Good day, and welcome to InMode's Fourth Quarter and Full Year 2023 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Miri Segal of MS-IR. Please go ahead.

Thank you, operator, and to everyone for joining us today. Welcome to InMode's fourth quarter and full year 2023 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 Mizrahy, Chairman and CEO. Moshe, please go ahead.

Thank you, Miri, and to everyone for joining us. 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; and Rafael Lickerman, our VP of Finance. Following the prepared remarks, we will all be available to answer your questions. The second half of 2023 presented challenges for InMode in the aesthetic industry, particularly in the surgical aesthetic sector. In the fourth quarter, we revised our guidance for the first time in the history of the company due to the increased impact of the industry slowdown. This resulted in a 5% year-over-year decline in Q4 revenue, which amounted to $126.8 million. However, we are pleased to have grown our full-year revenue to a record of $492 million, reflecting an 8% increase compared to the full year of 2022. We take pride in being the only company in the industry that consistently generates over $100 million per quarter, demonstrating growth even in the face of a challenging year. Moreover, we maintain our gross margin, the highest in the industry, strong and steady at 84% for both Q4 and the full year, all while maintaining our established price structure for the platforms and for the consumables. As previously mentioned, over 80% of the platform sales are facilitated through leasing agreements. Higher interest rates and longer lending approval cycles have impacted InMode's overall growth rate. This macroeconomic environment has also affected patients who are more sensitive to the price of aesthetic treatment, resulting in lower underlying demand for our minimally invasive treatment. To address these challenges, we are in the process of establishing an approval program with financial institutions to improve and expedite the credit decision process. In some cases, we leverage our strong balance sheet to support physicians by providing financing options ourselves. Additionally, capitalizing on this lower year and our robust balance sheet, in 2023, we expanded our R&D activity by hiring more engineers and recruiting trained professionals. Also, we increased our sales team in our subsidiaries, expedited international expansion, and increased investment in worldwide regulatory pathways. During 2023, we introduced two successful new platforms, Envision for the ophthalmology market and Define for the hands-free aesthetic market, which is the next generation of Evoke. We are encouraged by the results from the soft launch of our Envision platform last year, and we expect Envision to expand outside the U.S. during 2024. InMode continues to innovate, bringing new and exciting products to the market. In 2024, we plan to launch two new platforms, offering significant improvements in technology and energy levels, along with new technology for our minimally invasive treatment and for Morpheus8. Finally, we remain committed to supporting all customers, distributors, employees, and salespeople worldwide. Regarding the situation in Israel, we would like to reiterate that we have established a contingency plan with sufficient inventory globally, including in Israel, the U.S., and Europe. We continue to closely monitor the situation and are pleased to report that we are conducting business as usual. Now I would like to turn the call over to Shakil, our President in North America. Shakil?

