EUR 850.00 For Business Accounts Only

Morningstar | ISRG Updated Forecasts and Estimates from 07 Jun 2019

Intuitive Surgical's procedure growth in the first quarter was largely aligned with what we saw in 2018. The 18% volume growth in the quarter allowed the firm to commit to the higher end of its full-year forecast, which is now slightly ahead of our targets. However, it appears that the system sales deceleration may be here sooner than we expected, offsetting the positive impact of strong procedure volume. For now, we are leaving our fair value estimate and our wide moat rating intact. The shares have retreated slightly but remain expensive.

Procedure growth remained strong in the United States, up 17%, while outside the U.S. it was 21%, in line with historical numbers. Key drivers of the growth remained largely the same: General surgery maintained its torrid adoption pace, while mature gynecology grew at an un-mature-like mid-single-digit rate. While we believe general surgery should remain strong in 2019, with hernia and colorectal adoption opportunities still sizable, we continue to anticipate moderation and even a possible pullback in the mature procedures.

System revenue grew at 5.5% in the quarter, with total unit placements up 27% and the installed base up 13%, implying an uptick in utilization. The system growth deceleration in itself wasn't particularly surprising, given very challenging comps, but the underlying trends were. Intuitive saw material growth in trade-ins in the quarter, with "new" installations only up 7.6%. Trade-ins and operating leases accounted for almost half of total placements, which suggests the penetration rate is finally starting to subside. The system mix was also more skewed toward lower-priced X and SP models, which, coupled with surprising commentary regarding volume discounts, resulted in a rather low average selling price for the quarter. Some of the factors were probably seasonal, but the general downward pricing trend is notable and likely sustainable.

Intuitive's margins came in lower than historically as the company ratcheted up its R&D and sales spending efforts. With the Ion diagnostic platform approval and upcoming launch, as well as the SP roll-out, we anticipate the overall margin will decline roughly 200 basis points for the full year, but should return back to the 40%+ level in 2020.