How Intuitive Surgical Reported Such High Margins in 3Q17




Intuitive Surgical (ISRG) reported a gross profit margin of ~71.8% (of total sales) for 3Q17. This margin was lower, however, than the 73.1% it reported in 3Q16, mainly due to a medical device tax refund of ~$7 million that quarter. The fall in the service margin contributed to the declining gross margin, though the 3Q17 results were higher than the expectation, led by improved operational efficiencies and strong procedure growth.

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ISRG’s pro forma operating profit in 3Q17 came in at $347 million, representing a YoY (year-over-year) growth of 13%. Pro forma net income came in at $324 million, while EPS (earnings per share) came in at $2.77 in 3Q17, representing ~34% growth over its $2.06 in 3Q16. (These results have been adjusted for the stock split effected in October 2017. For details on the split, read Intuitive Surgical’s Recent Stock Split: The Market Reaction.)

Peers Becton, Dickinson, and Company (BDX), Stryker (SYK), and Abbott Laboratories (ABT) reported gross margins of 53%, 63%, and 58% of their total sales, respectively, in their recently reported quarters.

Notably, investors can consider the iShares Edge MSCI Min Vol USA ETF (USMV) for diversified exposure to Intuitive Surgical, which makes up ~1.5% of USMV’s total portfolio.

What impacted margins in 3Q17

Fixed costs rose in 3Q17 due to increased investments in R&D (research and development), commercial capabilities expansion across Asian and European markets, investments in a number of clinical trials, and stronger corporate competition capabilities. However, the gross margin in 3Q17 rose over 2Q17 due to improved production levels.

ISRG expects its gross margin in coming quarters to fluctuate, depending on product mix, cost-reduction capabilities, manufacturing efficiencies, and medical device tax reinstatement in 2018.


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