InMode Ltd. Q1 FY2022 Earnings Call

Hello and welcome to the InMode Limited First Quarter 2022 Earnings Results Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Miri Segal, CEO of MS-IR. Please go ahead.

Thank you, operator, and everyone for joining us today. Welcome to InMode’s first quarter 2022 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 InMode’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 would like to pass the call over to Moshe Mizrahy, Chairman and CEO. Moshe, please go ahead.

Thank you, Miri, and thanks to all of you for joining our first quarter 2022 earnings call. With me today are Dr. Michael Kreindel, our Co-Founder and Chief Technology Officer; Yair Malca, our Chief Financial Officer; Shakil Lakhani, our President in North America; Dr. Spero Theodorou, our Chief Medical Officer; and Rafael Lickerman, our VP of Finance. We will all be available for the Q&A session after our prepared remarks. We are pleased to report first quarter revenue of $85.9 million, an increase of 31.1% compared to the same period last year. We continue to achieve strong, profitable growth despite the continued uncertainty in the global market. Net income for the quarter on a GAAP basis was $31 million, and $34.1 million on the non-GAAP basis, reflecting year-over-year growth of 16%. As a result of our strategy of focusing on selling more systems in the global market, sales of capital equipment were strong, representing 84% of our total revenue in the first quarter. Sales of consumables and services accounted for 16% of the total revenue in the first quarter. By launching new platforms and innovative modalities and by expanding our installed base in the U.S. and around the globe, we continue to look forward to consistent growth in revenue from consumables, which will over time become a more significant portion of our revenue mix. Once again, our growth engines are minimally invasive and ablative technologies. These platforms are the core competitive advantage and the main differentiator between InMode and other aesthetic companies. Our technology enables patients to benefit from long-lasting results similar to those achieved in plastic surgery, but with minimal downtime, local anesthesia, and minimally invasive procedures. Minimally invasive and ablative platforms accounted for 80% of our Q1 revenue compared to 69% in Q1 of last year. We achieved this trend in strong demand and increasing brand recognition in the U.S. and globally. Hand-free devices generated 10% of our total revenue, and non-invasive RF and laser platforms represented the remaining 10%. Looking at the international side of the business, first quarter sales outside the U.S. accounted for $32.3 million or 38% of total sales, a 50.6% increase compared to the same quarter last year. InMode currently operates in 77 countries. In the first quarter, we opened a subsidiary in Italy, and we are very happy with the level of demand in this territory. We see most of the growth coming from regions where we have already established our presence; however, there remain opportunities in new territories, and we will expect to keep expanding our presence outside the U.S. in the coming quarters. While we faced operational challenges due to global supply chain issues in the quarter and increased shipment prices, we were successful in mitigating the impact of these challenges and were able to meet the demand and ensure each platform was delivered within 10 days. Our high commitment to each physician or clinic that orders platforms is stronger than ever, and we have developed different methodologies and mechanisms to cope with the current supply chain challenges. We anticipate that the supply chain challenges will continue, but we are monitoring the situation very closely and continue to proactively manage the process on a daily basis. As Yair will emphasize, we are maintaining our 2022 guidance, expecting total revenue to be between $415 million and $425 million. We will continue to update you as the year progresses. Now, I would like to turn the call over to Shakil, our President in North America. Shakil, please.

Thanks, Moshe, and everyone for joining us. As Moshe indicated, InMode reported another strong quarter, especially for a quarter that is traditionally slower in terms of revenue industry-wide. We posted a record number for consumable revenue, which is a good indicator of our growing utilization rate, increased demand for our platforms, and consistently growing installed base. We are happy to report another strong growth indicator. Over 30% of our customers in the U.S. have purchased a second device. The U.S. remains the leading market for InMode and was the biggest contributor to our top line, with total first quarter sales amounting to $53.6 million compared to $44.1 million in the same quarter of 2021. We are optimistic about the overall demand for our platforms and unique technology. We anticipate the North American business will continue to grow and be the main revenue contributor for InMode. We are encouraged by the positive response to our EmpowerRF platform, and we believe that InMode’s credibility and strong performance will support our expansion into the women’s health space. During the quarter, we noted marketing events and workshops attracting growing audiences. More and more patients have shown they are eager to improve their well-being, and InMode continues to be the leader in providing a wide array of aesthetic and wellness applications to help patients achieve their goals. We will continue hiring new sales personnel for the North American market, which we believe will boost top line growth just as in previous years. We are grateful to our team and their continued commitment to our consistent growth. I will now hand over the call to Yair for a review of our financial results in more detail. Yair?