Challenges in North America during the fourth quarter, despite the headwinds of lower platform sales, we are reporting a 20% increase in consumable and service sales in Q4. Consumables and service revenue accounted for 16% of total Q4 revenues. As Moshe mentioned, we are pleased with the successful launches of Envision and Define. Both platforms have made significant progress in North America, gaining traction among practices and patients. 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. Lastly, I'd like to thank our 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 us. Starting with total revenue, InMode generated $126.8 million in the fourth quarter of 2023 with a gross margin of 84% on a GAAP basis. For the full year 2023, revenue totaled a record $492 million, an increase of 8% compared to 2022. Non-GAAP gross margins remained the highest in the industry and within our target range at 84% for both the fourth quarter and the full year of 2023. In Q4 and in the full year of 2023, our minimally invasive technology platforms accounted for 83% of total revenues. For the full year of 2023, consumables accounted for 16% of revenue, an increase from 13% in 2022. Moving to our international operations, fourth quarter sales outside the U.S. accounted for $46 million or 36% of sales, a 9% increase compared to Q4 last year. For the full year of 2023, sales outside the U.S. accounted for $184.2 million or 37% of sales, an 18% increase compared to 2022. InMode now operates in a total of 96 countries. Among our global contributors, Asia and Europe were the primary drivers fueling our growth rate. To support our operations and growth, we currently have a sales team of more than 256 direct representatives and 82 distributors worldwide. GAAP operating expenses in the fourth quarter were $55.3 million and $215.7 million for the full year, which is a 5% and an 18% increase year-over-year, respectively. Sales and marketing expenses increased slightly to $49.5 million in the fourth quarter compared to $47 million in the same period last year. Sales and marketing expenses for the full year of 2023 were $193 million compared to $160.6 million for 2022. This increase is attributed to hiring more sales representatives and increasing our presence in the U.S. and globally. Next, we look at share-based compensation, which decreased to $6.3 million in the fourth quarter of 2023 and $23.6 million in the full year of 2023. On a non-GAAP basis, operating expenses were $49.5 million in the quarter compared to a total of $46.1 million in the same quarter of 2022, representing a 7% increase. For 2023, non-GAAP operating expenses were $194.1 million compared to $160.4 million for 2022. GAAP operating margin for Q4 and for 2023 was 40%. Non-GAAP operating margins for the fourth quarter and for the full year 2023 was 45% compared to 50% and 49% for the fourth quarter of 2022 and full year 2022. GAAP diluted earnings per share for the fourth quarter was $0.64 compared to $0.44 per diluted share in Q4 of 2022 and $2.30 in 2023 compared to $1.89 in 2022. Non-GAAP diluted earnings per share for this quarter were $0.71 compared to $0.78 per diluted share in the first quarter of 2022 and $2.57 for 2023 compared to $2.42 for 2022. Once again, we ended the quarter with a strong balance sheet. As of December 31, 2023, the company had cash and cash equivalents, marketable securities, and deposits of $741.6 million. This quarter, InMode generated $61.2 million from operating activities. Before I turn the call back to Moshe, I'd like to reiterate our guidance for 2024. Revenues between $495 million and $505 million, non-GAAP gross margins between 83% and 85%, non-GAAP income from operations between $217 million and $222 million, non-GAAP earnings per diluted share between $2.53 and $2.57. I will now turn over the call back to Moshe.

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

Thank you. We will now begin the question-and-answer session. Our first question today comes from Matt Miksic with Barclays. Please go ahead.

Hi, good morning. Thanks so much for taking the question. And I appreciate all the color. I wanted to maybe start off with just if you could talk a little bit about what you're assuming in your current 2024 revenue guidance? And what kind of indication that you've seen since December and early January to the trajectory of some of the major factors driving your current outlook for 2024?

Yes. Thank you for the question. Well, as you can see, we try to be very conservative. What happened in the last 6 months of 2023 in the macroeconomics, with the interest rates and all the leasing problems that we encountered, it's continuing in Q1. It's not over yet. We don't know what will happen during the quarters of 2024. We read a lot of macroeconomic studies and research, and we understand that it might get better in the second half of the year. And therefore, we have decided to be very conservative in the guidance. We want to meet the guidance and not change it like we did in the last 3 months of 2023. What we see in December and January is that the situation continues as it was in the last 6 months of 2023. We don't see any positive signs yet in terms of the obstacles that we faced in the last 6 months of 2023. And therefore, we will not change it until we are absolutely sure that we can meet the guidance that we will give. I don't know if I answered your question, but that's the situation currently.

Yes. No, that's helpful. And then secondly, you mentioned a couple of new platforms that you're launching this year. And if we are going to think about sort of the cadence for the year and the potential for things to start to stabilize and improve, what kind of factor might those play? Are those back-end loaded effects? And any additional color that you can share on those or any other actions you're able to take to offset some of the market dynamics you're describing? Thanks.

Okay. Basically, the two platforms that we will introduce in 2024 are second-generation technology for the minimally invasive, the RFAL, Radio-Frequency Assisted Liposuction and the Morpheus8 technology. These are basically the two main lines of the surgical part of our portfolio. We have developed a very unique and breakthrough technology for new minimally invasive techniques to perform plastic surgery with one incision point using revolutionary hand pieces. We have dramatically improved the performance of the Morpheus8, which is, as everybody knows, one of the biggest brand names in the medical aesthetics. Both will come during the year when we complete the R&D studies and regulations for them. We will introduce them to the market, not in Q1, but I would say more like end of Q2 or beginning of Q3. We believe that they will add to our revenue in the second half of the year, of course, considering that the macroeconomics and the situation in the last 6 months of 2024 will get better. As far as R&D, we're not slowing down. There is no slowdown in R&D at InMode. We continue to develop business as usual, and we will continue to bring two new platforms and two new indications either in the aesthetic field or in ophthalmology and women’s health with Empower. We currently have a pipeline of more than five major new platforms that we will bring to the market in the next few years. This is our core competency here in Israel, and we will continue to develop products and bring new solutions to doctors and patients.

