Good day, and welcome to InMode's Second Quarter 2024 Earnings Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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 conference 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 IR 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 Mizrahi, 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 CFO; Shakil Lakhani, our President in North America; our Medical Director and VP of Medical Affairs, Dr. Eran Krieger; and Rafael Lickerman, our VP of Finance. Following our prepared remarks, we will all be available for question-and-answer. I would like to highlight the development of the second quarter. As we previously mentioned in Q1, we launched our two new advanced platforms, IgniteRF and Optimus Max. We are happy to report that we have begun deliveries of both platforms and we believe we are on track to complete deliveries of pre-orders before the end of the year. We are happy to see strong demand and we believe that these innovative platforms that offer several technologies and handpieces will be solid contributors in the coming year. Once again, IgniteRF is the next generation of our legacy RFAL technology, a minimally invasive platform with a new Morpheus8 Burst handpiece and the all-new QuantumRF, a new version of a minimally invasive static surgical procedure in a box. The QuantumRF handpiece has been recently cleared by the FDA. With Ignite, physicians may adjust the depth of the power, allowing for more effective treatment in less time. These features are highly valued by physicians that aspire to shorten treatment time while achieving good results. The Optimus Max is a multi-application platform with Morpheus8, non-invasive RF handpieces, IPL and laser-based treatment. It is the most complicated device we have ever manufactured and it has many features that doctors and patients desire, such as the ability to deliver different energy levels at various depths, allowing for stronger results in less time and with less discomfort. The macroeconomic trend that we discussed on our last call impacted market demand as well as our financial results. The second quarter was a challenging one for us and for the aesthetic doctors. We have seen a major decrease in demand for treatment, mainly in the U.S. Our Israeli team is working on a longer shift to ensure we maintain our commitment to timely delivery. Their dedication and hard work are crucial to our success while maintaining our leadership position in the market. Earlier this month, we were pleased to update that the FDA cleared Morpheus8 for contraction soft tissue, the first and only of its kind. Our Morpheus8 treatment has become the gold standard in aesthetic treatment and our most popular technology. Additionally, the new indication enabled petitioners to expand their patient base. We continue to invest in R&D to provide medical professionals with the advancement they need to deliver the highest quality of care to achieve the best results. On the corporate level, I am pleased to introduce Dr. Eran Krieger as our Medical Director and VP of Medical Affairs. Dr. Krieger joined InMode four years ago. He has 30 years of experience in medical aesthetics and has worked for several Italian and Israeli companies in the field. I would like to thank Dr. Spero Theodorou for his time with InMode and wish him the best of luck in his future. Now, I would like to turn the call over to Yair Malca, our CFO. Yair?

Thank you, Moshe, and hello, everyone. Thank you for joining us. As Moshe mentioned, we launched two new platforms back in Q1 and started selling them on a pre-order basis. Once again, the sales that have not yet been delivered could not be recognized as revenue. Therefore, we continue to provide pro forma results, which add to the non-GAAP results, the pre-order sales and related expenses. We believe that the pro forma results better reflect our business activity during the quarter. Starting with total revenue, InMode generated $86.4 million in the second quarter of 2024. However, pro forma revenue was $102.6 million, which includes pre-orders of new platforms not yet delivered. GAAP gross margin in Q2 was 80%, and non-GAAP gross margin was 81%, while pro forma gross margin was 82%, compared to 84% in Q2 of 2023. In Q2, our minimally invasive technology platforms accounted for 87% of total revenues. Moving to our international operations, second quarter sales outside the US accounted for $40.9 million, representing 47% of total sales, a 17% decrease compared to Q2 last year. In Q2, Europe was the largest revenue contributor from outside the U.S. To support our operations and to ensure our future growth, we currently have a sales team of more than 250 direct reps and 83 distributors worldwide. GAAP operating expenses in the second quarter were $51 million, an 11% decrease year-over-year. Sales and marketing expenses decreased to $45.1 million in the second quarter, compared to $51.1 million in the same period last year. This decrease is due to the revenue shortfall in Q2 of 2024. Next, we looked at share-based compensation, which decreased to $5.2 million in the second quarter of 2024. GAAP operating margin for Q2 was 21%, compared to an operating margin of 42% in the second quarter of 2023. Non-GAAP operating margin for the second quarter was 27%, and pro forma operating margin was 34%, compared to a non-GAAP operating margin of 47% in the second quarter of 2023. GAAP diluted earnings per share for the second quarter were $0.28 compared to $0.65 per diluted share in Q2 of 2023. Non-GAAP diluted earnings per share for this quarter were $0.34 and pro forma diluted earnings per share for this quarter were $0.46, compared to $0.72 per diluted share in the second quarter of 2023, on a non-GAAP basis. Once again, we ended the quarter with a strong balance sheet. As of June 30, 2024, the company had cash and cash equivalents, marketable securities and deposits of $729.2 million. This quarter, InMode generated $42.1 million from operating activities. Regarding our latest share repurchase program, as of today, we successfully completed acquiring all 8.37 million shares at an average price of $17.97 per share. As for future capital allocation plans, we continue to carefully evaluate all options and we will provide updates as soon as we have news to report. Before I turn the call back to Moshe, I'd like to share with you our guidance for 2024. Full year 2024 revenue is expected to be $430 million to $440 million compared to previous guidance of $485 million to $495 million. Non-GAAP gross margin is projected between 82% and 84%, which is the same as previous guidance, non-GAAP income from operations between $150 million to $155 million compared to previous guidance of $169 million to $174 million. Non-GAAP earnings per dilutive share between $1.92 to $1.96 compared to previous guidance of $2.01 to $2.05. I will now turn over the call back to Moshe.