Thanks, Shakil, and good day everyone. Now I’d like to review our quarterly financial results in greater detail. Total revenue in the first quarter of 2022 increased 31.1% year-over-year to $85.9 million with a gross margin of 83% on a GAAP basis. Sales of minimally invasive and subdermal ablative technologies in the first quarter grew 50% year-over-year to 80% of our quarterly revenues. The geographical revenue mix in Q1 was 62% in the U.S. and 38% internationally compared to 67% and 33% for the same quarter in 2021. Revenues outside the U.S. represented 38%, with Canada, Europe, and Latin America being major contributors to the company’s goals. Our Q1 non-GAAP gross margin remained strong at 83%. We reiterate our long-term gross margin model of 84% to 86%, but we assume that in the short term, global supply chain challenges may continue to impact our gross margins. Capital equipment in the first quarter accounted for 84% of our revenue, while consumables and service revenues represented the remaining 16%. GAAP operating expenses in the first quarter were $36.1 million, a 26% increase year-over-year. Sales and marketing expenses increased at a similar rate of 26% in Q1 of 2022 compared to the first quarter of 2021. This is a result of an increase in in-sales related expenses as well as an improvement in the COVID status in most countries and regions around the world, especially in the U.S., where we saw a significant increase in in-person marketing events, as Shakil mentioned. Share-based compensation increased to $3.1 million in the first quarter of 2022 compared to $2.7 million in the first quarter of 2021. On a non-GAAP basis, operating expenses totaled approximately $33.4 million in Q1 of 2022 compared to operating expenses of $26.2 million in the same quarter of 2021, an increase of 27%. GAAP operating margin was 41% in the first quarter of 2022, the same as the first quarter of 2021. Non-GAAP operating margin for the first quarter of 2022 was 44% compared to an operating margin of 45% in the first quarter of 2021. The decrease in non-GAAP operating margin is primarily attributable to the change in gross margin. GAAP diluted earnings per share for Q1 2022 were $0.36 compared to $0.31 per diluted share in the first quarter of 2021. Non-GAAP diluted earnings per share for Q1 2022 were $0.40 compared to $0.34 per diluted share in the first quarter of 2021. We ended the first quarter with a very strong balance sheet. As of March 31, 2022, the company had cash and cash equivalents, marketable securities, and deposits of $399.5 million. On the cash flow front, the company generated $31.9 million from operating activities in the first quarter of 2022. We are pleased to have announced another share repurchase program during the first quarter of this year of up to 1 million shares. We continue to evaluate different venues to use our cash and create shareholder value. Before I turn the call back to Moshe, I would like to reiterate our guidance for 2022, revenues between $415 million and $425 million, non-GAAP gross margin between 84% and 86%, non-GAAP income from operations between $199 million to $204 million, non-GAAP earnings per diluted share between $2.06 and $2.11. I will now turn over the call back to Moshe.

Thank you, Yair. Thank you, Shakil. Operator, we are ready for the Q&A session.

The first question comes from Kyle Rose with Canaccord. Please go ahead.

Good morning. This is [indiscernible] filling in for Kyle, and congratulations on a strong quarter. To start, could you provide more details about your business in China, particularly how it's being impacted by the current resurgence of COVID and the increasing lockdowns in major cities? What are your thoughts for the remainder of 2022? Additionally, do you believe that the timeline for the approval of your two platforms in China has been delayed?

Yes, okay. I will answer that. It’s Moshe. Well, we are monitoring the situation in China daily. In China right now, we cannot send people to do training because anyone who goes to China needs to quarantine in a hotel for three weeks. So, no one from Israel and no one from other territories that we usually send to China to train doctors will accept such a restriction. Certain areas in China are in lockdown. Shanghai was under lockdown until this week, and now they have started to lock down Beijing as well. In the Shanghai area, our distributors in Beijing are trying to do as much as they can. They don’t allow salespeople to travel from city to city. Regarding the CFDA and regulation, the CFDA is now almost 100% occupied with COVID and solutions for it. As everybody knows, they do not have good vaccination coverage, and this is the reason why they continue to impose lockdowns on their cities and citizens. We sold less than 50% of what was budgeted for China in Q1. We don’t know when the lockdown and the situation will improve. We are getting surprised every day. Hopefully, towards the end of the second quarter, we will have a better understanding of the market there. In addition to China, Hong Kong, which is now part of China, has the same restrictions. Other countries in Asia, such as Korea and Japan, are improving but are not fully open yet. For example, to enter Japan, you need a COVID Visa, which is difficult to obtain. Yes, I mean, in the rest of the world, things are getting better, but as I described, Asia remains the worst case.