Very helpful. Thanks so much for the color.

Hey, good morning. This is Mike Sarcone on for Matt Taylor. And thank you for taking my question. So just to start, a follow-up on the guidance question. You talked about it from the macro perspective and some of the newer systems slated for 2024. So could you give any color on how you're thinking about contribution from Envision and the new Define system as you're thinking about 2024?

Yes, yes. First, I want to say something, Matt. The macro analysts at Jefferies were the only ones who predicted that the economy would start to slow down in the third quarter of 2023, and they were absolutely right. I read their macroeconomic studies and research in the beginning of the year, and they were quite correct. Regarding the Envision, the Envision was launched in the market in the middle of the second quarter in the United States, and we did well until the end of the year. We sold close to $30 million of this platform in 2.5 quarters, so we're very encouraged. We see that the doctors and users are happy with the results. We believe that the momentum will continue in 2024. We also intend to bring these platforms to Europe. We introduced the platforms during the distributor meeting in Paris during the IMCAS show a few weeks ago. Everyone was excited. We need to find the right distributors in Europe and train our salespeople in our subsidiaries there so they can handle and sell this platform. We plan to bring some doctors from the United States and Canada who are recognized experts in this category, ophthalmology, to conduct workshops in Europe so we can expedite the penetration process. But we are very encouraged with Envision. As for Define, as you know, the first generation of Define was the Evoke, which was very successful when it was introduced during COVID because it allowed the doctor to perform treatments while ensuring social distancing. But two years later, we decided that we wanted to improve this platform and bring something better designed, especially with the mask that we put on the face. We redesigned it and added Morpheus to the platform so the doctor can complement the hands-free treatment with Morpheus for the face, which is widely recognized for its great results. We developed a combination treatment for both the hands-free and Morpheus for these platforms. We introduced all this during the sales meeting of North America at the end of January, and it was well received. We believe that we are starting to penetrate the market with the new protocol and the new device. It is a hands-free device, and while it's not the highest technology or best seller of InMode, I believe it is the best in the market in the hands-free category. Did I answer you, Matt?

You did, Moshe. Thank you very much. And then just one more question. You talked about incorporating the continuation of these macro headwinds into guidance. And you also mentioned you're in the process of establishing an approval program to expedite the credit process and possibly leverage InMode's balance sheet. Can you just talk about kind of where you stand in that process in terms of when that gets off the ground and where you're going to focus geographically? If that starts to make some headway or becomes effective, can that drive upside to how you're thinking about 2024 sales or guidance right now?

Yes, this is Yair. Right now, I would say it is baked into our guidance already. We have a couple of programs, one in the U.S. and one outside of the U.S., and we are looking to expand those. Basically, what we are doing is a sort of risk-sharing mechanism where we can take a small portion of the risk from our leasing partners, which would give them the incentives to buy deeper and provide approval quicker. I think that's definitely going to help us. However, as we mentioned, there is also some slowdown in demand in the underlying market. And again, this will not assist with this portion. So overall, we have already implemented a couple of programs, and we plan to expand those. However, this is already factored into the guidance at least at the moment.

Okay, great. Thank you, Yair.

Thank you so much. Good morning, everyone. Thanks for taking the question. Just Yair and Moshe, on the underlying demand component here. Just curious, I know, Moshe, you mentioned January so far you haven't seen an improvement. I just want to confirm that that's true of the underlying demand as well. And I would just love to hear how you guys think about the drivers of improving demand. What should we be looking for as it relates to the economy that could signal a potential uptick in improving demand? That's the first part of my question. The second part, given that this is a capital business, how much of a lag is there once we see improving demand? Do people start purchasing equipment more readily 3 months later, 6 months later, or is it right away? Would just love some color on how to think about that? Thanks so much.

Okay. Well, I will reiterate what I said. Right now, in December and January, we do not see any change in the outlook of the macro situation. Whether or not we can predict three months in advance, we don't know. I don't think anyone can answer that. We see some slowdown, not just in equipment sales, but also in disposable sales because we believe that the slowdown affects consumers as well, resulting in fewer people currently seeking minimally invasive procedures, which are a bit more costly than non-invasive procedures these days. The only thing we can say is that we expect improvement in the macro situation sometime in the second half of the year, not in the first half. We see the same trend happening in Europe right now, especially in the major countries. Inflation in the United States has decreased slightly, but in Europe, it has not yet. Therefore, the recovery process there will take some more time. We are monitoring the situation closely, almost on a daily basis. We observe the behavior of the leasing companies, which informs us exactly what's happening in the market. The leasing companies are currently very cautious about the time it takes to clear a transaction, the interest rates they require, and the types of deals they do or do not want. So we are evaluating the situation continuously. So far, we don't see any signs of improvement. However, we hope to start witnessing it at the end of the second quarter.

