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This Is What’s Really Behind Intuitive Surgical, Inc. (ISRG)’s Revenue Shortfall

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I’ve stood by Intuitive Surgical, Inc. (NASDAQ:ISRG) and supported the robotic surgical device maker through thick and thin all while short-sellers and skeptics have torn it apart. Last night, the ball was knocked decisively back to the pessimist’s side of the court.

Intuitive Surgical, Inc. (NASDAQ:ISRG)Just 10 days prior to reporting its second-quarter results, Intuitive Surgical, Inc. (NASDAQ:ISRG) delivered an unexpected and disappointing blow to its shareholders by forecasting revenue of approximately $575 million, merely a 7% increase from the year-ago period, on net income of $160 million compared to $155 million in the previous year. Comparatively speaking, Wall Street had been anticipating that Intuitive Surgical, Inc. (NASDAQ:ISRG) would report revenue of $630.4 million and $177.7 million in income.

Intuitive Surgical, Inc. (NASDAQ:ISRG)’s press release noted some of the specifics of why the company fell short of expectations, but will leave the majority of its explanations for the conference call on July 18. Noted briefly within the release, though, was a combination of declining U.S. da Vinci surgical system sales caused by “economic pressure on hospitals,” and a slowdown in benign gynecological procedures.

The problems on the surface
There are a lot of potential factors that, on the surface, look as if they could have played a role in causing Intuitive Surgical, Inc. (NASDAQ:ISRG) to miss its revenue estimates. But, as you’ll see, these probably aren’t the real reason why Intuitive Surgical, Inc. (NASDAQ:ISRG) disappointed Wall Street and investors.

Source: Roswell Park, Flickr.

First and foremost, Citron Research and its chief researcher Andrew Left have been critical of the company since December when it outlined a five-point letter highlighting Intuitive’s shortcomings. Specifically, Left questioned the advantages of robotic surgery — including their safety — the way Intuitive Surgical went about marketing its products, and the potential for complaints and lawsuits stemming from complications associated with the da Vinci surgical system. While the concerns are certainly a nuisance, I would hardly call Citron’s commentary the reason Intuitive missed the mark in the second-quarter. Had this been the reason, Intuitive shouldn’t have crushed EPS estimates in the first-quarter… but it did!

Another possibility is the ongoing federal probe into the safety and efficacy of its da Vinci surgical system announced in late February. If physicians feel there is merit to the federal investigation into the safety of the da Vinci surgical system, they may opt for traditional laparoscopic surgery instead. Yet, studies have been published in the Journal of the American Medical Association that examined more than a quarter of a million women who had a hysterectomy between 2007 and 2010 and determined that robotic surgery was just as safe as laparoscopic surgery, with patients often spending less time recovering in the hospital compared to laparoscopic surgery.

It’s also logical to expect the number of complaints to rise as the number of procedures performed increases. As a percentage of overall procedures, there’s nothing disconcerting about the da Vinci surgical systems’ safety profile. In sum, I highly doubt the federal probe had much of anything to do with this quarter’s sales miss.

We could always blame Europe for the shortfall; I mean everyone else is doing it, right? Just yesterday, niche diagnostic and device maker for infants and newborns Natus Medical Inc (NASDAQ:BABY) warned that its revenue would be short of the Street’s estimates because of tepid European demand for its products. Even having products with little competition in a niche category (infants and newborns) wasn’t enough to save Natus Medical Inc (NASDAQ:BABY); could that be the reason Intuitive is faltering?

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