Understood. That’s helpful. Thank you, Moshe. And then, if I could just follow up on Empower. Maybe when could we see some data for EmpowerRF in terms of efficacy for SUI? And then in terms of expectations, I know you had previously mentioned $20 million for 2022. Is that still relatively in line? Thanks again for taking the questions.

Yes. I would say yes, that the guidance that we gave for $20 million in 2022 is still valid. Spero, would you like to answer the question regarding the SUI results?

Sure. We are already in the process of a couple of our studies that are in progress. So, I’m happy to share those with you, or Moshe can show you some preliminary results of SUI. As I said in previous calls, the results are very encouraging. The feedback we are getting from the field is giving us a huge base of data upon which our doctors can rely. We are collecting data, not just from our studies alone but also from a couple of universities with which we started doing some prospective, large trials, which is great, based on the proof-of-concept we've already established. We can share with you, I think we have in the past shared some publications that are in progress. We hope that those will be published in the next 2 or 3 months, but we are happy to provide that information to you.

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

Yes, good morning or good afternoon. Thanks for taking my questions. I guess I want to ask first about gross margin. So you are maintaining the 84% to 86% guidance for the year; you did 83% in the first quarter. You mentioned kind of near-term pressure. So just from a modeling perspective, I assume we should kind of have it gradually ramp up through the year and probably end up more sort of at the lower end of that range. Is that a reasonable assumption?

This is Moshe. Yair is here with me. I would say yes, we lost 1.5% in the first quarter mainly due to the supply chain challenges as I described. I’m sure everybody knows that right now electronic component prices went up dramatically. And sometimes we struggle to get them. As we said before, we have managed to develop a supply chain, which we have at least three suppliers for every component. So, we have managed to get what we need. But sometimes we need to use replacement components and change the printed circuit board, doing all kinds of maneuvers to avoid shutting down the production line. We managed to achieve that. As I said before, I don’t see the light at the end of the tunnel in terms of supply chain. Of course, as shipping costs rise, I can tell you that the cost for a 40-foot container from Israel to the U.S. used to be $3,500; now it’s $13,000. So, this is also significant. But eventually, I believe the market will return to stabilization, and things will improve. We believe that in the second and third quarters, we will perform better. Therefore, we have maintained the guidance of 84% to 86%. If you want to be on the safe side, to use 84% is better than 86% for your model.

Okay. That’s helpful. Thank you. And then I want to ask – Shakil mentioned that you have seen 30% of your – I guess it was maybe U.S. customers buying a second device? Can you maybe talk about whether they are buying the same type of device that they already had? Is it a different system? And then, to what degree are these sort of replacements where they are not using the other one, or are they continuing to use both devices?

Sure, Mike. So actually, no, they are completely different devices. So, it’s not because of anything other than the fact that they are actually successful with their first device, which is a big feather in our cap. In order to acquire their first device, we helped them succeed and demonstrated the return on investment that we promised them. This success shows that if they do well with one device, they want to invest in another. So, a big part of that is also our post-sales support team, which has been very helpful for our customers, and they work alongside our reps at the field level to generate these leads.

Okay. Thanks. But just as far as the surgical, or I guess the minimally invasive systems go, is there any reason that one of the surgeon customers would want to have multiple systems, or is it just not feasible to need multiple systems of the same type for efficiency reasons?

Yes. No, good question. Essentially, for the products that we do have, such as body type systems, the surgeon has to use that specific system. For some of our hands-free technologies or other aesthetic applications, we can allow them to delegate some tasks, depending on which state they are in or which province they are in, in Canada. Essentially, they want to have their primary device, which allows them to use the applications while also having something else that they can delegate. This way, they are generating double the revenue in that period. Does that make sense?

Yes, it does. Thank you.

Was there a follow-up, Mr. Matson?

No, no, that’s it. Thank you.

The next question comes from Jeff Johnson with Baird. Please go ahead.

