InMode Ltd.

Good morning and welcome to the In-Mode First Quarter 2024 Earnings Results 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 event 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 conference over to Mary Segal, CEO of MSIR. Please go ahead.

Thank you, operator and everyone, for joining us today. Welcome to In-Mode First Quarter 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 go to 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 Mizrachi, In-Mode's CEO. Moshe, please go ahead.

Thank you, Miri, and to everyone for joining us. With me today are Dr. Michael Quindle, our co-founder and chief technology officer, Yair Malka, our chief financial officer, Shaquille Akani, our president in North America, Dr. Spiro Teodoro, our chief medical officer, and Rafael Likerman, our VP of Finance. Following our prepared remarks, we will all be available to answer your questions. I would like to start with a review of development during the first quarter. In the beginning of 2024, we launched our two new and advanced platforms, Ignite RF and Optimus Max. Meanwhile, the macro environment continued to be challenging, and we experienced slowdown all through the first quarter. As a result, we decided to decrease our guidance for the year. We believe that industry headwinds may continue into the second quarter as well. We're excited to see a high level of interest and demand for our latest platforms, the Ignite RF and the Optimus Max. Although these platforms accounted for 16% of our sales in Q1, delivery was delayed due to ongoing construction of manufacturing lines that led to insufficient inventory levels. All our efforts are focused on fulfilling orders remotely and ensuring that our inventory meets the needs of customers who have already pre-ordered the new platforms. Let me expand on the new line of platforms. Ignite RF is the next generation of our legacy radiofrequency assisted lipolysis technology, a minimally invasive platform with the new Morpheus 8 burst handpiece, and all new Quantum RF handpieces. Quantum RF handpieces are expected to be FDA cleared in the second half of 2024 and patent protected for 25 years. Optimus Max is a multi-application platform with Morpheus 8 burst and non-invasive RF, IPL and laser-based treatment. We expect that these two platforms will play a significant role in our growth of our company. Moving to capital allocation, InMod Board of Directors has approved a third share purchase program, up to 8.37 million shares. In addition, we keep all others' options on the table, including exploring strategic M&A opportunities, paying dividends, as well as additional future buyback. Before I conclude, I am pleased to welcome Dr. Michael Engel as new chairman of the board. Michael has been a board member since 2019, and he has served on the board of several public companies. He has significant financial and executive experience, including leading the Discount Investment Corporation Limited in Israel. His executive experience includes serving as a CEO of DCM, a publicly traded company. Dr. Engel holds a BA in economics and an MBA and PhD in finance from Columbia University. We look forward to benefiting from his financial and strategic expertise. Finally, regarding the current war situation in Israel and the status of our new platforms, management would like to assure investors that we prioritize the safety and the well-being of our employees, and all of our team is safe. In addition, due to the war in Israel, assembly lines of the new platforms may take longer to complete, and a new platform delivery may be pushed to the second half of the year. Now I would like to turn the call over to Shaquille, our president of North America. Shaquille, please.

Thanks, Moshe, and everyone for joining us. As mentioned, InMode is not immune to the headwinds in our industry. However, despite the slowdown, we are pleased to report that consumer rules and service grew 13% year over year and accounted for $22.5 million in Q1. Once again, it's a testimony to the demand and widespread recognition of the InMode brand. We are excited about the enthusiasm and demand for our new and improved platforms, and we believe they will be growth drivers for us going forward. Considering the anticipated slower market demand this year, we've implemented changes within our sales team in North America. We've adjusted our infrastructure to position ourselves for accelerated growth when market conditions improve. As a global leader in the aesthetic space, with the most diversified portfolio, we continue to attract seasoned and accomplished salespeople. Our talented and dedicated team remains pivotal in driving our future success. Once again, I'd like to thank our entire North American team for their continued hard work. I'll now hand over the call to Yair for a review of the financial results in more detail. Yair?

