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Morningstar | Intuitive Surgical's 2018 Procedure Growth Remarkable; We Anticipate Moderation in 2019

Intuitive Surgical's procedure growth in the fourth quarter was largely aligned with previous quarters' robust trends. The 18% procedure growth in the quarter resulted in an overall healthy top-line performance. Intuitive expects a moderating but still very strong uptake in procedures in 2019, above our forecast. While there are some procedures where we are likely to increase our forecast, we are likely to be on the lower end of the firm's 13%-17% growth range guidance. We intend to slightly raise our fair value estimate as we roll our model and incorporate higher 2019 numbers, but we anticipate the shares will still be trading materially above our valuation. Despite the pending entrance of several new players into robotic surgery, we maintain our wide moat rating for Intuitive.

Procedure growth was once again driven by the U.S., up 18%, while outside the U.S. grew 24%, in line with historical numbers. Even if we assume the company will penetrate a sizable percentage of the target market (we forecast nearly 2 million daVinci procedures by 2027, or 40% of the estimated 5 million-procedure market), the company's U.S. growth is still likely to moderate considerably in the coming years. While we believe general surgery should be strong in 2019, with hernia and colorectal adoption opportunities still sizable, we anticipate moderation and even possible pullback in the mature procedures. The U.S. market is now responsible for nearly 75% of the firm's sales, which conveys the recent strength of the domestic market but also notable risk once procedure growth normalizes and system demand decelerates. We do see opportunities for daVinci outside the U.S., and Japan in particular was strong in the quarter, bolstered by additional reimbursements.

The firm's margins and earnings growth were in line with our expectations. We anticipate some margin pressure in 2019 with the new Sp model rollout and investments the firm is making in distribution and research and development.

Systems revenue growth was robust in 2018 with the installed base up 13%, implying an uptick in utilization. The improvement in utilization is partly attributable to healthy dVp and dVh volume, supported by the company's assessment of gynecology surgery increasingly performed by higher-volume facilities. Notably, a substantial percentage of total unit sales was attributable to trade-ins and operating leases. While trade-ins are likely to moderate in 2019, the company's operating lease strategy is paying off, with leases accounting for the growing number of placements, which could be valuable if macro conditions weaken. We still view tremendous opportunity for new systems, particularly outside the U.S., and our total installed base forecast incorporates a mid-single-digit growth rate over the next decade.