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

The first question comes from Danielle Antalffy with UBS. Please go ahead.

Hi. Good morning, guys. Thanks so much for taking the question. Congrats on the product launches. My question is, I appreciate the guidance you're giving for 2024, but looking ahead to 2025 and how we should be thinking about the evolution of the market here. I mean, it will be off easier comps. Obviously, you'll have these new product launches, which will start getting delivered in the back half of this year. So, to sell-digit growth to double-digit growth, in your mind, a feasible thing in 2025 even if the market doesn't turn around, or do we really need to see that market turn around in order to get back there? Thanks so much.

Hi, this is Moshe. How are you? I believe it will be very – now it's very early to judge what will happen next year. We have two quarters ahead of us. The third quarter, as you know, in medical aesthetics, is usually the softest one, and we believe that the fourth quarter probably will be a strong one following the election in the United States. We're still waiting to see the interest rates go down on lease packages that will enable doctors to purchase more systems and not wait. Right now, it's not happening yet. In addition to that, we need to see how the two platforms that we just launched will succeed in the market. We launched them only in the United States. We still have to launch them also in Europe and other territories. Usually, that's what we do. We started in the US and continue. We all hope that all the changes that we do in the organization and the territories, the two companies that we have established in Japan and Germany will pick up in the second half of 2024 and will be ready in 2025. The plan, I can tell you, if everything goes well and the war in Israel does not escalate, this is a major issue right now for us, as everybody knows. We track that on a daily basis, especially now. All of a sudden, yesterday, most of the airlines discontinued flights to Israel. Hopefully, we will not be short of supplies of all kinds of components in the near future or in the upcoming weeks. There are several elements that we cannot foresee. We need to wait and see what will happen in the third quarter before we can say something strong about 2025.

Okay, that's helpful. I appreciate that. And then just on the margin side of things you guys have been pretty transparent about your willingness to continue to invest even in a tough environment. I guess just how do we think about the potential drivers of margin year going forward – margin improvement easily going forward into 2025? Are these new platforms accretive to margin, dilutive to margin, in-line, any color there? Thanks so much.

Every product that we develop and every platform that we develop and every handpiece that we develop is designed from the beginning, and we calculate what the margin will be. We will never develop a product that on the drawing board shows a 60% or 65% gross margin. Everything that we do relates to margin. We design the product so the margin will be high. As you can see, even when the sales go down because of many reasons – microeconomics, less demand for treatment, which we now see in the United States and the war in Israel – everything in the design phase is planned, and we continue to invest in R&D. Everything is intended to maintain a high margin, and that's the philosophy of the company.

Understood. Thanks so much.

The next question comes from Caitlin Cronin with Canaccord Genuity. Please go ahead.

Hi, everyone. Good morning. Thanks for taking the questions. I guess just maybe if you could provide some more color on why the environment was so much worse versus the prior quarters. Was it really just this deterioration in patient demand? And then on that point, if you noted earlier if interest rates go down but the patient demand remains lower, it would make sense that the providers would still not – would still be hesitant about buying systems. Do you think both of those really have to recover for demand to come back?

Eventually, it will come back. But I know that the regular interest rate, yes, you're right, went down. But the interest rate on lease packages especially for five years the doctors are using lease companies in order to finance the purchase did not come down enough to enable us to sell more systems. And eventually, it will come. I don't know when. I believe that it will take some time. The second half of this year is crucial to see what will happen on the demand. Regarding procedures, the way we know that the procedures numbers are coming down is because we sell less disposable. In the United States, we sold 30% less disposable compared to Q2 2023. That's crucial. We're investigating the main reason for that. I believe people are saving money and doing fewer treatments in a time like this. Hopefully, it will go back because aesthetics people want to continue to look nice, and aesthetics will eventually go up again. The technology, the special technology that we are selling will be in demand. Judging by comparing us to some of our competitors, we're still selling, making money, and we still have a positive cash flow. Although it's a tough time, we keep all the employees. We don't lay off or fire people right now because this is the asset of the company. Hopefully, everything will get better and we will continue the momentum.