Thanks, Shaquille, and hello everyone. Thank you for joining us. As Mosfei mentioned, this quarter we launched two new platforms and started selling them on a pre-order basis. While we could not yet recognize these sales as revenue, we decided to provide performer results, which add to the non-GAP results, the pre-order sales, and the related expenses. We believe that the performer results better reflect the business activity during the quarter. Starting with the total revenue, Inmo generated $80.3 million in the first quarter of 2024. However, performer revenue was $96 million, which includes the pre-orders of new platforms that have not delivered yet. GAP and non-GAP gross margin in Q1 2024 were 80%, while performer gross margin was 82%, compared to 83% in Q1 of 2023. In Q1, our minimally invasive technology platforms accounted for 84% of total revenues. Moving to our international operations, first quarter says outside of the US accounted for $38 million, representing 47% of total sales, a 14% decrease compared to Q1 last year. In Q1, Europe was the largest revenue contributor from outside the US and reached the record sales number. To support our operations and to ensure our future growth, we currently have a sales team of more than 248 direct reps and 83 distributors worldwide. GAP operating expenses in the first quarter were $45.8 million, a 2% decrease year over year. Cessna marketing expenses decreased slightly to $39.8 million in the first quarter compared to $41.7 million in the same period last year, this decrease attributed to the revenue shortfall in Q1 of 2024. Next, we look at service compensation, which decreased to $4 million in the first quarter of 2024. GAP operating margin for Q1 was 23% compared to operating margin of 39% in the first quarter of 2023. Non-GAP operating margin for the first quarter was 27% and pro forma operating margin was 35% compared to a non-GAP operating margin of 43% in the first quarter of 2023. GAP diluted earnings per share for the first quarter was $0.28 compared to $0.47 per the literature in Q1 of 2023. Non-GAP diluted earnings per share for this quarter were $0.32 and pro forma diluted earnings per share for this quarter were $0.45 compared to $0.52 per the literature in the first quarter of 2023 on a non-GAP basis. Once again, we ended the quarter with a strong balance sheet. As of March 31, 2024, the company had cash and cash equivalents marked with securities and deposits of $770.5 million. This quarter, Inmo generated $24.1 million from operating activities. Before I turn the call back to Moshe, I'd like to share with you our guidance for 2024. Full year 2024 revenue will be $485 million to $495 million compared to previous guidance of $495 million to $505 million. Non-GAP gross margin between 82% and 84% compared to previous guidance of 83% to 85%. Non-GAP income from operations between $169 million to $174 million compared to previous guidance of $217 million to $222 million. Non-GAP earnings per diluted share between $2.01 to $2.05 compared to previous guidance of $2.53 to $2.57. I will now turn over the call back to Moshe.

Thank you, Eir. Thank you, Shaquille, operator. We are ready for Q&A.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. Our first question comes from Matt Mixit of Barclays. Please go ahead.

Great. Thanks so much. I appreciate you taking the questions. Maybe first, I think it's the topic that we talk most about when we do talk about in-mode, as the confidence in the direction of travel for things like the major factors that have been most challenging for you in the last six to nine months, the financing delays and sort of end market demand, if you could talk about just that, confidence, and then I have one follow-up.

You mean, how confident are we on the market demand? I didn't hear the question.

Yes, I'm sorry. Confidence in the trajectory of stabilization and improvement and anything that you can give investors on, sort of the timing of how you expect that to play out this year.

Okay. At the beginning of the year, at the beginning of 2024, I believe in the last earnings call, I said that we expect that the interest rate in the United States and all over the world will start to come down in the second half of 2024. Most of our doctors are financing their acquisition of capital equipment with a package lease of five years. The interest rate today on lease financing has reached a very high rate, something like 14 and 15 percent. And that's something that caused delay in the decision of the doctors. We were under the impression that maybe in the second half of the year, interest rate will go down and the interest rate on lease packages will go down as well. But in the last month, what we have seen in April, that inflation in the United States starting to rise again. And the announcement of the chairman was that he doesn't know where he will start cutting down the rate. Therefore, we're not sure that that will happen in the second half of the year. We hope so. Once the economy will start to grow again, especially when the interest rates will go down, then we believe we will start to see another momentum in the medical field. But right now, if we want to focus the second quarter and maybe the beginning of the third quarter, we don't see a major change. And I believe I said that in my testimony. Does that answer your question? Yes,

very much. It's helpful. And then and so I guess, you know, while you're waiting for things that you can control, which some of the things you just described, you know, maybe talk, if you could, a little bit about, you know, things that you can control. What what can you advance in the next couple of quarters in terms of the new product launches? You know, what can you advance geographically, potentially to sort of offset some of the some of the kind of macro backdrop issues that you just described?

