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Intuitive Surgical, Inc. (Nasdaq: ISRG) Q1CY22 Earnings Review

RIGHT Analysis Date 4/28/2022 Current Price: $235
Wisdom Global: ISRG: Q1CY22 result review
USD Mn Q1CY22 YoY QoQ Remarks
Revenue 1,488 15.1% -4.1% driven by 19% YoY Da-Vinci procedure growth with 16% growth in US procedures and 25% growth in OUS procedure growth.  Worldwide system sales grew 4.4% YoY
Gross profit 1,010 11.9% -4.8% higher costs of products; services maintained its gross margins;
EBIT 408 -2.1% -9.4% 32% YoY growth in R&D costs and 20% in SG&A; R&D costs from a broader set of
product development initiatives, Ion and SP platform investments, digital investments, advanced instrumentation & advanced imaging; SG&A was driven by higher travel and training costs compared to last year. SG&A this quarter was more in-line with pre-pandemic expenses
Net profit 369 -15.1% -3.5% higher taxes & lower other income was driven by unrealized losses on investments
resulting from strategic arrangements
GM 67.9% (200) bps (50) bps  driven by higher freight and material costs, lower first quarter 2022 system ASPs, and higher fixed costs from investments
EBIT margin 27.4% (490) bps (170) bps higher r&d and sg&a costs
NPM 24.8% (690) bps 10 bps higher taxes & lower other income
Major Segments Rev. (USD Mn) Q1CY22 YoY % of Total Remarks
Instruments & Accessories 810 14.8% 54.5% driven primarily by procedure growth of approximately 19% YoY and
incremental sales of advanced instruments (not systems: Da Vinci systems are in the systems segment sales); with the US at 16% procedure growth and OUS at 25%. OUS procedure growth was driven by procedure expansion in the UK,
Italy, China, Germany, and Japan.
Systems 428 16.1% 28.8% primarily driven by OUS systems sales which grew at 16% YoY while the US was (2)%.
Services 249 14.6% 16.8%  higher service revenue, reflecting a larger installed base of systems
–  have been investing in the OUS markets, and OUS procedures have grown faster in proportion to U.S. procedures. However, in Q1CY22, almost the entire US topline growth was from procedure growth and so the US market for systems seems saturated for now. The management was non-committal on greenfield hospital opportunities in the US. OUS is growing at a brisk pace with 25% procedure growth YoY and 16% systems sales growth. While OUS could continue to grow at a faster pace than the US, the lack of growth in the US will be a drag on the overall company since the US forms 65% of total sales. There are about 4000 hospitals in the US that still don’t have a Da Vinci system installed but they may be using other hospitals within the region or concentrating on larger urban hospitals while the more rural hospitals may not be adding Da Vinci systems and so it seems their US market for new systems placement is highly penetrated and saturated to quite an extent. It eliminates one leg of growth which is US new systems sales.
– During 2020, da Vinci procedure volumes and system placements were significantly impacted by the COVID-19 pandemic, as healthcare systems around the world diverted resources to respond to COVID-19. In 2021, COVID-19 resurgences continued to impact da Vinci procedure volumes. While hospitals may have been prepared with purchases of systems in 2021, the resurgence in procedure volumes could surprise on the upside if COVID doesn’t impact again in 2022.
– Instruments & accessories, systems, and services (all three segments) revenues grew at about the same pace YoY in this quarter. Moreover, the procedures don’t seem to be very discretionary in nature since even in a covid year such as 2020, the number of Da Vinci procedures grew 1% YoY.
– SG&A was back to pre-pandemic levels as a percentage of revenues which is fair with the caveat that revenues have increased significantly from 2019 levels and hence we expected SG&A to display some positive operating leverage which seems to be missing in this quarter. R&D as a percentage of revenues is one of the highest we have seen in the last three years in spite of a 15% CAGR in revenues negating any positive operating leverage from R&D. Overall, no operating leverage from operating expenses in this quarter, and ditto for the rest of the year.
– Expect ISRG to grow EPS at a CAGR of 0.3% from CY21-23 primarily driven by higher expenses, fixed investments, and taxes compared to CY21.
– Currently trades at 50x FY21 & FY23 PE multiple which seems expensive given the recent declines in overall market multiples for all growth stocks and no growth expected in GAAP earnings for ISRG between FY21 & FY23