Got it. That makes sense. And then just pushing a little further your lowest guidance further than the Q2 myth. Is that really just to reflect conservatism into the back half of the year?

Conservatism on what? I didn't understand the question.

You lowered the guidance, which appeared further than the Q2 myth. So just wondering if you are just being more conservative with your guidance into the back half of the year?

I understand the question. Thank you for repeating it. We're always conservative on the guidance, always. I mean, we changed the guidance because the revenue in Q2, which is usually a strong quarter, was not good enough. We were not satisfied with the numbers that we showed. In the two quarters on a pro forma basis, we did something like $196 million. To meet the $230 million or $240 million target, we still have to make $240 million in the next two quarters. As I said before, the third quarter is usually a slow one because it's summer and people do fewer treatments during the summer. We hope we will do well in the third quarter compared to the typical numbers of the third quarter. If that is the case we will be, I don't want to say absolutely sure, but we will be encouraged to show that the fourth quarter will be strong. Then we will meet the $240 million needed to reach the $440 million guidance.

Understood. Thanks so much.

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

Thank you. Good morning, guys. A couple questions here, I guess, Moshe, you've got about 11,000 almost 11,000 systems now placed in the U.S., almost 25,000 globally. Remind me if any of those systems have been upgraded over the years? And I think the answer is no on that. Are the new systems, Optimus Max and IgniteRF and those kinds of systems, systems that should have upgrade demand in addition to new system demand? Are the feature sets different enough than the older technology in the field? Will you be offering kind of trade-in programs in that? Is that a focus or is it really just focused on new system sales at this point? Thanks.

At this point, we're focusing on new system sales, but as we have stated more than once, the Ignite is our second technology for minimally invasive RF. It's a little bit different from the BodyTite, FaceTite, and NeckTite. It is not exactly replacing them because it's working with a different technology. So I believe that doctors who have BodyTite, FaceTite, and NeckTite systems, which they are happy with, will buy the Ignite as well in order to have a comprehensive opportunity for different indications. Regarding the Optimus Max, as you remember we had the Optimus before the Optimus Max, but the Optimus Max has different handpieces with slightly different energy levels and is more user-friendly. Yes, in the future we will do some trade-in, but we will not do a program for everyone. The plan is eventually to sell the Optimus Max to all the doctors who previously had the Optimus and have already paid off the original lease, which is between three to five years. So partially it will be a trade-in. Mostly it will be new system sales.

Okay, that's helpful. And then two other follow-up questions, I guess one just on the procedural consumable sales down 30%, it sounds like you said year-over-year in the U.S. Obviously, we saw the global number in the press release. Do you believe that's all just macro-driven? Any indication from the field the doctors are talking to about any kind of conversion to other technologies, share loss, anything there? So that's one question. And then two, your placements this quarter did go up sequentially. And obviously, I know Q2 tends to be a seasonally stronger quarter than Q1. But that sequential increase from Q1 to Q2 was almost a fairly normal increase like we've seen in some past years. Is there anything to read there that, you know, on the margin, you're through the worst of it, or am I being too optimistic there, which I might be? Thanks.

Okay, let's start with the disposables. I said that we see a drop in the disposable in the U.S., but we have some increase in other countries. So we have some offsetting numbers on the total, which were lower than the second quarter of 2023. But the main decline or drop came from the U.S. market. Now, the reason for that, we believe, is macroeconomics. People are saving money because our treatments are not $500 or $300 like regular cosmetic treatments, hair removal, you know, vascular lesion, etcetera. Doctors charge for minimally invasive treatments between $3,000 to $6,000, or even $7,000 per treatment. Therefore, it seems relatively expensive to some people. I believe that drives the downtrend. Additionally, just because, for example, the Morpheus was very, very popular and became the gold standard, we start seeing some Chinese copies on the market with the same name, logo, or label. They claim that this is made by InMode or sometimes even have the same part number. We don't know how they got into the market, especially in Europe, some in Asia, and now we see some in Latin America. I'm sure that there are some in the United States as well. Doctors get confused and make mistakes, buying a $10,000 system instead of a $120,000 system from InMode, believing that it does the same. Finally, they realize that this is a fake. We're trying to fight it and do a lot of legal activity against those companies. We try to stop them from bringing their products into those territories. But it's just because of the success. Therefore, the Chinese copied us and attempted to develop something similar. Sometimes it looks the same, but it's just a pure imitation. Did I answer your question, or did you have another one?

Yes, that raises about five other questions, which maybe we'll handle offline in the callback. But on the sequential increase in placements, that was the question I asked. And, again, I know Q2 tends to be seasonally stronger than Q1. I get that. But the pattern, the increase.

