MAKO Surgical's Next Frontier Is Just Beginning

MAKO Surgical (NAS: MAKO) sure was on a wild ride today. You can't say I didn't warn you to buckle up ahead of the surgical specialist's fourth-quarter and full-year earnings report last night.

Shares opened higher and promptly touched a high of $39.75, a gain of more than 6% from yesterday, and proceeded to sell off just under $36, before rebounding to a 2.5% loss on the day and over 8% below today's high. Investors clearly have mixed feelings about the results. Were they that ominous and/or confusing?

Beat the Street
Revenue in the fourth quarter soared by 122% to $32.9 million, not only beating the consensus estimate of $30.7 million but also squeezing a hair ahead of the highest estimate of $32.8 million. The bottom line came in right on target with a net loss of $5.6 million, or $0.14 per share, which nearly halved the quarterly loss from a year ago.

Full-year figures looked similarly encouraging, with 2011 revenue posting a 91% increase to $84.5 million to finish off the year. Net loss for the year was $36.1 million, or $0.89 per share, which was a modest improvement compared with the $38.7 million, or $1.13 per share, lost in 2010.

Break it down
Looking at the revenue breakdown reveals that most of the figures came in roughly where I expected them to, based on the operational data that the company provided back in January. The ballpark figures I came up with were $11.3 million in procedure revenue, $15.3 million in RIO system revenue, and $2 million in service revenue, with the acknowledgement that MAKOplasty total hip arthroplasty, or THA, application sales could provide the boost to beat the Street.

Here's how they came in relative to expectations.


Source: SEC filings.

Procedure revenue was right on target at $11.4 million, and service revenue was $1.7 million. RIO systems brought in a total $19.8 million, with about $13.8 million from systems and $6 million from THA application sales. The company sold 37 THA applications in the quarter, at an average selling price, or ASP, of about $165,000 to retrofit older systems for THA procedures.

About $1.9 million of RIO system revenue was deferred for the one-year warranty that the company provides and is excluded in the $19.8 million figure above. Each system earned an ASP of about $850,000 domestically, while the two that were sold to international distributors grabbed an ASP of $700,000.

This extra boost incorporated into system revenue brought down the proportion of revenue from recurring sources, but I wouldn't be concerned, since procedure revenue doubled YOY and service revenue jumped 113%.

Hips: the next frontier
On top of that, THA procedures typically fetch higher average selling prices than the partial knee procedures. Knee procedures have historically brought in consistently about $5,000 per procedure, but hip procedures can fetch upwards of $5,500 per procedure, with $5,300 on average this quarter. This means that as hip procedures begin to take off, average revenue per procedure should trend higher.

THA procedures are also helping MAKO milk more revenue from each system, as utilization rates have been on the rise. The average monthly utilization per system in the fourth quarter was 7.2 procedures per month, up from 6.5 last quarter and 6.7 last year. THA is expected to add roughly 1 to 2 to this metric through 2012, which is on the low end of what the market was expecting.

Feel the burn
MAKO has about $58.7 million in cash and investments, and cash burn in 2012 is projected to be between $25 million and $30 million, most of which will happen in the first half of the year. The company expects to finish off the year with about $30 million in cash.

The company is expecting to be able to execute on operations this year without turning to capital markets for additional funding, meaning the company shouldn't need to take on debt or issue dilutive equity.

At this rate, MAKO should be able to make it to sweet black ink and become cash flow-positive before its coffers run out. The consensus thinks that the loss in 2013 will be as narrow as $0.08 per share, with profitability following in 2014, but some analysts think that the company could squeeze out a few cents of profit as early as next year.

Keep your eye on the ball
So why the fickle trading today?

Are the shorts to blame? Probably a little bit. Could THA adoption be faster? It wouldn't hurt. Do the results validate MAKO's status as a Rule Breaker with true multibagger potential? Absolutely. Today's action doesn't concern me as a shareholder, since I'm in it for the long haul and this growth story is just beginning.

MAKO is set to become the next Intuitive Surgical (NAS: ISRG) , complete with multibagger returns. Intuitive used the same business model to catapult to a $20 billion market cap, $1.76 billion in annual revenue, and $495 million net profit last year. Compare that with smaller MAKO's respective digits of $1.5 billion capitalization, $84.5 million top line, and -$36.1 million bottom line.


MAKO Surgical Revenues Chart by YCharts

Intuitive shareholders who have enjoyed its ride should seriously consider adding MAKO to their Watchlist and maybe even their portfolios. Traditional rivals Zimmer (NYS: ZMH) and Johnson & Johnson (NYS: JNJ) need to watch their backs, because this disruptor has its sights set on their lunches.

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At the time thisarticle was published Fool contributorEvan Niuhas a synthetic long options position in and owns shares of MAKO Surgical, but he holds no other position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool owns shares of Johnson & Johnson, MAKO Surgical, and Zimmer Holdings.Motley Fool newsletter serviceshave recommended buying shares of MAKO Surgical, Johnson & Johnson, and Intuitive Surgical and creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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