Intuitive Surgical’s Services business accounts for around 17% of the company’s value, according to our estimates. The segment primarily includes full-time support to Intuitive Surgical customers, from installing its surgical systems to repairs and maintenance. It also includes training surgeons to use the complex da Vinci Surgical Systems. The company usually enters into service contracts with customers at the time of sale. The segment has seen solid growth over the past few years, led by growth in the installed base of surgical systems. Looking at the segment’s performance so far in 2017, sales grew around 12%, which compares with 15% growth in the Product segment. The chart below shows the historical as well as estimated revenue trajectory for Intuitive Surgical’s Services segment.
Overall, we expect the segment’s sales to grow at an average annual rate of nearly 10% in the coming years. This growth should primarily be driven by the continued growth in installed base while maintaining the current pricing. Services revenues are recurring, as they are subject to periodic renewal of service contracts that are initiated at the time of the system purchase. As the average price of systems increases in the future, we expect the service contracts may have higher price points as well. Moreover, the systems will likely require a greater amount of customer training, as the company works to expand the scope of procedures. Also, there will be continuous upgrades to the complex systems, which will require a greater amount of maintenance as well as training. These factors should help the company maintain its current pricing in an environment where competition is likely to increase in the coming years. Average revenue per installed unit has been more or less around $130,000 over the past few years, and we expect it to remain consistent throughout our forecast period.
It should be noted that service revenues are linked to the Product sales and expansion in scope of procedures. While the growth in the number of procedures is strong, it has slightly declined this year in each subsequent quarter. The competition is building from TransEnterix, Medtronic, Verb Surgical and Titan Medical. TransEnterix’s surgical system recently received FDA approval. While the company currently has very little competition in its space, that is likely to change soon, and it could impact the growth trajectory for Intuitive Surgical’s Product as well as Services revenues.
Our $314 price estimate for Intuitive Surgical's stock is around 20% below the current market price.
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