Jeff, I didn't say increase.

The sequential increase in the number of units you placed in the second quarter was higher than the first quarter. I don't want to over-read that and say, oh, that means the market's getting better. But that sequential increase of units placed in 2Q did go up. It did follow a normal pattern. My question is just does that tell us that we're at kind of a little bit better place than we were maybe a quarter ago? Or is that too optimistic of a read? Thank you.

I understand. I mean, the answer relates to the difference between regular recognition and the pro forma results. Sometimes, when a doctor orders an Optimus Max and the deal is closed and financed, and we do not have the Optimus Max, we send them an Optimus regular. It's not the same system, but they can start working with an Optimus. Once the Optimus Max is available, we replace that. Therefore, it creates some confusion on the total systems delivered. I would suggest to look at the numbers in U.S. dollars and not only the total. By the end of the year, everything will be balanced.

Understood. Thank you.

The next question comes from Joseph Conway with Needham and Company. Please go ahead.

Hi, guys. I hope your day is going well. Maybe just one question on the Optimus. You had mentioned that this is the most complicated device you had manufactured at this date. I was just kind of curious about your thoughts on the laser or the IPL market in general, if it's growing more than minimally invasive. If this is kind of an area you guys are going after more. And maybe just a little bit more color, if you could describe what portion of your business, total business, is that laser IPL technology.

I assume you're talking about the Optimus Max and not the Optimus. Am I right?

Yes.

On the Optimus Max, for example, the IPL is much more powerful than the one on the Optimus because we learn how to get more from the same energy level. The Optimus Max has more power in the system itself, so it can deliver more energy. The Optimus Max has different types of software to enable all kinds of new procedures which are not available or not possible on the Optimus. The Optimus Max can handle the two Morpheus8 Bursts with the scale and the burst technologies, which, again, were not often on the regular Optimus. On the Optimus Max, eventually, we will be able to upgrade to other laser systems that cannot be done on the regular Optimus. So, overall, although it seems like the same name, it's a fully upgraded technology with a better way to set up energy depth, etc. It's much more powerful, as I said, and includes new handpieces for Morpheus. The regular handpieces of non-invasive RF like the former remain the same as in the Optimus, but the outside design is a little different. It’s the most comprehensive and complicated system that we have ever manufactured. Look on the Internet to see the system itself and you will realize for yourself. But we believe that there is nothing like that on the market for regular medical aesthetic treatment that is not very invasive. This system eventually will be a very successful one.

Okay. Thanks for that color. And then I guess two more, I'll just ask them together. The consumable and service revenue declined this quarter. It was kind of the first time it declined in our model. Obviously, a tough comp, and you laid out some of the reasons for that. I was curious, though, are the handpieces supply constrained for InMode or is that more focused on the capital equipment? And then just a separate question. In terms of the share repurchase program, 8.7 million shares, is that kind of a target for a potential follow-on or a potential another share purchase program? Would you target that at a similar level or are you guys thinking kind of at a higher level, lower level?

I will start with your first question. Handpieces are part of the system and they're capital equipment. Handpieces are not disposable. Disposables are what you put on the handpiece in order to do the treatment or connect to the system like the BodyTite, FaceTite, or the Quantum so you can do the procedures. So, handpieces refer to laser handpieces, Morpheus handpiece, IPL handpiece, Lumecca, Forma, BodyFX, MiniFX. It is part of the capital equipment. It is not disposable. On your second question, we conducted a buyback of 8.37 million shares, which is exactly 10% of the total outstanding shares that we had. Why is it 10%? Because of some tax issues. If we do more than 10%, we will have to pay, according to the Israeli IRS, dividend tax. They allow us to do, and hopefully they will allow us to continue, but we asked for a pre-ruling from the Israeli IRS, and they allowed us to do 8.37 million shares, which is about 10% of the total shares. If we decide in the future to continue with buybacks, all options are on the table right now. We will ask again, and hopefully it will be approved so we can do some more in addition to the 8.37 million shares.

Okay. Thank you for taking our questions.

At this time, there are no further questions in the question queue. So this concludes our question-and-answer session. I would like to turn the conference back over to Moshe Mizrahi, CEO of InMode, for any closing remarks.

Thank you very much, operator. Thank you, Miri. Thanks to all the employees of InMode in Israel, Europe, North America, Latin America, Asia, and all of our subsidiaries. Thanks to all the distributors in the 96 countries that we operate. Thanks to the shareholders of InMode that have worked with us for so many years. A special thanks to the Israeli team, as I said before, who continue to come to work every day, even if needed, with two shifts a day in order to be able to supply everything, despite the challenges of the ongoing situation. I would like to especially thank them. We'll see you all in the next quarter. Thank you very much.

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