Thursday afternoon, medical device maker Intuitive Surgical (click ticker for report: ) reported weak second quarter results and reduced its full-year outlook. Revenue jumped 8% year-over-year to $579 million, falling short of consensus expectations. Earnings per share increased 4% year-over-year to $3.90, below consensus estimates. Of course, these headlines are no surprise after the company pre-announced weak results earlier this month. We’ve of the firm but are sticking with our small position in the portfolio of our Best Ideas Newsletter.
The big news in the press release was the extremely bearish revenue guidance given by management. After announcing first-quarter results, the firm provided a revenue growth outlook of 16%-19% for fiscal year 2013. With the market for da Vinci systems slumping, management now anticipates revenue growth of 0%-7%, which implies weak second half results. Management also took a haircut to its procedure growth outlook, which was forecasted to expand 20%-23% for the year (now expectations are for 15%-18% growth). Still, Director of Finance Calvin Darling sounded optimistic about overall procedure growth, saying on the conference call:
“I think when you look at the overall guidance and the revised range, we are talking about general surgery performing well and in line with our earlier guidance. And similarly on the urology side and internationally, so I think the change overall really is very much attributable to the benign gynecologic procedures in the U.S.”
If the slowdown is truly concentrated to one type of procedure, then procedure growth should continue to remain relatively strong (as it is forecasted to be).
Overshadowing the slowdown in revenue growth was the firm’s announcement that it received a warning letter from the FDA. In June, Intuitive Surgical received a Form 483, which has escalated into a warning letter to fix some of the issues the FDA found during its prior audit. Though the market took it as a rather negative event, Darling on the firm’s conference call seemed to believe the issues were addressable.
As with SEC investigations, FDA investigations don’t necessarily signal that something is wrong with the company, and the issues the FDA brings up can be solved. Nevertheless, an FDA warning letter simply adds to the laundry list of problems currently impacting the firm’s fundamental performance.
In our view, efficacy issues remain much more important to the company’s future than temporary FDA issues. Management cited a study from The Annals of Surgery conducted at the University of Pittsburgh in which the researchers found reduced surgical times as well as better oncologic outcomes for patients who had da Vinci procedures versus traditional laparoscopic treatments. If the study-data flow remains positive, we believe procedure and systems growth could reignite.
Valuentum’s Take
Without question, Intuitive Surgical has been a disappointing holding in the portfolio of our Best Ideas Newsletter. Still, we think the prevailing healthcare spending environment ahead of new health industry regulations combined with efficacy questions could simply be a bump in the road for the traditionally high-growth da Vinci maker. We intend to hold onto Intuitive Surgical, the smallest position in our Best Ideas Newsletter portfolio, until we have further clarification on whether the headwinds are temporary in nature.