OK, there are basically three venues that I will that I will describe. The first one is we're trying to work with the leasing companies and work with them to ease the risk of the leasing company by creating some kind of a pool in order to enable them in order to share the risk with them and enable them to finance more deals. We did that in the first quarter. It was successful, partially successful. We cannot we cannot include all the deals under the pool program, but that's helped because we have a very strong balance sheet and we can share the risk with the with the leasing company in order in order to enable them to finance more deals. And we did that. And and I believe we will continue to do it in the second quarter. The second venue is the new platforms. There are always what we call the first doctors to buy new equipment. We came up with two, I would say, breakthrough, two new platforms, breakthrough, breakthrough, breakthrough technology on two new platforms. And we believe that some doctors, even if the interest rate is high and even if those platforms are new, all kind of technology, I would say users that they will buy the new equipment and that will help a little bit. The growth or maintaining the revenue generation, generating revenue in the second and maybe on the third quarter. The third venue is I'm sure everybody knows that in the late twenty twenty three, we have established two new subsidiaries, one in Germany that cover cover Austria as well and one in Japan. So these two subsidiaries started to work on the first quarter. It's not on a full momentum yet. It takes time to ride on the learning curve and build the momentum in those country. But when we go direct, we recognize the full value of the of the of the of the sales and not just the transfer price because we're direct. And that's also, I would say, help to increase the top line. Other than that, I don't think we can do something that might change the macroeconomics. I believe we're too small to do something like that.

Yes, of course. Thanks so much for the call.

The next question comes from Danielle and Talfi of UBS. Please go ahead.

Hi, everyone. This is Simon Megan on for Danielle. I just want to dig into your operating margin a little bit. It looks like general administrative expenses ticked off a bit more than expected. Wondering if you could just get some color there.

I don't think GNA was higher than the first quarter of twenty twenty three. Our GNA is relatively very, very, I would say, slim or very, very low. What went up was the marketing as marketing and sales and marketing. And this is because of two reasons. One, you know, when you measure percentage and we did not cut marketing and sales expenses, we continue to do all the marketing activity and all the sales activity that that basically was planned late last year when we developed the budget or the beginning of this year. We did not say, OK, we're selling less. We're cutting marketing and sales. We did not. We did not cut R&D. We continue to do the R&D as we plan in the beginning of the year. So when you are marketing and sales expenses are combined, you know, fixed cost and and and and the commission, which is not fixed cost. But the fixed cost is the same when you sell 80 million dollars or when you sell one hundred and twenty million dollars. So percentage wise, it's a little bit higher. The second, the first quarter is usually a tough quarter as far as marketing expenses, because we have at least three major events, the sales meeting of North America, IMCA in Europe and the distributor meeting. And and and therefore the cost of those marketing expenses are a little bit higher than in a regular quarter. Overall, if you look on the overall, if you look on the performer marketing and sales expenses with that, with everything that I said, I believe that we will be able to adjust that to the original number or to the previous number. And once we get once we once we reach again above one hundred million dollars of revenue, because percentage wise, it will come down.

That is really helpful. Just a quick follow up for you. Thinking about the product launches this year, how should we think about the contribution of some of these platforms to sales throughout the year? And do you expect that any of these platforms will cannibalize sales of your other platforms?

Well, a second generation of minimally invasive usually I would not say cannibalize, because it will take a long time to cannibalize an old generation. But in the first few years, it's over and above. It's an addition because we did not stop selling the first generation, the RFAL. We continue to sell it. We launched the second generation right now only in few countries. All the rest of the countries were still selling the regular body type and not the Ignite or the regular Optimus and not the Optimus Max. But yes, eventually some of the doctor will prefer to buy the new generation, even if it's a little bit more expensive than to buy the old generation. But there are always markets for the old generation. So we're keeping two lines, the top line, which is the second generation and the baseline, which is the I would say the first generation, which is the body type platforms and the regular Optimus. And I believe that it will take at least four or five years before the first generation will disappear or fully cannibalize.

That's helpful. Thank you.

