Good morning and welcome to the InMode First Quarter 2024 Earnings Results Conference Call. Please note, this event is being recorded.

Thank you, operator and everyone, for joining us today. Welcome to InMode's 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 Mizrahy, InMode's 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; Dr. Spero Theodorou, our Chief Medical Officer; and Rafael Lickerman, 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, IgniteRF and Optimus Max. Meanwhile, the macro environment continued to be challenging and we experienced a 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 are excited to see a high level of interest and demand for our latest platforms, the IgniteRF and the Optimus Max. Although these platforms accounted for 16% of our sales in Q1, delivery was delayed due to the ongoing construction of the manufacturing line, which led to insufficient inventory levels. All our efforts are focused on fulfilling orders promptly and ensuring that our inventory meets the needs of customers who have already preordered the new platforms. Let me expand on the new line of platforms. IgniteRF is the next generation of our legacy radio frequency-assisted lipolysis technology, a minimally invasive platform with the new Morpheus8 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 Morpheus8 Burst and noninvasive RF/IPL and laser-based treatment. We expect that these two platforms will play a significant role in the growth of our company. Moving to capital allocation. InMode's Board of Directors has approved a third share purchase program, up to 8.37 million shares. In addition, we keep all other options on the table, including exploring strategic M&A opportunities, paying dividends, as well as additional future buybacks. Before I conclude, I am pleased to welcome Dr. Michael Anghel as the 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 the CEO of DCM, a publicly traded company. Dr. Anghel 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 that all of our team is safe. In addition, due to the war in Israel, the assembly line of the new platforms may take longer to complete and new platform deliveries may be pushed to the second half of the year. Now I would like to turn the call over to Shakil, our President of North America. Shakil, 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 consumables and service grew 13% year-over-year and accounted for $22.5 million in Q1. Once again, this is 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 markets and 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 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. As Moshe mentioned, this quarter, we launched two new platforms and started selling them on a preorder basis. While we could not yet recognize these sales as revenue, we decided to provide pro forma results, which add to the non-GAAP results the preorder sales and the related expenses. We believe that the pro forma results better reflect the business activity during the quarter. Starting with the total revenue, InMode generated $80.3 million in the first quarter of 2024. However, pro forma revenue was $96 million, which includes the preorders of new platforms not delivered yet. GAAP and non-GAAP gross margin in Q1 2024 were 80%, while pro forma 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 sales outside of the U.S. 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 U.S. and reached a record sales number. To support our operations and to ensure our future growth, we currently have a sales team of more than 248 direct representatives and 83 distributors worldwide. GAAP operating expenses in the first quarter were $45.8 million, a 2% decrease year-over-year. Sales and 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 is attributed to the revenue shortfall in Q1 of 2024. Next, we look at share-based compensation, which decreased to $4 million in the first quarter of 2024. GAAP operating margin for Q1 was 23%, compared to an operating margin of 39% in the first quarter of 2023. Non-GAAP operating margin for the first quarter was 27% and pro forma operating margin was 35%, compared to a non-GAAP operating margin of 43% in the first quarter of 2023. GAAP diluted earnings per share for the first quarter were $0.28 compared to $0.47 per diluted share in Q1 of 2023. Non-GAAP 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 diluted share in the first quarter of 2023 on a non-GAAP basis. Once again, we ended the quarter with a strong balance sheet. As of March 31, 2024, the company had cash and cash equivalents, marketable securities and deposits of $770.5 million. This quarter, InMode 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-GAAP gross margin is between 82% and 84%, compared to previous guidance of 83% to 85%. Non-GAAP income from operations is between $169 million to $174 million, compared to previous guidance of $217 million to $222 million. Non-GAAP earnings per diluted share is between $2.01 to $2.05, compared to previous guidance of $2.53 to $2.57.

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

And our first question comes from Matt Miksic of Barclays.

Maybe first, I think it's the topic that we talk most about when we do talk about InMode is the major factors that have been most challenging for you in the last 6 to 9 months, financing delays and the end market demand. If you could just talk about that confidence.

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 improvements and anything that you can give investors on 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 lease of five years. The interest rate today on lease financing has reached very high rates, something like 14% to 15%. And that's something that causes delays in the decision of the doctors. We were under the impression that maybe in the second half of the year, interest rates will go down and the interest rates on lease packages will go down as well. But in the last months, what we have seen in April is that inflation in the United States is starting to rise again and the announcement of the Chairman was that he doesn't know when he will start cutting down the rate. Therefore, we are not sure that that will happen in the second half of the year. We hope so. Once the economy starts to grow again, especially when the interest rates go down, then we believe we will start to see another momentum in the medical field. But right now, if we want to focus on 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. That's helpful. And then, while you're waiting for things that you can't control, which some of the things you just described, maybe talk about things that you can control. What can you advance in the next couple of quarters in terms of the new product launches? What can you advance geographically potentially to offset some of the macro backdrop issues that you just described?

