Intuitive Surgical Company Earnings: Hit or Miss?

Expectations are such for robotic surgical systems maker Intuitive Surgical (NAS: ISRG) that it can report solid results and still disappoint some investors. Although shares closed 4% higher on Tuesday, after-hours trading following the company's earnings announcement wiped out all of those gains, despite the results beating analyst estimates.

Intuitive Surgical posted third quarter revenue of $538 million -- 20% higher than the same quarter last year. Earnings shot up 50% compared to 2011, although it is important to note that 31% of that increase resulted from one-time tax benefits.

Prior to the earnings release, I noted three key factors to watch with Intuitive Surgical. Let's take a look to see how the company fared during the third quarter in these three areas.

Europe continues to present headaches. This isn't surprising, considering that another large medical device company, Edwards Lifesciences (NYS: EW) , experienced slow procedure growth in Europe during its third quarter.

Intuitive Surgical reported slower procedure growth in Europe, as expected. However, whereas in the last quarter management was unpleasantly surprised by sluggishness in Europe, this time around they were not caught off guard.

The company predicted in July that third-quarter revenue could come in near or below second quarter levels because of the Europe headwinds. As it turned out, this prediction hit the mark pretty well. Third-quarter revenue increased only a fraction of a percent compared to second quarter.

Three months ago, Intuitive Surgical projected that expenses for the third quarter would increase compared with second quarter. The primary reasons that the company cited for this expected uptick related to the timing of employee stock options and scheduling of research and development projects.

Total operating costs did in fact increase during the third quarter, from $161.1 million last quarter to $178.7 million this quarter, with $9.5 million of this $17.6 million difference stemming from higher R&D costs. The good news for Intuitive Surgical -- and investors -- is that there were no big negative surprises.

I mentioned in my analysis prior to the earnings release that the biggest potential for an upside surprise could be with the company's continued expansion of the da Vinci system into new procedures. That upside surprise didn't occur, although Intuitive Surgical did report solid numbers.

The company's strongest revenue growth continues to be felt in the instruments and accessories category. Sales for these items jumped 24% compared with the same quarter last year.

Intuitive Surgical expected that procedure growth would be stronger than the actual results. Europe was one contributing factor. The other was that prostatectomy procedures in the U.S. continue to decline because of what CEO Gary Guthart referred to as "changes in prostate cancer detection and treatment."

The company lowered its guidance on procedure growth to 24% as a result of these issues. The prior range had been 27% to 29%. However, management stated that revenue and earnings for the year should come in on the high end of prior forecasts.

Easing on
Some investors could be concerned that the European woes and slowing U.S. prostatectomy procedures will drag the company's future growth more than anticipated. Some might also think the stock is too expensive with a forward P/E of 30 when other medical device makers trade at much lower multiples.

Medtronic's (NYS: MDT) forward P/E of 11 looks cheap by comparison. Boston Scientific (NYS: BSX) has a forward P/E of 12. On the other hand, Accuray (NAS: ARAY) sports a sky-high forward P/E of 223 because of low earnings.

My view is that Intuitive Surgical is worth the higher multiple. Growth in Japan should help alleviate problems from Europe. The company stands to benefit from expanded usage of its robotic systems for other types of surgeries. Using the da Vinci system in tele-surgery applications could be coming in the not-too-distant future.

Maybe the stock won't experience rapid surges, but I expect Intuitive Surgical to keep easing on upward over the long run.

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Fool contributor Keith Speights has no positions in the stocks mentioned above. The Motley Fool owns shares of Intuitive Surgical and Medtronic. Motley Fool newsletter services recommend Intuitive Surgical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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