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

Hey, this is George Ahn for Caitlin. Thanks for taking our questions. So our first one kind of builds off the last question. As we think about these new platforms, especially with the delays in delivery, how long do you see that kind of lasting throughout the year? And then more so looking at your guidance, how much of a contribution of these new platforms, these pre-orders is kind of accounted in your current guidance numbers?

OK, regarding the first quarter, we believe that it will take at least the second quarter and the third quarter in order to fulfill all the pre-orders. Because remember, in the third quarter, we're still accepting orders for the new devices and we still have something like I would say 120 devices or platforms that we have to deliver, which were pre-ordered. So it will last more than one quarter. I hope that in the fourth quarter, everything will be in line and we will deliver the system without any need to accept pre-orders. So before the end of the year, business will go back to usual. Now remind me the second question.

Yeah, just on the new platforms like the pre-orders, how much of that is currently considered within your guidance?

I mean, it was all considered within the guidance. I mean, the guidance that we gave took into account the pre-orders of Q1.

OK, great. And then our second question, any more color you can give on the Salesforce changes in the US?

Shaquille, can you answer that?

Yeah, sure. We've actually had some changes at the top of management. We've also added a separate group of directors, which were internal promotions, which in turn will create some upward mobility and has for some of the people that have obviously deserved it and those who will be deserving it. So once things change a little bit and the macroeconomic environment becomes a little more favorable for us, we're just planning on that bounce back, as I mentioned in the script earlier. So we're obviously trying to prepare for it. We're trying to move forward. We're trying not to do what many other companies do at times like this while we're still trying to control our balance sheet as well. So we're trying to get prime for when things bounce back.

The next question comes from Mike Mattson of Needham and Company. Please go ahead.

Hey, everyone. This is Joseph on from Mike today. I wanted to maybe, you know, some of these may have already been asked, so apologies, I joined late. But I wanted to maybe just get an update on the manufacturing facilities. You know, you still seeing pressure on delivery times or I guess, you know, has that gotten better or worse? You know, what's the labor capacity look like? And I guess how is that affecting the pre-order backlog? I just want to kind of get a gauge of, you know, how much of this pre-order backlog is more or less just demand versus, you know, reduced delivery times and manufacturing ability there.

OK, good. We have two facilities, two manufacturing facilities in Israel, one in Tiberia and one in a small city called Migdala Emek. And we're manufacturing all the product in both of them. So basically every line that we have, every manufacturing line can be adjusted to every product. So it's a full backup. OK, that's the way we design it. And that's the way we build it as we go to the new platforms. Yes, we're in some delay. And this is because of the situation in Israel. Everybody knows that, you know, in Israel, the army is built from a reserve duty. And therefore, some of our employees were drafted for a long time and that's created some delay in the manufacturing. But we're catching up right now. We're working to shift in order to catch up and create enough inventory to enable us sufficiently to deliver every pre-order. But as I said, we will not we don't think it will take one quarter. It will take more than one quarter to fulfill all the pre-order. But these orders are already been accepted, most of them already been paid. So we are 100 percent sure that we will deliver 100 percent of them in the next, I would say, three to six months. As far as as far as the manufacturing facility, we have capacity to double the sales. Last year, we basically manufacture more than six thousand systems. And if necessary, we can we can we can bring the production level or the production capacity to ten thousand without adding any capital equipment. It's only to run this to run the production line more than one shift. So as far as the logistic and the purchasing of component, there was no problem. A little bit delay because of logistic issue due to the war in Israel. But but other than that, we are building a safety inventory to make sure that the production line will never stop. So, you know, we're working on it 24 hours a day. And we believe so far, even with the war that is running now for more than six months, we're successful delivery. The only thing that we did not deliver on time are those pre-orders. But we can assure the investors that all of these orders will be will be shipped within within a time frame that they said before. Few months and we will we basically will get back to normal.

OK, great. Yeah, thanks for all that color. I guess maybe just moving on to the new platform. So, you know, you're launching some upgraded platforms to your legacy, you know, your legacy devices. I think you said that they've been shipped to a certain number of countries. And so I just wanted to maybe get some some info there, maybe some early feedback from from some of your customers who have used these new platforms as well as I think you said previously that the new body tight and face tight. The upgrades kind of lower the procedure complexity. So I was also curious if maybe you've been selling more to, you know, anybody that's, I guess, not a plastic surgeon. So like health clinics or anything like that, if they found the new platform, you know, easy to use.

