10-QPeriod: Q3 FY2006

INTUITIVE SURGICAL INC Quarterly Report for Q3 Ended Sep 30, 2006

Filed October 27, 2006For Securities:ISRG

Summary

Intuitive Surgical, Inc. (ISRG) reported strong performance for the nine months ended September 30, 2006, with total revenue reaching $260.1 million, a significant increase from $155.2 million in the same period of the prior year. This growth was primarily driven by increased adoption of the da Vinci Surgical System across various surgical specialties. The company also saw robust growth in recurring revenue from instruments, accessories, and service, which constituted 45% of total revenue for the period. The launch of the new da Vinci S Surgical System in January 2006 has been well-received, contributing significantly to system sales. Operationally, the company's gross profit margin remained strong, though slightly impacted by new accounting standards and inventory charges. Operating expenses, particularly R&D and SG&A, increased to support business expansion and the adoption of SFAS 123(R) for stock-based compensation. Net income for the nine months was $48.4 million, compared to $44.6 million in the prior year, showing continued profitability. The company maintains a healthy balance sheet with substantial cash and investments, indicating strong liquidity for future operations and growth.

Key Highlights

  • 1Total revenue increased by 68% year-over-year for the nine months ended September 30, 2006, reaching $260.1 million.
  • 2Recurring revenue (instruments, accessories, service, training) grew significantly and represented 45% of total revenue for the nine-month period.
  • 3The company sold 120 da Vinci Surgical Systems in the first nine months of 2006, a substantial increase from 75 in the prior year, with 101 being the new da Vinci S model.
  • 4Net income for the nine months ended September 30, 2006, was $48.4 million, up from $44.6 million in the prior year.
  • 5The company adopted SFAS 123(R) in 2006, leading to the recognition of stock-based compensation expense, impacting operating costs and reported net income per share.
  • 6Cash, cash equivalents, and investments totaled $292.3 million at the end of Q3 2006, demonstrating strong liquidity.
  • 7The effective income tax rate increased significantly from approximately 7.8% in the first nine months of 2005 to 39.9% in the first nine months of 2006 due to the reversal of a valuation allowance on deferred tax assets.

Frequently Asked Questions

The primary driver of Intuitive Surgical's revenue growth is the increasing adoption of its da Vinci Surgical System across various surgical specialties, coupled with strong recurring revenue from instruments, accessories, and service contracts.

The adoption of SFAS 123(R) starting January 1, 2006, requires Intuitive Surgical to recognize stock-based compensation expense for employee stock options and awards. This has led to an increase in operating expenses (Cost of Revenue, SG&A, R&D) and a reduction in reported net income and EPS compared to previous periods where such expenses were not recognized in the income statement. This expense is non-cash.

Recurring revenue, derived from instruments, accessories, and service contracts, is a key component of Intuitive Surgical's business model. It represents a growing and predictable revenue stream that supplements the capital sales of the da Vinci Surgical Systems. The company expects this segment to increase as a percentage of total revenue over the long term.

The significant increase in the effective tax rate from approximately 7.8% in the first nine months of 2005 to 39.9% in the first nine months of 2006 is primarily due to the reversal of the valuation allowance on net deferred tax assets in the fourth quarter of 2005. This was based on management's conclusion that it was more likely than not that the company would realize sufficient future taxable income to utilize these assets. Consequently, the company began recording a higher income tax expense based on its operating income.