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Intuitive Surgical’s Key Metric to Watch Doesn’t Have a Dollar Sign Next to It

Motley Fool Staff, The Motley Fool

Intuitive Surgical (NASDAQ: ISRG) reported fourth-quarter earnings and it delivered a small miss on profits. Wall Street, no shock, dinged its stock price accordingly.

But as Motley Fool Money host Chris Hill and Fool senior analysts Aaron Bush, Ron Gross, and Jason Moser note in this segment from the podcast, there are a lot of reasons to be upbeat about the surgical robot company, its business model, its procedure growth, and its potential for investors.

A full transcript follows the video.

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This video was recorded on Jan. 25, 2019.

Chris Hill: Shares of Intuitive Surgical falling a bit this week. Fourth quarter profits for the maker of surgical robots fell short of Wall Street's expectations. I don't know, Aaron, this really seems like a speed bump for this business.

Aaron Bush: Yeah, the miss was negligible. I'm not even really thinking about that. The bigger deal about this quarter filling out the rest of the year is seeing how they top this year's procedure goals. At the beginning of this past year, management was calling for 9% to 12% procedure growth. Over the course of the fiscal year, they delivered 18% procedure growth, and in this fourth quarter delivered 19% procedure growth. By most accounts, they still are topping expectations when it comes to the core metrics. Part of that has to do with adding new systems. This quarter alone, they added 290 systems, about 5,000 total systems. Still making good progress there. We're also seeing clear growth and more procedures happening per system, meaning that doctors and patients are increasingly choosing to go use Intuitive Surgical's equipment. Because of all this, now over 70% of the revenue is recurring, which I don't think many people realize when they think surgical robots, that it's a recurring revenue business.

Hill: I thought they just sold the systems. They get paid based on the number of procedures?

Bush: Yeah. It's high-margin, recurring business. It's fantastic. I think this is a company that, even though this was a speed bump, they continue to be underestimated. For 2019, they're guiding for 13% to 17% growth in procedures, which is more optimistic than it was this past year. When you realize how large their markets are, the fact that they're improving their machines, building new ones, they're attacking more types of procedures, competition is lagging, they're starting to accelerate their push into China, there are still a lot of levers here that they can pull to keep growth going.

Jason Moser: That recurring revenue is a big deal. I don't want to undersell that. It's high profit margin revenue. In the healthcare space, it seems like a lot of companies are pulling it off. Masimo , Idexx Laboratories . It's a neat space to be looking for those kinds of models.

Aaron Bush has no position in any of the stocks mentioned. Chris Hill has no position in any of the stocks mentioned. Jason Moser owns shares of Idexx Laboratories and Masimo. The Motley Fool owns shares of and recommends Idexx Laboratories, Intuitive Surgical, and Masimo. The Motley Fool has a disclosure policy .