Intuitive Surgical Inc. (ISRG) posted a 20.6% fall in adjusted earnings per share to $3.24 for the third quarter of the year from $4.08 in the same quarter of 2013. However, the robotic surgical systems maker’s earnings beat the Zacks Consensus Estimate by a wide margin of 56 cents.

Net earnings ebbed 25.4% to $119.6 million from $160.4 million in the 2013-third quarter. The adjusted figures excluded the impact of customer trade-out program for their recently purchased da Vinci Si Surgical Systems with Intuitive Surgical’s recently announced da Vinci Xi Surgical System and amortization of intangible assets.

Reported net earnings per share fell 16.0% to $3.35 from $3.99 in the third quarter of 2013, while net earnings declined 21.1% to $123.7 million from $156.8 million in the year-ago quarter. The decrease can be attributable to significant rise (33.2%) in cost of revenues and higher operating expenses (up 10.4% year-over-year) in the quarter.

Intuitive Surgical, Inc - Earnings Surprise | FindTheBest

Revenues

Revenues in the quarter escalated 10.2% to $550.1 million, surpassing the Zacks Consensus Estimate of $516 million. The rise is attributable to higher revenues from all the business segments. Excluding the impact of the trade-out program, revenues were $534.1 million in the quarter, reflecting a 7.0% rise from the prior year quarter. In the quarter, global procedures grew 10% over the prior year.

Margins

Adjusted gross profit inched down 2.5% to $350.3 million while gross margin decreased 830 basis points (bps) to 63.7% in the quarter.

Adjusted operating earnings dipped 15.5% to $151.7 million while adjusted operating margin declined 840 bps to 27.6% from the prior year quarter.

Segment Results

Revenues from Instruments and Accessories grew 14.1% to $272.8 million in the quarter. The decrease is attributed to higher da Vinci procedure volume and timing of customer orders. Increased procedure volumes were driven by growth in U.S. general surgery procedures and worldwide urologic procedures.

Revenues from Systems rose 6.5% to $168.8 million. Intuitive Surgical shipped 111 da Vinci Surgical Systems during the quarter, up from 101 systems in the third quarter of 2013. Sales of da Vinci Xi System moved up to 59 units in the third quarter of 2014 from 50 units in the second quarter of 2014.

Intuitive Surgical placed 61 systems in the U.S. during the quarter compared with 65 systems last year. Outside the U.S., the company placed 50 systems compared with 36 systems in the third quarter of 2013. Among them, 25 systems were placed into Europe and seven into Japan compared with 17 into Europe and 13 into Japan in the third quarter of 2013.

Revenues from Services rose 7.0% to $108.5 million. The improvement reflected growth in the installed base of da Vinci Surgical Systems.

Financial Position

Intuitive Surgical had cash, cash equivalents and investments of $2,262.7 million as of Sep 30, 2014, down 17.8% from $2,753.9 million as of Dec 31, 2013. Inventories scaled up 10.7% to $198.9 million as of Jun 30, 2014 from $179.6 million as of Dec 31, 2013.

Intuitive Surgical completed the repurchase of stock under its 1 billion accelerated stock repurchase program. Under the program, the company has purchased a total of 2.5 million shares at an average purchase price of $397.52.

Our Take

Intuitive Surgical continues to be affected by stiff hospital capital spending environment. The company’s robotic surgical systems came under fire in the past due to several incidents that raised doubts about the robotic surgical technology.

However, Intuitive Surgical is optimistic about its new da Vinci Xi Surgical System, which has been approved by the U.S. Food and Drug Administration ("FDA") and received the CE Mark in Europe.

Currently, Intuitive Surgical retains a Zacks Rank #3 (Hold). Some better-ranked scrips in the medical instruments industry include AngioDynamics Inc. (ANGO), Alphatec Holdings, Inc. (ATEC) and Cepheid (CPHD). AngioDynamic sports a Zacks Rank #1 (Strong Buy), while both Alphatec Holdings and Cepheid carry a Zacks Rank #2 (Buy).

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