3 Ways Intuitive Surgical Inc. Can Slice Up a Solid Third Quarter

Intuitive Surgical's last earnings report was a mixed bag. As Rule Breakers analyst Karl Thiel pointed out in July after the robotic surgery company reported second-quarter earnings, sales were down 12% year over year after adjusting for a $6 million trade-in allowance for the new da Vinci Xi system, but procedures performed by doctors grew 9% year over year.

Source: Intuitive Surgical.

Doctors are increasingly using the company's machines, but in a tough capital budget environment, hospitals aren't willing to buy new systems. Obviously, this situation can't go on forever; as competition for time on the machines heats up, doctors will eventually demand that administrators buy new Intuitive products.

With that in mind, here are three things you should focus on when Intuitive Surgical releases earnings after the market closes on Tuesday.

1. Procedure volume
On its second-quarter call, Intuitive Surgical's management guided for procedure growth of 5%-8%, tightening up its previous guidance of 2%-8%. For the first half of 2014, Intuitive Surgical is sitting on a 5% year-over-year growth in procedures, so it will have to at least match that level of growth to meet its goal.

Fortunately, 5% growth seems easily attainable since the company is working off a weak comparison to the second half of 2013. According to my calculations, second-quarter procedures were about 11% higher than those of the third quarter last year and more than 2% higher than the fourth quarter's; so as long as procedures match second-quarter levels, Intuitive Surgical can easily reach its goal. Any sequential growth from the number of procedures in the second quarter will be a bonus.

2. Which procedures
The total volume of procedures is important, but the type of procedures being performed will indicate the sustainability of the growth.

Surgeons specializing in urology and gynecology were the first to embrace the da Vinci systems, but growth in their use has diminished as the market saturates. To drive future growth, Intuitive Surgical needs an increase in the systems' use in other surgical procedures. Look for growth in single-site cholecystectomy (gall bladder removal), single-site hysterectomies, and hernias.

Investors should also monitor where the procedures are being performed. The second quarter saw 7% growth in procedures using Intuitive systems in the U.S., while international growth was 17%. The more these procedures are adopted outside the U.S., the more systems will be sold there. Just 35 of the 96 da Vinci systems sold in the second quarter went to international markets.

3. Which systems
Only 50 of those 96 systems sold were Intuitive Surgical's new Xi systems, so there's plenty of potential for future growth from the new technology.

While we usually think of procedure growth driving future system growth when time on the machines becomes limited, but the opposite could be true for the Xi. The design allows for new kinds of procedures because the arms can reach more anatomy without needing to reposition a patient. Doctors asking their hospitals to buy the new Xi is a good sign for growth outside of the procedures that have become Intuitive Surgical's base.