Okay, that's helpful. And then you obviously have a very strong balance sheet. I appreciate the work you're doing to help take on risk as well. I assume that doesn't preclude you from continuing to search for potential M&A opportunities. Can you comment on where you guys stand there? I mean, it feels like the market might be ripe given the difficulties and you guys are in a strong position there. Thanks so much.

We're currently exploring potential candidates for M&A, something that complements our portfolio, not a laser company by the way. It's a company also in the aesthetic field but not similar to ours. We're in the very early stages of evaluating the company. We don't have any banking support; we're doing this ourselves. We will know better sometime in early March whether we can proceed to the next practical step or not. That's all we are currently doing. As I said before, the Board of Directors decided against share buybacks for many reasons I have explained, preferring instead to reserve funds for a more strategic M&A, which we believe will benefit the company more effectively than buying back stock. I must say, however, that the macroeconomics have not been favorable for the M&A process because all the sellers are waiting to see if the market improves and may get a better price for their assets. But that's the current situation. As I mentioned earlier, we're exploring one opportunity right now.

Thank you so much. Great color.

Good morning. Thanks for taking my questions. Just wanted to start with kind of a quarterly sequencing in 2024. Could you comment on whether or not you're comfortable with consensus in the first quarter? I think it's around $100 million or so?

We do not give guidance per quarter. We only give guidance per year, and we update the guidance when we feel it's necessary based on the performance of the quarter and what we see moving forward. Therefore, we will not comment on any guidance for the first quarter. As you know, this industry has some seasonality. The fourth quarter is typically the strongest, while the third quarter is the slowest because of the summer. The second quarter is also strong, and the first quarter falls in between. However, in recent years, due to COVID and other factors, the seasonality has not always followed past patterns. As a result, we do not know what will happen in 2024, which is why we do not provide quarterly guidance.

Okay, I understand. And then your commentary around patient demand. From what I remember, I don't recall you discussing that as much in the previous couple of quarters, where the focus seemed to be more on financing conditions, such as interest rates and tighter financing in general. Was this patient demand issue a newer headwind, or has it been persistent?

Well, we need to distinguish between non-invasive treatment and minimally invasive treatment. Non-invasive treatment, such as hair removal, pigmentation, and other topical treatments, are commodity procedures with a lower cost. We do not focus on this segment, as only 10% of our products fall into this category. Therefore, I cannot comment on how this segment fared in the wave of market challenges. On the other hand, minimally invasive procedures, primarily through radio-frequency-assisted lipolysis, involve plastic surgical procedures made with one incision point. The cost of these procedures ranges from $2,000 to $7,000, making them relatively expensive compared to non-invasive treatments. We are experiencing some slowdown in the disposable part of our business. However, it is not a major slowdown. In the fourth quarter, we actually sold more disposables than in the third quarter, but the growth rate did not meet our expectations. Overall, in 2023, we sold almost 1 million disposables compared to 730,000 in 2022. Thus, we are experiencing an increase in the total numbers of disposables and procedures, but the growth rate is not as high as in previous quarters or years. I expect improvements when the market rebounds and consumers can spend on these procedures again, so that is the current situation. This is why we say we see a slowdown, but do not interpret this as a complete stall—it is just a slowdown in the growth rate. Am I explaining myself?

Yes, that makes sense. Thank you, Moshe.

Hi, everyone. Thanks for taking the questions. I just want to focus on the U.S. for a moment. What was consumable growth in the U.S. in Q4? Was it still positive, was it negative? And then just regarding the guidance for this year, what does that really assume from the U.S. perspective—continued deceleration or some growth?

Shakil, would you answer that?

Overall consumable growth did grow around 15%, I would say. Obviously, it's lower than in Q1, Q2, or Q3. So as Moshe mentioned, we do see some slowdown in the growth rate. In the high teens, but it is definitely lower than the 40% growth rates we observed in the first half of the year.

Got it. Okay. And when do you expect the dry eye indication in the U.S. for Envision?

Say it again? Dry eye indication for...

