Although 2010 was a lousy year for medical technology stocks, patient investors know that the buyers will return in time. When they do, high-growth companies like Intuitive Surgical (Nasdaq:ISRG) will surely be on the shopping list. For while there are legitimate concerns about how long this company can sustain double-digit system growth, it is much harder to argue away the rising procedure counts and incredible free cash flow conversion performance.
A Strong Finish to the Year
Intuitive capped 2010 with another estimate-beating performance. Revenue rose 21%, exceeding even the high estimate, as instrument and accessory sales jumped 33%. System sales grew 10%, while service revenue rose 27% for the same period. Revenue growth in instruments was supported by a 35% increase in DaVinci-assisted procedures and a back-of-the-envelope calculation suggests that procedure counts per machine per week rose about 8% to around 3.7. (For more, see A Checklist For Successful Medical Technology Investment.)
While there was almost nothing to quibble with in the top line numbers, the company's operating leverage was not quite up to the same standard. Gross margin rose about 30 basis points from the year-ago level, a somewhat surprising lack of leverage given the larger contribution of instruments and accessories. The company also posted a sizable increase in SG&A and R&D (though few investors really begrudge higher R&D spending for growth med-tech names), and that limited operating income growth to 20% and resulted in a slight decline in operating margin.
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