InMode - Q3 2024

Transcript

Operator (participant)

Good day and welcome to the InMode Q3 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to hand the call to Miri Segal, CEO of MS-IR. Please go ahead.

Miri Segal (CEO)

Thank you, Operator, and everyone, for joining us today. Welcome to InMode's Q3 2024 earnings call. Before we begin, I would like to remind our listeners that certain information provided on this call may contain forward-looking statements, and the safe harbor statement outlined in today's earnings release also pertains to this call. If you have not received a copy of the release, please visit the investor relations section of the company's website. Changes in business, competitive, technological, regulatory, and other factors could cause actual results to differ materially from those expressed by the forward-looking statements made today. Our historical results are not necessarily indicative of future performance. As such, we can give no assurance as to the accuracy of our forward-looking statements and assume no obligation to update them except as required by law. With that, I'd like to pass the call over to Moshe Mizrahy, CEO.

Moshe, please go ahead.

Moshe Mizrahy (CEO)

Thank you, Miri, and to everyone for joining us. With me today, Dr. Michael Kreindel, our Co-founder and Chief Technology Officer; Yair Malca, our CFO; our medical director and VP of medical affairs, Dr. Eran Krieger; and Rafael Lickerman, our VP of finance. Following our prepared remark, we will be available for Q&A. During the Q3, macroeconomic headwinds continued to impact our performance as reflected in our financial results. A decrease in minimally invasive treatment and a slowdown in platform sales led to less-than-expected sales in consumables and platforms in Q3, which in turn led us to revise our full-year guidance. We are optimistic about the early endorsement of our 2 new platforms, IgniteRF and Optimas Max. We hope that as macroeconomic environments improve, particularly in easing interest rates and faster financial approval from leasing companies, more physicians will recognize the benefit and efficacy of these new platforms.

I would like to elaborate on our decision this quarter to reorganize some aspects of our corporate structure. As part of these management changes, we had to release some members of the management of the U.S. and replace certain management in the U.K. , Spain, and France. We believe these management changes are essential for aligning our target market with the right company structure. Additionally, we're segmenting the North American market into separate roles for the U.S. and Canada, allowing us to focus on specific needs in each geographic area. We're making additional changes in our workflow that will better reflect our activities. Finally, regarding the situation in Israel, we want to assure everyone that our top priority remains the safety of our employees. We have overcome challenges relating to production, and we take pride in our employees' dedication in working longer shifts to uphold customers' commitment.

Now, I would like to turn the call over to Yair Malca, our CFO, to review the financial results in more detail. Yair?

Yair Malca (CFO)

Thank you, Moshe, and hello, everyone. Thank you for joining us. Starting with total revenue, InMode generated $130.2 million in Q3 of 2024, out of which $31.9 million was generated from pre-orders received in Q1 of 2024. This leaves us with $98.3 million of net sales received in Q3. GAAP and non-GAAP gross margins in Q3 were 82%. Moving to our international operations, Q3 sales outside of the U.S. accounted for $36.4 million, representing 28% of total sales, a 19% decrease compared to Q3 last year. To support our operations and to ensure future growth, we currently have a sales team of more than 250 direct reps and 83 distributors worldwide. GAAP operating expenses in Q3 were $57.9 million, a 2% increase year-over-year. Sales and marketing expenses increased to $51.9 million in Q3 compared to $50.8 million in the same period last year.

This increase was primarily driven by our recent management change costs, higher commissions, as well as additional spending on trade shows and workshops activities in Q3 of 2024. Next, we look at share-based compensation, which decreased to $4 million in Q3 of 2024. GAAP operating margin for Q3 was 37% compared to an operating margin of 38% in Q3 of 2023. Non-GAAP operating margin for Q3 was 40% compared to a Non-GAAP operating margin of 43% in Q3 of 2023. GAAP diluted earnings per share for Q3 was $0.65 compared to 0.54 per diluted share in Q3 of 2023. Non-GAAP diluted earnings per share for this quarter was $0.70 compared to 0.61 per diluted share in Q3 of 2023. Once again, we ended the quarter with a strong balance sheet.

