism, their gross margins are moving lower, due to the 3DHD launch in 1Q'07. Full-year 2007 gross margins guidance is 65-66%, below firm's prior GM assumption of 68%. Bear's higher sales assumption basically offset theirlower GM assumptions, keeping 2007 EPS at $2.60 per share.

They continue to rate ISRG Peer Perform. ISRG continues to make outstanding headway in penetrating its anchor prostatectomy markets, as well as the growing gynecological oncology market. However, given current valuation levels, the firm prefers to wait for a more compelling entry point.

Notablecalls: Impressive quarter by ISRG. I love the fact that many of the systems were sold to existing customers. It shows how satisfied the hospitals are with ISRG's products. Despite that I suspect that in the s-t the stock's a sell around $115-120 level. Both Wachovia and Cowen made nice calls on ISRG when the stock was trading sub-$90 and I suspect there will be some profit taking following the recent run. Also, sequentially declining revenues and lower GM (albeit s-t) do not sound THAT good.

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