Okay. We are well in the process of finalizing the protocol with the FDA under IDE submission. They asked a few questions. Hopefully, by the end of this month, we will answer them, and they will allow us to conduct a pivotal study for 510(k) clearance, which will probably start sometime at the end of this quarter. We have already selected the sites for the study according to the protocol that will be approved. It is a process. However, while we do not claim this because we lack FDA clearance, we have preliminary studies that show a combination of treatments helping dry eye, and doctors are testing it themselves, with great feedback on the results.

Thank you.

Thank you. Good morning, guys. Moshe, understanding that you do not provide quarterly guidance, I’ll try again on it. You have indicated that you do not expect an improvement in the first half and that should come potentially in the second half. Looking back at '23, both quarters were solid in the first half, with the first quarter being particularly strong. Given your earlier comments, I would logically assume mid to upper single-digit revenue decline in the first half year-over-year, while hoping the second half will see growth. Does this logic have flaws? Even though I realize you do not provide quarterly guidance.

This is Yair. We do not give quarterly guidance, but you see that the overall guidance is pretty much flat year-over-year. I would say that the revenue sequence between the quarters will either be similar to 2023 or back-loaded due to the factors Moshe mentioned.

Yes. In 2023, the first two quarters saw quarter-over-quarter growth of 20%. If you ask me if we anticipate the same growth this year, absolutely not. The second half of 2023 saw a slowdown. I believe in 2024, it will be the opposite: the first two quarters will be the slowest, and the second two quarters will compensate.

All right. We will try again offline. On the margin side, Moshe, looking at the pre-COVID operating margins, you maintained around that 40% range. You peaked at 50% in 2021-2022. This past year you brought it down to around 45%, guiding to approximately 44 this year. Should I assume that we’re settling in the low to mid-40s range for operating margins for the foreseeable future, assuming no major acquisitions? Is that a reasonable model for InMode over the coming years?

Absolutely. We are working hard to maintain steady margins, both gross and operating. Even though you may have noticed our increased spending on marketing, this is a strategic decision during a slowdown period. Some might think that in a crisis, you should reduce expenses; however, we believe that this is a crucial time to continue investing in marketing. The opportunity to capture market share during slowdowns is important for us. While the total market may be down, we believe our market share has grown in the last six months. We are currently waiting for reports from competitors and monitoring industry trends, where many companies have also faced declines.

Thank you.

Thank you. And our final question today comes from Anthony Petrone with Mizuho Financial Group.

Thank you for taking a question. Fit me in here. Maybe one on macro, just as we think about it geographically, how do the pressures in the U.S. stack up relative to Europe and the APAC region? That would be the first question. When you think about financing options, Moshe, do we think about directly financing practices? Or will there also be an option for patient finance, such as CareCredit, which provides financing for aesthetic procedures? Can you venture into that market as well? Or will this just focus on capital financing?

Good question. As for territories, I think we mentioned in the PR that the rest of the world grew by approximately 18% in 2023, while North America grew less than that. This is not due to a lack of investment in North America. In 2023, we established two new subsidiaries, one in Japan and one in Germany and Austria, and we continue to hire more salespeople. We believe that the rest of the world market will grow in 2024. We plan to keep investing in addition to what we're doing in the U.S. So, the rest of the world grew a little more than the U.S. in 2023, particularly in terms of platforms and new regulatory approvals in different countries. Regarding financing customers, we have never been in this business. There are companies actively do so and work directly with doctors. We do not intend to finance patients as this is not our core business. We will assist our leasing companies, as Yair and I mentioned, to expedite transaction approvals for doctors, but we do not plan to enter the patient finance business.

Thank you. We've run out of time for questions today. 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.

Thank you, operator. Again, I would like to say that although 2023 was a challenging year for us, we kept up the momentum. We know how to turn a slowdown and crisis into opportunities, and I believe we did that with all the new R&D initiatives and two new subsidiaries we established, even in tough times, adding more personnel worldwide to enlarge our sales and support force. I want to thank all InMode employees globally for their hard work during 2023, especially our Israeli team. As everyone knows, we face very challenging times in Israel. The efforts made since October have been commendable in ensuring the business runs as usual, despite many team members being on reserve duty. Everyone worked overtime as needed, and we successfully rescheduled our manufacturing lines to maintain supply within 7 days. We continue to support our customers and strive to maintain our margins. I hope 2024 will be a better year for us. While 2023 was not particularly tough, it was not a bad year either. Thank you all, and I look forward to seeing you at the end of the first quarter.

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