Okay. There are basically three venues 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 to share the risk with them and enable them to finance more deals. We did that in the first quarter. It was partially successful. We cannot include all the deals under the pool program, but that helped, because we have a very strong balance sheet and we can share the risk with the leasing company to enable them to finance more deals. And we did that 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 breakthrough technologies on two new platforms. And we believe that some doctors, even if the interest rates are high and even if those platforms are new technology, I would say, users that they will buy the new equipment and that will help a little bit with growth or maintaining the revenue generation in the second and maybe the third quarter. The third venue is, I'm sure everybody knows that in late 2023, we established two new subsidiaries, one in Germany, that also covers Austria, and one in Japan. So these two subsidiaries started to work in the first quarter. It's not at full momentum yet. It takes time to ride the learning curve and build the momentum in those countries. But when we go direct, we recognize the full value of the sales and not just the transfer price, because we are direct. And that also, I would say, helps 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 effect that.

The next question comes from Danielle Antalffy of UBS.

This is Simon Negin on for Danielle. Just want to dig into your operating margin a little bit. It looks like general and administrative expenses ticked up a bit more than expected. Wondering if you could just give some color there.

I don't think G&A was higher than the first quarter of 2023. Our G&A is relatively very low. What went up was the marketing, yes—sales and marketing. And this is because of two reasons. One, when you measure percentage, we did not cut marketing and sales expenses. We continued all the marketing activity and all the sales activity that was planned late last year when we developed the budget or at the beginning of this year. We did not say, 'Okay, we're selling less, we're cutting marketing and sales.' We did not. We did not cut R&D. We continued to do the R&D as we planned at the beginning of the year. So when you—I mean, marketing and sales expenses are combined fixed costs and the commission, which is not fixed cost, but the fixed cost is the same when you sell $80 million or when you sell $120 million. 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, IMCAS in Europe, and the distributor meeting. Therefore, the cost of those marketing expenses are a little bit higher than in a regular quarter. Overall, if you look at the pro forma marketing and sales expenses, 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 again above $100 million 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 minimal invasive usually will 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 a few countries. In all the rest of the countries, we're still selling the regular BodyTite and not the Ignite, or the regular Optimus and not the Optimus Max. But yes, eventually, some of the doctors will prefer to buy the new generation, even if it's a little bit more expensive than to buy the old generation. But there is always a market for the old generation. So we're keeping two lines: the top line, which is the second generation, and the baseline, which is the first generation, which is the BodyTite platforms and the regular Optimus. I believe that it will take at least four to five years before the first generation will disappear or fully cannibalize.

Next question comes from Caitlin Cronin of Canaccord Genuity.

This is George, on for Caitlin. 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 lasting throughout the year? And then more so looking at your guidance, how much of a contribution of these new platforms, these preorders, is kind of accounted in your current guidance numbers?

Okay. 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 preorders. 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 preordered. 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 preorders. Before the end of the year, our business will return to normal. Now remind me the second question?

Yes. Just on the new platforms, like the preorders, 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 preorders of Q1.

Okay. Great. And then just our second question, just any more color you can give on the sales force changes in the U.S.?

Yes, 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 for some of the people that have obviously deserved it and those who will be deserving it. So once the 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 primed for when things bounce back.

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

This is Joseph on for Mike today. Wanted to maybe get an update on the manufacturing facilities. Are you still seeing pressure on delivery times? Or I guess, has that gotten better or worse? What's the labor capacity look like? And I guess how is that affecting the preorder backlog? I just want to gauge how much of this preorder backlog is more or less just demand versus reduced delivery times and manufacturing ability.