As of September 30, 2024, the company had cash and cash equivalents, marketable securities, and deposits of $684.9 million. This quarter, InMode generated $34 million from operating activities. Regarding our second share repurchase program for 2024, as of today, we have acquired 3.2 million shares at an average price of $15.86 per share. As for future capital allocation plans, we continue to carefully review and evaluate all options, and we will provide updates as soon as we have news to report. Before I turn the call back to Moshe, I'd like to share with you our guidance for 2024. Full-year 2024 revenue to be between $410-420 million compared to prior guidance of $430-440 million. Non-GAAP gross margin between 81%-82 compared to prior guidance of 82%-84.

Non-GAAP income from operations to be between $140-145 million compared to prior guidance of $150-155 million. Non-GAAP earnings per diluted share remains the same as in previous guidance at $1.92-1.96. I will now turn over the call back to Moshe.

Moshe Mizrahy (CEO)

Thank you, Yair. Thank you very much. Operator, we're ready for Q&A.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Matt Miksic of Barclays. Please go ahead.

Mike Matson (Senior Equity Research Analyst)

Hi. Thanks so much. Can you hear me okay?

Moshe Mizrahy (CEO)

Yes, we do.

Mike Matson (Senior Equity Research Analyst)

Great. And just 1 question on the full-year EPS guidance and understanding the impact of the buybacks. You've talked often in the past about investing through this cycle, and yet, obviously, we're able to kind of offset some of the reduction in sales with some element of cost control. So if you could maybe talk a little bit about where some of those cost controls are coming through, and then I have 1 follow-up.

Moshe Mizrahy (CEO)

In Q3, we didn't do any cost cutting or cost control. Actually, we continued business as usual in R&D, marketing, etc., and we did not lay off any employee. In addition, we spend a little bit more on the manufacturing due to the war in Israel, so we need to work overtime, and that costs us a little bit more money. I don't think we did any cost control or cost sharing or cost cutting in Q3. This is the structure of our profitability, and although it went a little bit down, the gross margin and the EBIT, but that's natural because of the slowdown and the war in Israel.

It's impressive. Congrats on managing through that at the end of the year. Maybe just as a follow-up, any color or comments you can provide or thoughts on the turn, the potential turn, the timing of a kind of improvement in some of the end markets, particularly in the U.S., in this cycle that we're kind of managing through right now? Thanks.

In the beginning of this year, we thought that in Q3, we would start seeing some relief on the slowdown. To be honest, unfortunately, we don't see any change in the slowdown, especially not in the interest rate on lease packages, and we don't see that on Q4 as well. I hope that it will start sometime next year. I don't think it will be on Q1 and maybe Q2. We don't know, and we don't want to say anything on that because in the last 2 quarters' earnings calls, we said we believe it will start on Q4, but as I said, we don't see it yet.

Mike Matson (Senior Equity Research Analyst)

Thanks so much for the color.

Operator (participant)

The next question comes from Mike Matson of Needham & Company. Please go ahead.

Mike Matson (Senior Equity Research Analyst)

Hi, guys. This is Joseph from Mike. If maybe you could give us a little color on how maybe the last rate cuts helped leasing in your business and looking forward into 2025, can you kind of frame us how another rate cut, maybe of similar size, would help customers' financing? Or do you think maybe the financing problem is going to be alleviated by multiple rate cuts from here, not just 1?

Moshe Mizrahy (CEO)

The rate cuts or the interest cuts, the general one, did not affect yet the lease interest rate, the lease package that doctors are buying our equipment with. It's still very high, and the process takes much longer because the leasing company wants to make sure that they are giving money to the right people. As we said last quarter, we helped with doing some pooling and sharing some of the risk with the leasing company. But as you can see, the results on Q3, we did less than $100 million when the expectation was to go to $104 million, $105 million, or whatever, and we did only $98 million, which is less than what we expected. I don't want to guess and tell you that it will start slowing down or the interest rate will start coming down sometime in the beginning of next year. We really don't know.

