InMode Ltd. Q2 FY2022 Earnings Call

Good morning and welcome to the InMode Ltd. Second Quarter 2022 Earnings Result Conference Call. All participants will be in a 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 to everyone for joining us today. Welcome to InMode's second 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 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 turn the call over to Moshe Mizrahy, Chairman and CEO. Moshe, please go ahead.

Thank you, Miri. And thanks to everyone joining us for our second 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. Following our prepared remarks, we will all be available for a Q&A session. We are pleased to report another record quarter with revenue of $113.5 million, an increase of 30% compared to the same period last year. Clearly, growth across the U.S. and key regions globally underscores the strong demand for our technologies and product portfolio. Our growth engine includes the launch of two new modalities every year, growth in the United States, geographical expansion outside the U.S., and high-volume sales of consumables as a result of more frequent use of our platforms. All these factors remain on track and support continued successful execution in the second half of 2022 and beyond. Our focus remains on our bipolar RF technology, offering minimally invasive surgical platforms for the body, face and also for women's health. We have a highly efficient sales team of more than 200 reps worldwide. With their excellent work, sales of capital equipment represent 87% of our total revenue in the second quarter, while sales of consumables and services accounted for the remaining 13%. We're excited to see the numbers of consumable sales growing quarter-after-quarter and consistently reaching new highs. As our installed base grows and we expand our market share, consumables and services will contribute a bigger portion to our revenue mix. Moving to our international operations, second quarter sales outside the U.S. totaled $41.2 million or 36% of sales, a 33% increase compared to Q2 last year. InMode operates in a total of 78 countries. Our newly opened subsidiary in Italy is up and running smoothly and contributing to our positive results in the European market. We see demand from Europe, Asia, and Latin America continuing to be strong. In addition, important markets such as China, Korea, Brazil and Mexico are gaining traction thanks to the efforts of our local presence. On the macro level, supply chain issues during the second quarter were under control and closely managed as we continue to prioritize maintaining sufficient inventory levels. We are placing orders ahead of time and making exceptional efforts to keep delivery times around the 10-day mark. Now I would like to turn the call over to Shakil, our President in North America. Shakil?

Thanks, Moshe, and thanks everyone for joining us. We are happy to report another record quarter establishing a strong pace for the remainder of the year. North America continues to be the main contributor to our total revenue across all segments. Total revenue generated from North America this quarter was $82.7 million. As we look ahead at the upcoming quarters, the North American market is positioned to remain the biggest revenue contributor and growth driver for InMode. The Empower platform has received positive feedback from physicians and patients. Our expansion into the women's health and wellness space is becoming a vital part of InMode's business. Total sales were originally projected at $20 million for the year, but with the current market along with Health Canada's approval, we are now aiming to reach over $30 million in revenue by the end of the year. We continue to see our marketing events increasing in attendance. As we continue to invest in resources, our goal has been to attract new talent while retaining the top salespeople in the nation. I'd like to thank the entire North American team for their continued hard work. I will now hand over the call to Yair for a review of the financial results in more detail. Yair?

Thanks, Shakil and hello everyone. Thank you for joining. Starting with total revenue, InMode generated $113.5 million in the second quarter of 2022, a 30% year-over-year increase with a gross margin of 83% on a GAAP basis. Breaking this down, we see sales of minimally invasive and subdermal ablative technologies in the second quarter grow 48% year-over-year to account for 80% of our quarterly revenues. Of the total sales in Q2, 64% came from the U.S. and 36% came from the Rest of the World compared to 65% and 35% respectively, for the same quarter in 2021. Of our international contributors, Canada, Asia and Latin America were the major markets driving this growth rate. Our Q2 non-GAAP gross margins remain strong at 84% despite the global supply chain challenges. Moving on, capital equipment in the second quarter represented 87% of the total revenue, while consumable services accounted for the remaining 13%. GAAP operating expenses in the second quarter were $45.4 million, a 37% increase compared to Q2 of 2021. Sales and marketing expenses increased to $39.7 million in the second quarter, compared to $28.7 million in the same period last year. This increase is primarily due to hiring more sales representatives, expanding our presence in the U.S., and attending additional in-person marketing activities and trade shows. Next, we look at share-based compensation, which increased to $6.4 million in the second quarter of 2022 compared to $2.9 million in the second quarter of 2021. On a non-GAAP basis, operating expenses reached $39.5 million this quarter, compared to a total of $30.4 million in the same quarter of 2021, representing a 30% increase. GAAP operating margin was 43% in Q2 of 2022 and non-GAAP operating margin for the second quarter of 2022 was 49% compared to the operating margin of 51% in the same period last year. Looking at GAAP diluted earnings per share for the second quarter, we see an increase to $0.52, compared to $0.48 per diluted share in Q2 of 2021. Non-GAAP diluted earnings per share for this quarter was $0.59, compared to $0.51 per diluted share in the second quarter of 2021. Once again, we ended the quarter with a strong balance sheet. As of June 30, 2022, the company had cash and cash equivalents, marketable securities, and deposits of $443.6 million. This quarter, InMode generated $47 million from operating activities. Before I turn the call back to Moshe, I'd like to reiterate our guidance for 2022. Revenues are projected between $425 million and $435 million. Non-GAAP gross margin is expected to be between 83% and 85%. Non-GAAP income from operations is anticipated to be between $204 million and $209 million, and non-GAAP earnings per diluted share are forecasted to be between $2.11 and $2.16. I will now turn over the call back to Moshe.