Okay. Good. We have two manufacturing facilities in Israel, one in Tiberias and one in a small city called Migdal HaEmek. We're manufacturing all the products in both of them. Every line that we have can be adjusted to every product. So it's a full backup, okay? As for the new platforms, yes, we're experiencing some delays and this is because of the situation in Israel. Everybody knows that in Israel, the army is built from reserve duty. Therefore, some of our employees were drafted for a long time and that created some delays in the manufacturing. But we're catching up right now. We are working two shifts to catch up and create enough inventory to enable us to sufficiently deliver every preorder. But as I said, we don't think it will take one quarter. It will take more than one quarter to fulfill all the preorders. But these orders have already been accepted, and most of them have already been paid. So we are 100% sure that we will deliver 100% of them in the next, I would say, three to six months. As far as the manufacturing facility, we have capacities to double the sales. Last year, we manufactured more than 6,000 systems. If necessary, we can bring the production level or the production capacity to 10,000 without adding any capital equipment—it's only to run the production line more than one shift. So as far as the logistics and the purchasing of components, there were no problems, just a little delay because of logistics issues due to the war in Israel. Other than that, we are building a safety inventory to ensure that the production line will never stop. So we're working on that 24 hours a day. Even with the war that has been ongoing for more than six months, we have successful deliveries. The only thing we did not deliver on time are those preorders, but we can assure the investors that all of these orders will be shipped within the time frame that I specified before, and we will get back to normal.

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

Absolutely. Let me start with the Ignite, okay? The Ignite is a full surgical platform. What do I mean by full surgical platform? The Ignite can handle the BodyTite, the FaceTite, what we call the first generation, but with higher energy because we improved the handpieces. But that's something we did to ease the process and make the treatment faster. In addition, we have developed new handpieces, which, instead of 2 cannulas, they have only 1 cannula, and the bipolar RF is in the tip of the cannula. That makes the doctor more flexible to reach any part of the body, much easier than with the regular RFAL. In addition to that, these platforms will include two new Morpheus handpieces, one for the face and one for the body. The Morpheus is now called the Morpheus8 Burst, and it is a new generation technology. You can go to any depth you want, you can pulse at any depth, up to three in every punch of the skin. You can determine the level of energy at every depth. For example, you can go to 7 millimeters, deliver 50% of the energy, go up to 5 millimeters, deliver 30% of the energy, and go up to 2 millimeters deep in the skin and deliver 20%, altogether 100%. This is another technology that we developed. The Morpheus8 Burst handpieces for the face and for the body, with 24 pins or with 40 pins, are able to use these two technologies, which we call Burst and Scale. This is one platform, which we believe is a breakthrough technology; it's something that nobody has done before, well protected, and covered by patents for 25 years. Although I have to say that nobody has tried to infringe our radio frequency-assisted lipolysis, the BodyTite patent, since the beginning of commercialization in the United States. The second platform is the Optimus Max. Basically, the Optimus Max has a new design, much nicer than the regular Optimus, with an adjustable screen, and handpieces that look a little bit better and different. The IPL handpiece has 25% more energy. But this platform is designed to be able in the future to handle some other handpieces that we're developing now, which the regular Optimus cannot. This is another platform which is new. As I said before, we do not think that these two platforms will cannibalize the first generation, meaning the Optimus Max will cannibalize the Optimus, or the Ignite will cannibalize the BodyTite. It will be over and above. Every doctor who wants to do more with the Morpheus will need to buy one of these two. He cannot use the new Morpheus handpiece on the old generation platforms, so that will push the doctors to have two or more different platforms and that's good for us. We are now launching them in the U.S. and working on regulations in Canada, Europe, Asia, and other territories. It will take time. For example, in China, it takes 2 to 3 years to get the new platforms on the market; in Brazil, ANVISA, it can take about 1 year to 1.5 years, and we just started. Therefore, it will take a few years before these two platforms are commercially available in all the countries, 96 countries, we are selling today. It’s a process; it’s medical equipment, it’s not fire and forget. You need to train, you need to create clinical data, and you need to have training centers. It’s a process that takes a few years before the full capacity of those platforms will be utilized. Did I answer your question?

Absolutely, yes. That was all very helpful. Maybe just one more. I think I heard you discuss that they—providing loans for certain customers using your cash balances has been going well, more or less...

No, no. That's not what I said. I didn't say that we're providing loans. I said that we had an agreement with leasing companies to help them limit the risk, by creating a pool of money that in some few cases can help the leasing company to enable them to take more risks in the deals they're helping to finance. I didn't say that we are financing the customers. We are not. We are not a bank.

This is Yair. We put together some programs, risk-sharing programs with some leasing companies in which—we take a fraction of the risk, and in return, they are willing to provide faster approvals and basically go deeper in terms of the credit profile of our customers.

Okay. Yes. Okay. That makes much more sense then. 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 Mizrahy for any closing remarks.

Okay. Thank you, everybody. Thank you, everyone, for joining us. I want to thank all the InMode employees all over the world for continuing to work with us. I want to especially thank the Israeli team that works days and nights during the challenging time that we are having today and maintaining all the activities that this company is performing. Thank you again and we'll see you again in August.

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