10-QPeriod: Q3 FY2008

INTUITIVE SURGICAL INC Quarterly Report for Q3 Ended Sep 30, 2008

Filed October 17, 2008For Securities:ISRG

Summary

Intuitive Surgical, Inc. (ISRG) reported strong financial performance for the third quarter and first nine months of 2008, demonstrating robust revenue growth and increasing profitability. Total revenue surged by 50% year-over-year in Q3 2008 to $236.0 million, driven by significant increases in both product and service revenue. The company continues to benefit from the expanding adoption of its da Vinci Surgical System, with system unit sales increasing by 44% in the quarter. Recurring revenue, comprising instruments, accessories, and services, now represents 46% of total revenue, highlighting the company's successful recurring revenue model. Operationally, the company saw a 58% increase in operating income to $85.0 million. Despite increased investments in R&D and SG&A to support growth, profitability remains strong. The balance sheet shows a healthy increase in cash and investments, providing ample liquidity. However, investors should note the company's exposure to auction-rate securities (ARS), which have experienced failed auctions, leading to a temporary illiquidity and an unrealized loss. While the company believes it has the ability to hold these investments, this represents a notable risk factor.

Financial Highlights

25 data points
Beta

Revenue

$235.99M

71.9% Gross Margin

Net Income

$57.59M

24.4% Net Margin

EPS (Diluted)

$0.16

Cash & Equivalents

$227.61M

Free Cash Flow

$81.81M

Financial Statements
Beta
Revenue$235.99M
Cost of Revenue$66.42M
Gross Profit$169.57M
R&D Expenses$21.85M
SG&A Expenses$62.69M
Operating Expenses$84.54M
Operating Income$85.03M
Net Income$57.59M
EPS (Basic)$0.16
EPS (Diluted)$0.16
Shares Outstanding (Basic)351.13M
Shares Outstanding (Diluted)360.97M

Key Highlights

  • 1Total revenue increased by 50% to $236.0 million for the third quarter of 2008 compared to the prior year's quarter.
  • 2Recurring revenue grew by 54% to $109.7 million in Q3 2008, now representing 46% of total revenue.
  • 3The company sold 91 da Vinci Surgical Systems in Q3 2008, a 44% increase year-over-year, contributing to an installed base of 1,032 systems.
  • 4Operating income increased by 58% to $85.0 million in Q3 2008.
  • 5Cash, cash equivalents, and investments grew significantly, ending the quarter at $821.4 million, indicating strong liquidity.
  • 6Research and Development expenses increased by 53% to $21.9 million in Q3 2008, reflecting continued investment in innovation.
  • 7The company has an unrealized loss of $8.3 million on auction-rate securities, which are currently illiquid due to failed auctions, though management believes this is temporary and does not impact ongoing operations.

Frequently Asked Questions

Intuitive Surgical's revenue growth is primarily driven by the increasing adoption of its da Vinci Surgical System across various surgical specialties, particularly urology (prostatectomy) and gynecology (hysterectomy). This adoption is fueled by the system's ability to offer improved clinical outcomes, reduced invasiveness, and faster recovery times for patients. The company also benefits from a strong recurring revenue stream from instruments, accessories, and service contracts.

The company demonstrates strong financial health, with a substantial increase in cash and investments to $821.4 million as of September 30, 2008. Operating activities generated significant positive cash flow. While the company holds $86.6 million in auction-rate securities that are currently illiquid due to failed auctions, management believes this temporary lack of liquidity will not adversely affect the company's ability to conduct its business, given its overall cash position and expected operating cash flows.

The company is strategically increasing its investments in Selling, General, and Administrative (SG&A) and Research & Development (R&D) to support its rapid business growth and innovation. R&D expenses increased by 53% year-over-year in Q3 2008, and SG&A expenses rose by 56%. While these investments are impacting short-term expenses, they are crucial for the long-term development of new products and market expansion, and the company continues to achieve strong operating income growth.

The recurring revenue stream, which includes revenue from instruments, accessories, and service contracts, is increasingly important for Intuitive Surgical. In Q3 2008, it accounted for 46% of total revenue, up from 45% in the prior year. This segment is growing rapidly and provides a more predictable and stable revenue base, complementing the capital equipment sales of the da Vinci Surgical System.