Thank you, Yair and thank you, Shakil. Operator, we're ready for the Q&A session.

Thank you. We will now begin the question-and-answer session. Our first question comes from Kyle Rose with Canaccord Genuity. Please go ahead.

Great, this is Gibran on for Kyle. Thank you so much for taking the questions and congrats on another strong quarter. Maybe to start, I just wanted to dig in a bit on China. How has that fared in Q2? Has that situation improved at all? I think you had mentioned on the Q1 call that you had sold less than 50% and have sort of expectations. So any update there would be helpful. And then any other update on the CFDA approvals as well?

Okay, thank you. Well, the situation in China has not changed since Q1. The country is still closed; it means the same situation. If you travel to China, you have to be in lockdown for two weeks in a hotel. You cannot travel from city to city. But even with that, with all the limitations, we did better; we did twice as much as in Q1 in Q2. And this is due to the fact that we made some kind of changes in our operations there. We moved some of the people from Beijing to Shanghai and some others to other cities so they can operate freely within the cities without the need to travel from city to city. But the main issue is, since the country is closed, we cannot send any training doctors to train or conduct seminars in China, especially not on the new devices that we're now developing. The CFDA is moving very slowly. We filed another two applications for two more products last month, but we did not receive any new approvals in the last quarter. It's not like the FDA, where when you file you get an answer when you are questioned or approved. In China, the only thing you need to do is wait and see what will happen. Hopefully, and these are the rumors, starting in October or November, the Chinese government will open the country a little bit more. Some people will be able to travel within China and into China without the need to be in lockdown for a long time. The same situation with Hong Kong, which is now part of China. So overall, we managed to do twice as much better than last quarter, but yet not the way that we want to be.

Understood. Thank you, Moshe. And then on Empower, maybe throughout the first half, how are revenues tracking versus your expectations? Is $20 million still a fair assumption for the full-year this year? And then maybe given your execution thus far, some of the KOL groundwork you’ve laid and some of the data readouts that we’re expecting, how can Empower sort of scale in year two next year? How should we start to think about the commercial scaling next year? Thank you for the question.

Well, the guidance that we gave for 2022 was $20 million. The only thing that I can tell you is that so far we have done better than the guidance based on six months. Last month, a month and a half ago, we managed to launch Empower in Europe during the IMCAS Conference in Paris. Now we’re working country by country and sending trainers to train some doctors in order to establish luminary bases in every country in Europe. We are doing the same in Mexico right now and we will send some doctors from the U.S. to train the Mexican luminary doctors. We were planning to launch Empower in Asia during the IMCAS show in Bangkok at the end of September. So overall, the situation is good. I believe we will do better than the $20 million that we provided as guidance. However, it is too early to judge what will happen in 2023. I believe that if everything goes well, we're going to do well in 2023, above the guidance that we gave for 2022. I mean, we don't want to give more detail on that, because it has only been six months that we've been working with Empower. We have some luminary doctors who like the system and are getting good results. We started the process to clear the system for other indications with the FDA. We are very invested in Empower because we believe that we want to be the leader in the women’s health and wellness market.

Understood. Thanks, Moshe. And if I could just squeeze in one quick question. On gross margin, just any updated thoughts, given sort of the sustained inflationary pressures we're seeing. Is 83% to 85% still a reasonable sort of goalpost long-term?

Well, I want to tell you that the fact that we went up from 83% to 84% this quarter was a big, big challenge. And you know, keeping the gross margin between 83% and 85% is a very difficult task. Because, as you probably know better than me, prices of components and sub-assemblies of electronics are going up every day. Manufacturing costs, labor costs, transportation, and logistic costs have all increased in the last six months by an average of at least 10%. Some components and some sub-assemblies are more than that. We are fighting against this where we are opening more suppliers for every component and sub-assembly. Right now, we have at least three suppliers and three vendors. In order to ensure that we will get everything on time. The most important thing right now is not just the prices; it’s keeping all the lines running. We know that some of our competitors are giving delivery times of six to eight months on platforms. We are delivering every system within 10 days, not more than 10 days. This is a challenge, and I want to thank all the logistics, supply chain, and manufacturing teams here in Israel and all around the world for doing a good job. To keep the 84% or even 83% is becoming very difficult and very challenging. But as you see, we are doing our best. Do you hear me? Hello?

