Was MAKO's Third Quarter Good Enough?

Steve is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Four weeks ago, I wondered in print whether MAKO Surgical's (NASDAQ: MAKO) third quarter results represented a breaking point for the company.  With MAKO's after-the-bell announcement yesterday, it's time to touch base to see how it fared.

Third quarter revenue rose 46% from the same year-ago period to $29.2 million, with a net loss of $6.6 million, or 15 cents per share.  Perhaps most importantly, the company showed a marked improvement in its ability to move RIO systems, selling 15 robots in the quarter -- the same number sold during the entire first half of 2012.  After posting two successive quarters of lower RIO system sales, investors were finally able to breath a collective sigh of relief.

Apart from the all-important RIO system sales, however, I previously outlined several other important positive signs which helped convince me MAKO remained on the right track.  Let's take a look to see whether these still hold.

Robust procedure growth?  

During the third quarter, 2413 MAKOplasty procedures were performed, representing a 7% decrease from the previous quarter and a 33% increase from the same period last year.  Monthly system utilization also dropped to 6.2 procedures from 7.2 in the second quarter of 2012.  At first glance this seems cause for concern.  After all, as I mentioned last month some investors worry MAKO could still go the way of Hansen Medical (NASDAQ: HNSN), whose stalled procedure growth served as an ominous omen for future growth.  For more context, however, take a look at MAKO's monthly system utilization for the past three years: 

<table> <tbody> <tr> <td><strong>Period</strong></td> <td>2009</td> <td>1Q10</td> <td>2Q10</td> <td>3Q10 </td> <td>4Q10 </td> <td>1Q11 </td> <td>2Q11 </td> <td>3Q11 </td> <td>4Q11 </td> <td> 1Q12</td> <td> 2Q12</td> <td>3Q12</td> </tr> <tr> <td><strong>Monthly Utilization</strong></td> <td> 5.6</td> <td> 6.6</td> <td> 6.3</td> <td> 5.7</td> <td> 6.7</td> <td> 6.2</td> <td> 6.4</td> <td> 6.5</td> <td> 7.2</td> <td> 6.6</td> <td> 7.2</td> <td>6.2</td> </tr> </tbody> </table>

After reviewing the table, the most recent quarter's drop certainly doesn't appear to be radically outside the realm of normal monthly utilization numbers.  In addition, it's important to note selling larger numbers of RIO systems can negatively affect monthly utilization as hospitals experience some lag time between initial implementation and full-scale utilization.  Lastly, it's encouraging to note the negative effect of new systems on utilization averages will become less evident as the installed system base continues to grow.

Of course, this doesn't mean investors are happy; predictably, analysts immediately asked for clarification on the lowered procedure guidance during the Q&A portion of yesterday's earnings call.  Management answered in part by blaming lower than expected YTD procedure counts and system sales, but also made clear their confidence utilization rates will "bump up north of seven" -- even after accounting for negative effects from Hurricane Sandy -- given the visibility they have so far in the current quarter.  With MAKO's fourth quarter historically being the strongest, and with many patients putting off surgeries until the end of the year as deductibles are met, I'm inclined to believe Q3's 6.2 utilization number is no cause for alarm.  

Hip procedures continue to ramp?

The company sold 14 MAKOPlasty Total Hip Arthoplasty Applications in the third quarter, including 11 to new customers and three as upgrades to existing systems.  Now 60% of the installed base has the THA application, up from 58% last quarter.  Of the 2322 domestic procedures, 302 were hip MAKOplasty procedures, representing a 7.4% increase from last quarter.  That may not sound like much, but it's impressive considering simply maintaining that quarterly growth rate would represent a 33% annualized gain in hip procedures.  Also during yesterday's call, CEO Maurice Ferre reiterated to analysts they will likely see an "inflection point" with regard to hip surgeries sometime in 2013.

Slowing cash burn?

I wrote a few weeks ago analysts would quickly scroll down the Q3 report to verify cash burn is slowing as much as MAKO claimed.  In the second quarter, the company reported $35 million in cash and equivalents in the bank after using $11.5 million.  This quarter, however, MAKO reported cash and equivalents remaining of $28.4 million, meaning they only used $6.6 million in Q3.  Once again, while this may sound bad, remember it tracks perfectly with the company's previous expectations of ending the year with around $23 million left in the bank.

Any news on new applications?

Last quarter, I also speculated that we were given hints of a new shoulder or total knee application in the form of increased R&D costs and conversations with RIO system owners.  While we were given no word this quarter on a shoulder application, MAKO finally made its first official statement regarding plans for a Total Knee Arthoplasty (TKA) application. 

This is particularly intriguing because MAKO has traditionally pitched its current partial knee procedures as a less-intrusive alternative to potentially-unnecessary total knee surgeries supported by competitors like Zimmer Holdings (NYSE: ZMH) and Stryker Corporation (NYSE: SYK). Still, Zimmer and Stryker can breathe easy for now; Dr. Ferre was quick to note the TKA solution should not be expected in the near term.  When an analyst asked "Why mention it now versus keeping it quiet?" Ferre responded to say he felt it was appropriate to provide color on MAKO's significant Q3 investment in their partner, Pipeline Orthopedics.

To sum it up, despite several assertions of a "mixed bag" this quarterMAKO Surgical's report held mostly good news for investors.  Aside from the monthly utilization numbers, MAKO has answered many questions for uneasy shareholders with its slowing cash burn, plans for a Total Knee application, ramping hip procedure counts, and the crucial improvement in RIO System sales.  

Alas, the report wasn't quite good enough to convince skeptics MAKO is out of the woods just yet, so its shares are likely to stay depressed for a short while. At current levels, however, MAKO offers a perfect entry point for patient, long-term investors.

Steve Symington owns shares of MAKO Surgical. The Motley Fool owns shares of MAKO Surgical and Zimmer Holdings. Motley Fool newsletter services recommend Hansen Medical and MAKO Surgical . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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