Mike Matson (Senior Equity Research Analyst)

Okay. Yeah, that's helpful. And then I guess maybe around gross margin, how can you guys or I guess what is your expectation around returning to the mid-80s gross margin? At the current revenue level, is a lot of this being driven by overtime and what have you in the manufacturing facilities? Do you need consumables to really return to growth to get back to the mid-80s?

Moshe Mizrahy (CEO)

I don't think we will go to the mid-80s, which, what, 85% or 86? It would be very difficult. I still believe that 80%-82, it's a nice gross margin for a company like us, being the size of InMode today. Cost of transportation goes up. The war in Israel, which lasts too long, does not help us with cost, does not help us with the manufacturing process. So going back to 85%, maybe in the future, but we don't see 85% in Q4 and not in 2025.

Mike Matson (Senior Equity Research Analyst)

Okay. Thank you very much.

Operator (participant)

The next question comes from Caitlin Cronin of Canaccord Genuity. Please go ahead.

Caitlin Cronin (Equity Analyst)

Hi. Thank you for taking the questions. Just a quick one. I'm not sure if I heard if you guys said, but if you could just give us the U.S. consumables growth for the quarter, that would be great.

Moshe Mizrahy (CEO)

No. On the contrary, we know the consumable in the U.S. went down, not up, and the total was, again, less than what we expected, and I said that in my speech because less minimally invasive treatment is being made right now. Now, the reason for that is that our treatment with InMode equipment, it's a relatively expensive treatment. It's on thousands of dollars and not hundreds of dollars. So we believe the macroeconomics also reflect in that and also did not help doctors to do more treatment, and therefore, we have realized that doctors in North America are making 40% less treatment than last year.

Caitlin Cronin (Equity Analyst)

Okay. Makes sense. And then I think you mentioned in your pre-announcement, the press release about moving some operations away from Israel. Can you provide a little more color on what that means, the timing, where, when?

Moshe Mizrahy (CEO)

Currently, we're manufacturing only in Israel. We have 2 major facilities and 3 smaller ones, which makes up components. But the 2 main ones are assembling the product. We have all to remember that in order to manufacture medical platforms or medical devices, which have to be regulated by 27 different regulatory bodies around the world, it's not so easy to find a facility that can handle it. We try to explore several opportunities with some companies in Europe, mainly in Europe, so it will be close to us. If we go to China, it's almost impossible to control. But unfortunately, we have no facility that can handle our products with the right regulatory approval from those regulatory bodies. And therefore, even with the war in Israel, we believe we can manage from Israel. Although it's difficult and there's uncertainty, I agree. But no, we have no other alternative.

Caitlin Cronin (Equity Analyst)

Okay. Thanks so much.

Operator (participant)

The next question comes from Tommy Hahn of Baird. Please go ahead.

Thomas Hahn (Analyst)

Great. Can you guys hear me?

Moshe Mizrahy (CEO)

Yes.

Thomas Hahn (Analyst)

Great. Thanks so much for taking the questions. Your U.S. systems installation number this quarter jumped to 610 versus 350 last quarter by our math. Does that Q3 systems placed number include all of the preorders delivered in Q3, or were those preorders booked in the first half of the year? And could you remind us how you counted the old systems you placed in offices in anticipation of the delivery of the preorders? Thanks.

Moshe Mizrahy (CEO)

I believe on Q3, we delivered all the preorders.

Yair Malca (CFO)

We don't have more preorders to deliver.

Yeah. We exclude them from the installed base installation in the first half of the year, and we include everything in Q3.

Moshe Mizrahy (CEO)

As you can see, the total gap number is $130.2 million, out of which $32 million are preorders. The net sales of Q4, as I said before, was only $98 million, less than expected, but we managed to deliver all the rest.

Thomas Hahn (Analyst)

Perfect. Thanks for clearing that up. System ASP also jumped up to $140,000 from 115,000 previously. Were there any one-timers driving that, or have you been able to take price with your new systems? Thanks for the questions.

