Intuitive Surgical Earnings: Procedures Growth in Q1 Is Remarkable

While we were expecting solid midteens growth in procedures for fiscal 2023, Intuitive Surgical’s ISRG first-quarter results easily surpassed our expectations with 26% growth globally. This allowed the company to raise its procedures guidance materially, from 12%-16% to 18%-21%. We are updating our model to account for this massive surprise on the upside and expect a modest increase in our $204 fair value estimate for this wide-moat business.

Robust procedures growth was a surprise not just for us, but also for the company. Intuitive alluded to a few drivers of demand acceleration, but even if adjusted for relatively easy comparisons, the broad-based volume improvement was puzzling. System utilization was up 13% year over year, relative to normal roughly 5% growth. Demand was strong across all geographies and procedures, but the low acuity/high-volume (cholesystectomy, hernia, and hysterectomy outside the U.S.) procedures clearly took off in the quarter. We estimate that robotic surgery gained market share relative to other approaches in benign surgery in the quarter.

Growth in system placements was also strong, inside and outside the U.S. The U.S. market, which continues to be affected by low trade-in volume, saw a solid uptick in the greenfield placements. Outside the U.S., 171 units placed in the quarter is an uncharacteristically high number (adjusted for seasonality). Intuitive was a bit cautious on the systems placements commentary suggesting the capital environment remains tight; we agree with this sentiment, but will be dialing up our capital placements forecast.

The only negative development in the quarter was on the gross margin line, where manufacturing issues and increase in inventory reserves led to a 100-basis-point reduction relative to last year. The compressed margin will remain throughout the year despite a 5% increase in pricing on the instruments side. Other expenses were in line with our modeling.