Yes. Thank you. Our next question comes from Joseph Conway with Needham. Please go ahead.

Hello, quick question on the Envision launch. Obviously, Empower’s exceeding your expectations so far and another record for consumable revenue in the quarter. Just kind of change your thinking on the launch for Envision. And I guess maybe could you just solidify that timeline?

Well, the timeline stays the same. We did a soft launch in Canada, and I believe Shakil can elaborate on that more than I can. We are now finalizing a study with full site that we did and we will be submitting for publication a peer-reviewed article. We are working with the FDA on the indications. I believe that if not by the end of this year, sometime at the beginning of next year, Envision will be launched in the United States and thereafter in Europe and Asia. Shakil, do you want to say something on Canada, please?

Yes, Joseph. We've actually had a pretty successful soft launch in Canada. As you know, before we do anything, we want to make sure that we have the appropriate KOLs on board. We want to ensure that we have the proper logistics in place, inventory, so on and so forth. So as Moshe said, we're hoping for sometime in early 2023, hopefully, but at this point, we've gotten some really good traction, as I mentioned, in Canada. And, again, as I said, we want to make sure that we have the correct things in place, including the clinical side of things and the KOL side of things as well. So with that being said, I think we feel pretty comfortable and confident with it. But you'll hear more about that towards the start of next year.

Okay, great. Thank you. And then maybe just moving towards consumables? Can you maybe dissect a little bit of that growth? Obviously, there was very strong growth in the installed base. So maybe, yes, dissect a little bit between increased physician utilization and just purely from the growth of the installed base?

Sure. So we’ve actually started to expand our post-sales support, all that Moshe discussed on the international side of things. But at least in North America, we've expanded our post-sales support team, almost doubling the size of what we were last year. We're still working on filling a few spots. But that's definitely been a major contributor. We have two directors that have done a great job. They've helped us really grow that side of the business. Of course, some of the resources that we are investing in consumer marketing. We have a very good launch in some electronic billboards and things like that to raise consumer awareness. It’s always nice when you have friends who turn around and ask you is Morpheus8 the device that you guys make, which happens quite frequently now. So we're building the brand. As I mentioned, the same thing goes for Envision and Empower. We'd like to crawl, walk, run, rather than the other way around. So in doing that, I think it's been a successful approach for us as a company, and we plan to continue to do that. So I think we can expect some continual growth on that side of things. Hopefully, that answers your question, Joseph.

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

Thank you, guys. Good morning. Moshe, just on system placements. I mean, you mentioned China still has the lockdown issues there. But I think this was your biggest quarter ever of global placements, so a couple of questions, I guess. One, what's been the tenor of demand even over the last couple of months? It seems like financing rates are probably going up; there’s a little bit of competitive noise out there that we continue to hear in the channel. But you seem to be powering through very well. So kind of what are your expectations maybe over the next six to 12 months in this macro environment and what are you seeing in the field? And then kind of a second question on placement, can you help us understand again? It's a number we ask about quite frequently, but what is penetration in the U.S. now for the surgical derma and plastic surgery segment of the market? Where do you see penetration at right now, and how much room is left there? Anything on those topics would be helpful? Thank you.

Well, if we want to take it to the worldwide level, we have about 14,000 systems installed. The total available market, if you want to count dermatologists, plastic surgeons, aesthetic surgeons, OBGYNs, and in the future, ophthalmologists worldwide, is more than 200,000. I'm talking about doctors with clinics. You know our portfolio is very wide. We can serve aesthetic doctors who want to do hair removal and skin rejuvenation because we have the best hair removal device and also the best IPL for skin rejuvenation, all the way to plastic surgery, FaceTite, NeckTite, BodyTite. We started with women's health to do all kinds of indications. So with a wide portfolio like that, I believe that worldwide we are in a very, very early stage, very early stage, and we have room to grow, and we are doing it. We have room to grow in almost every country. In addition to that, we have several products which are not yet approved, not in Europe, not in Asia, and probably not in South America. We continue to invest heavily in regulation in 27 countries simultaneously, in 27 countries, and it's tech time, tech studies, tech money. Not always can we overcome the bureaucracy in every state, but eventually, all the products would be approved. This is another growth engine, widening the portfolio that you can sell in every country out of the 87 countries that we’re selling. In North America, we have a wide range of regulation from the FDA because we started in the U.S., and we started and later on, we started in Canada. But right now, in Europe, when the CE marked moved from the MDD direction of regulation to the MDR, which has become much more difficult, it is a challenging situation, but we are working on it and we will overcome it. The good news is that the barriers to entry for competitors with all these regulations are high. So I believe that the follow-through penetration is in the very early stage, and we will continue to develop products and create a wider portfolio. I don’t know what to say as far as penetration in the United States. In the U.S. alone, there are about 40,000 to 50,000 lasers installed. Every one of these doctors who are using lasers will eventually use one of our systems. So if we sold in the U.S. 6,500 or 6,600 systems, we still have room to grow. As you can see, we’re growing quarter-over-quarter, so the penetration is getting wider and wider. Did I answer you?