Moshe Mizrahy (CEO)

I mean, the new system, the Ignite and the Optimas Max, just because this is some early bird, we can charge a little bit more. We raise the prices a little bit, and that helps us with the price per platforms. But I believe looking forward, it will be difficult to maintain the same price per platforms. But we're raising prices a little bit on the new platforms. We cannot raise prices on the current portfolio.

Operator (participant)

The next question comes from Sam Eiber of BTIG. Please go ahead.

Samuel Eiber (Analyst)

Hi. Good morning, everyone. Thanks so much for taking the questions here. Maybe I can start on some of the changes to the commercial organization. It sounded more of a realignment and maybe splitting up some territories a little bit differently. But I guess any changes to the go-to-market strategy? Is the selling approach any differently, or is it really just a realignment in terms of territories?

Moshe Mizrahy (CEO)

It depends. In Europe, we changed management in Spain, U.K. , and France. And the reason why we changed management in these 2 countries is because we basically were not happy with the results and the dedication of the management on those territories. And therefore, we have decided that we need to change them, and we hired a new management. And I believe that the new management are more dedicated and more eager to succeed. In the United States, it's a little bit different story. In the United States, we had 2 major VP sales leave, 1 earlier in the year and 1 right now, and the president and the chief medical officer, which was replaced with the VP clinical affairs in Israel. The president of North America, Shakil, was with us for almost 7 years. He did a great job.

And after 7 years of doing the same in the same position, I thought it will be a need we need to make some changes in order to realign the organization. So right now, we don't have a president in North America. Canada reports directly to me, and the 2 new VPs for the East and for the West in the United States are also reporting to me. So actually, in the meantime, I'm also the president of North America. I intend to spend at least a week every month in Irvine in our office and visit doctors and the territories and work with them in order to realign the organization. In the meantime, I want to keep it that way. I'm not looking for a president for the United States.

Canada will continue to report to me until we find what exactly organizational changes we want to make with the new portfolio and with the current portfolio. It takes time, but we're in the process.

Samuel Eiber (Analyst)

Okay. That makes a lot of sense. And maybe just following up on some of the newer products, we'd love to just hear any early feedback. Maybe you've heard from some of the early customers that adopted Ignite and Optimas Max. I guess how many of these are upgrades versus new customers that are now excited about the new platforms? And I guess just the third part of the question, is that allowing you to maybe go beyond some of the core plastic surgeons that you've typically gone after? Thanks for taking the questions.

Moshe Mizrahy (CEO)

The 2 platforms are different. The first one, the Ignite, it's minimally invasive and ablative platforms, mainly for surgeons, plastic surgeons, aesthetic surgeons, dermatologists, any doctor who can perform surgical procedures. The second platform, the Optimas Max, it's more, I would say, platforms with different types of handpieces, all the way from laser, IPL, and also ablative with the Morpheus. We did not do any upgrade yet, or maybe very little. We sold most of them to new doctors or to doctors who wanted a second system. We will put together a promotion on Q4 and maybe early next year to do some kind of an upgrade to doctors who are having the BodyTite, which will be replaced with the Ignite, and the Optmas, which will be replaced with the Optimas Max.

Samuel Eiber (Analyst)

Really helpful. Thanks for taking the questions.

Operator (participant)

This concludes our question and answer session. I would like to turn the call over to Moshe Mizrahy InMode CEO for any closing remarks.

Moshe Mizrahy (CEO)

Thank you, everybody. Thank you to all the shareholders, to all of InMode employees in Israel and worldwide. Especially, I want to thank the Israeli employees that, as everybody knows, the headquarters and the 2 manufacturing facilities are, I don't want to call it this way, but they are close to the border, to the north border, and the war is here. They are still coming to work, and everybody is dedicated so we can continue to serve our customers. I want to thank all InMode customers for the loyalty. I want to thank all the luminary doctors. Looking forward to seeing you in the next earnings call. Hopefully, in Israel, it will be better days.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.