Hi guys, good morning and good afternoon. Thanks for taking the questions. So, Moshe, I just wanted to start with Asia, China. Obviously, as you mentioned, a lot of headwinds still in that market. What was maybe any way to quantify the year-over-year impact of those markets? Did it drag growth down by a specific number of points? Or, even for the full year, what were you anticipating China and Asia might contribute, and how much has come out of that, even as you are still maintaining the full year guidance? Any insight there would be helpful.

Well, I believe China in 2021 had the same situation with the COVID. In January until March, the country was totally closed. China right now in the first quarter of 2021, we did $1.9 million, and in the first quarter of 2022, we did $1.1 million. So, we decreased a little bit in China due to the situation in the first quarter. Your question about whether we will maintain the budget for China for the rest of the year, we hope so. So far, in Q2, the first month, we don’t see a major change. They have just released Shanghai, and now they have imposed restrictions on Beijing. Therefore, I don’t anticipate a big jump there. I would say that if we achieve 50% to 60% of the original budget, that will be good. We set a regional budget for China in 2022 between $12 million to $13 million. We are still waiting for approval from the CFDA for the other three platforms that we applied for. We have not yet received any updates; everything is slow due to COVID. Regarding other countries in Asia, I believe that Korea is doing better than China, and we will achieve something similar to what we did last year, which was in the range of $10 million to $12 million. Japan is more difficult due to COVID. Australia and India are open now, so we hope that these two subsidiaries will contribute. We will not change our guidance for 2022 because of that; we hope to sell more in other territories to cover the shortage in Asia.

And that makes sense. Thank you. And then just a follow-up on the system sales themselves. I think one thing that may be getting lost in your numbers today is that the minimally invasive RF number was strong again. I think it was up over 50% year-over-year and improved on a sequential comp basis. It’s the hands-free products that were down, and obviously, hands-free was a fantastic product in the early days of COVID recovery, at $8 million a quarter this quarter. Is that kind of the new run rate for that hands-free? Does it still come down another few million dollars? It seems like to me that hands-free, again, was a great product for its time back when we were first recovering from COVID. But once we get through maybe some year-over-year headwinds on that and start to stabilize here, the whole company number can improve a little bit once we get through some of the challenges associated with that year-over-year decline in hands-free products.

Okay. Let me explain what happened with the hands-free and why sales declined. As you know, we came up with a new generation of the Evolve. We added a modality called Transform, which is a combination of EMS and RF. We believe that it’s working well. We are doing the same with Evoke. We plan to launch the second generation of Evoke towards the end of this quarter or the beginning of the next quarter, the third quarter. Therefore, we decided not to continue selling the Evoke in the first quarter. We mainly sold only the Evolve. Hopefully, by launching the second generation Evoke in a few months, sales numbers will return to the levels they used to be, which were between 17% to 18% of total revenue.

Okay. So, you are not seeing necessarily a fundamental fall-off in interest for the hands-free products. It’s more just product timing at this point.

Exactly.

Okay. And last question. Sorry for the multiple ones here. I believe when we last spoke, you were not passing on some of the increased shipping costs and some of the increased component costs. I think you could. It feels like to me that in aesthetics, there has been some pricing power for other companies. However, maybe just talk about your rationale for not doing that. Has that improved your standing in the eyes of your customers? Just your thoughts on why you haven't passed along some of those added freight costs and/or system costs.

Well, usually we don’t raise prices in the middle of the year. We are trying to overcome the supply chain challenges without raising prices. It’s not necessary to adjust prices of the platforms and disposables just because we are facing some, I would call them temporarily—although they may last longer—challenges with the supply chain; we all believe it will return to normal. Thus, we have decided not to raise prices of the platforms. We will reevaluate our decision sometime at the end of the year for 2023 and decide whether we want to make adjustments or maintain our current price structure.

Correct. We didn’t pass anything to our customers.

Yes. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Moshe Mizrahy, CEO, for any closing remarks.

Thank you, operator. Thank you, Yair. Thank you, Shakil. Thank you, Spero. Thank you, Michael, and Miri, of course, for organizing this earnings call. I would like to thank again all of InMode employees. We worked very hard in the first quarter, overcoming all the challenges that we have described. We continue to work hard. We will continue to service our customers in the best way and come up with new technologies and new platforms every year. Again, thank you all, and I look forward to seeing you in the next earnings call.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.