Absolutely. Let me start. Let me start with the ignite. OK, the ignite is the full surgical platforms. What do I mean by full surgical platforms? The ignite can handle the body tight, the face tight, what we call the first generation, but with higher energy because we improve the hand pieces. But that's something that we did in order in order to ease the process and make the treatment faster. In addition, we have developed new hand pieces which which instead of two to two to two canulas, they have only one canula and the bipolar RF is in the tip of the canula. That makes the doctor more flexible to reach any part in the body much easier than than when they are with the regular RFAL. In addition to that, these platforms will include two new Morpheus hand pieces, one for the face and one for the body. And also the Morpheus, the Morpheus, which call now Morpheus 8 burst is a new generation technology. You can go any depth you want. You can pass in any depth up to three in every in every punch of the skin. You can determine the level of energy in every depth. So, for example, you can go to seven millimeter, deliver 50 percent of the energy, go up to five millimeter, deliver 30 percent of the energy and go up to two millimeter deep in the skin and deliver 20 percent altogether. So this is another technology that we develop and the Morpheus 8 burst hand pieces for the face and for the body with 24 pins or with 40 pins are able to use these two technology, which we call burst and scale. So this is one platform which we believe that it's a breakthrough technology. It's something that nobody did before. Well protected because all covered with patent, which, you know, now we can count on 25 years, although I have to say that nobody has tried to infringe our radio frequency assisted lipolysis, the body type patent since the beginning of the of the since the beginning of the of the of 2026. When we start promoting them and commercializing them in the United States, the second platform is the Optima smacks. Basically, the Optima smacks. It's a new design, much nicer than the regular Optima with adjustable screen with hand pieces that look a little bit better and different. The IPL handpiece has 25 percent more energy, but this platform is designed to be able in the future to handle some other hand pieces that were developing now, which the regular Optimus cannot. So this is another platform, which is which is the new platform. Now, as I said before, we do not think that these two platforms will cannibalize the first generation mean that the Optima smacks will cannibalize the Optima or the or the or the ignite will cannibalize the body type. It will be over and above. So every doctor who wants to do more with the morphs will need to buy one of these two. You cannot use the new morphs handpiece on the old generation platforms. So that will push the doctors to have two or more, two or three different platforms. And that's good for us. In addition, as I said, we are now launching them in the US. We're working on regulation in Canada, Europe, Asia and other territories will take time. As you know, for example, in China, it takes two to three years to get the new platforms on the market in Brazil and visa. It's can take the same about a year, a year and a half. And we just started. So it will take a few years before these two platforms will be commercially available in all the countries, 96 countries that we're selling today. It's a process. It's a medical equipment. It's not fire and forget. You need to train. You need to create clinical data. You need you need you need to have training centers. You need to publish. It's a process that takes a few years before the full capacity of those platforms will be exploited. Did I answer the question?

Oh, absolutely. Yeah, that was that was all very helpful. Thank you. Maybe just just one more. I think I heard you discuss that they, you know, providing loans for certain customers using your cash balance. And going well, more or less. No, no, that's not what they

said. I didn't say that we're providing loans. I didn't say that I said that we had an agreement with leasing companies to help them, you know, limited the risk by creating a pool, pool of money that in some cases that can help the leasing company. So to enable them to take more risk in the in the bills that they are helping to finance. I didn't say that we're financing the customers. We're not we're not a bank.

Sure. This is your year.

This is the year we put together some programs, a risk sharing programs with some leasing companies in which under which we take a fraction of the risk. And in return, they are willing to provide faster approval and basically buy deeper in terms of credit profile of our customers.

OK, yeah, OK, that that makes much more sense. And I mean, that clears up my question. Thank you very much.

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

OK, thank you, everybody. Thank you, everybody, for joining us. I want to thank all the employees all over the world for continue to work with us. I want to thank especially for the Israeli team that work days and nights during the challenging time that we're having today. And and and maintaining all the activity that basically this company is performing. Thank you again. And we'll see you again in August.

The conference is now concluded. Thank you for attending today's presentation. And you may now disconnect.