An installed base is worth more than a product launch

It traded at 399.54 this morning, +0.71% on the session. Med-tech coverage tends to focus on the device. The device is the least interesting part of the business.

Where the money actually is

Selling a capital machine into a hospital is a long, expensive, lumpy sales process. It also creates something considerably more valuable than the sale: an installation that consumes disposables every time it is used, for as long as it is used.

The hardware is the acquisition cost of an annuity. Once the machine is in a theatre, the recurring revenue grows with procedure volume, needs no further selling, and is very difficult for a competitor to displace, because displacing it means retraining the surgeons.

Why switching costs here are unusually real

In most industries switching costs are contractual and get talked about more than they bind. Here they are procedural. A surgeon trained on one system, in a hospital whose theatre workflow is built around it, does not switch because a rival is ten per cent cheaper.

• Recurring revenue per installed unit, and whether it is rising
• Procedure growth, which is the underlying demand signal
• Placements, which matter as future annuities rather than as this quarter's revenue
• Utilisation, meaning procedures per installed machine, which tells you if the base is being used or merely sold

Where I stand

Long. The valuation is demanding and I am not going to pretend otherwise. What the price buys is a recurring revenue stream with genuine switching costs and a demand driver that grows with an ageing population, which is about as durable as a growth input gets.

A machine sale is revenue once. A trained surgeon is revenue for a decade.

What would change my mind

Procedure growth slowing, or utilisation falling while placements keep rising. The second would mean machines are going into hospitals and not being used, which is the polite version of a demand problem and shows up a year before anyone calls it one.