Sorry, Jeff. Just to chime in to answer some of your other questions, you had asked. So in regards to financing, I know that's something that everyone’s keeping an eye on here. We've talked to our brokers and a number of leasing companies; we haven't seen rate hikes as of yet. I think they're going to start to kick in slowly. The nice thing about it is, because of the macroeconomic environment right now, it's not going to come as a surprise, nor is it just going to be niche to our industry. So I think people are going to be accepting of it. I think the key thing is, as long as we can continue to ensure that our customers are successful with their devices, if it's going to be a small delta on a monthly basis, we can try and help them make that up by driving more patients through their practice by investing in further resources as we do. Hopefully that answers that question there. But in terms of competition, I know you talked about that. As a company, we don’t worry too much about competition; we actually look at competition as a good thing. It breeds awareness. I think a lot of times when you do have work getting out there, just keep in mind, as much as it sounds like we’ve had a seasoned laser industry or seasoned RF industry, we're still relatively new players in the market. We've carved out a unique market with some of the devices we have. So we’ve been pretty comfortable penetrating what we have; we still see a very long runway, but also don’t forget that the non-core market is a huge market that we can penetrate. So as long as the healthcare system continues to be the way it is in terms of managed care, there's always going to be physicians that are looking at adding certain revenue or separate revenue streams for their practice regarding the specialties, as you mentioned, with plastic surgery, dermatology, and so forth. Again, in the derm world, we're very, very early on. In the plastic surgery world, don’t forget, the goal with all of our doctors is to get in their offices to make them successful. Because of the wide array of products we carry, we’re able to go in, and if they're successful with their first one, we’re going to help them benefit and hopefully they’ll reinvest for the second one. So that's part of the business model as well. Hopefully that answers the other part of your question.

Yes, it does. That’s helpful from both of you. Thank you. And then I guess my only other question really is just, Moshe, we only see it in the proxies once a year, but stock has been off here pretty significantly this year. Has there been any level of interest from an insider buying standpoint? Has anybody stepped up into buying at these levels internally? And maybe the same question for Yair; I think there's over $400 million of cash and marketable securities on the balance sheet at this point. Any thoughts on a buyback? Again, valuation looks pretty compelling, I would argue at these levels, or just any thoughts on both insider buying and or buyback? Thanks.

Well, let me answer the first question or the first part of your question and Yair will answer the second part. As far as the executive team and the insiders, they are fully committed, and they are here to stay. Yes, some of them sold some shares because, and I can tell you that in 2021, we planned to do a secondary when the banks asked us to sell some of the executives and some of the insiders through the secondary, but unfortunately, that did not happen. So it was done in the market. I can tell you that some of these insiders and executives started to buy shares when the stock went down because they believe in the company strongly. Therefore, the executive team is here to stay; we're not going anywhere. This is the company that we have established, this is the company that we built, it’s a successful company, quarter-over-quarter, and we're not going to leave just because some of us have sold some shares or some of the employees have exercised some of the options and sold some shares. This is something very common in a public company, especially four years after the IPO. In addition, we do have $450 million, and you know, we don't have any candidate company right now to buy, but we are exploring opportunities. I can tell you that we're exploring opportunities almost every month, and when the opportunity presents itself, we will do it. Therefore, the money remains on the balance sheet, but we have the intention to use it.

Thank you.

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

Okay, thank you, operator. Thank you, Miri. Thank you, Shakil, Yair, Spero, Mishka, and Rafi who are with me here today. I want to extend my thanks to all the InMode team, salespeople, logistics people, manufacturing people, R&D people, engineering, everyone who's working very hard 24/7 to make sure that we deliver what we promise to deliver, and we're doing so quarter-over-quarter. This is a family-oriented company. Everybody here is some kind of a partner and an owner. I want to thank all the shareholders who have been with us for a long time. I know that right now there are some macro issues, and the stock market is not in the best shape and position. I believe that if we continue to deliver quarter-over-quarter another record, everything will be in place. So thank you all again, and hopefully we will see you in the next earnings call. Thank you.

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