Good day, and welcome to the InMode's Third 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 hand the call to Miri Segal, CEO of MS-IR. Please go ahead.

Thank you, operator and everyone for joining us today. Welcome to InMode's third 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 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 pass the call over to Moshe Mizrahi, 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; 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 Q&A. During the third quarter, macroeconomic headwinds continued to impact our performance as reflected in our financial results. A decrease in minimally invasive treatment and a slowdown in platform sales led to less than expected sales in consumables and platforms in Q3, which in turn led us to revise our full-year guidance. We are optimistic about the early endorsement of our two new platforms, IgniteRF and Optimus Max. We hope that as the macroeconomic environment improves, particularly with easing interest rates and faster financial approvals from leasing companies, more physicians will recognize the benefits and efficacy of these new platforms. I would like to elaborate on our decision this quarter to reorganize some aspects of our corporate structure. As part of these management changes, we had to release some members of the U.S. management and replace certain management in the UK, Spain, and France. We believe these management changes are essential for aligning our target market with the right company structure. Additionally, we are segmenting the North American market into separate roles for the U.S. and Canada, allowing us to focus on specific needs in each geographic area. We are making additional changes in the Rest of the World that will better reflect our activities. Finally, regarding the situation in Israel, we want to assure everyone that our top priority remains the safety of our employees. We have overcome challenges related to production, and we take pride in our employees' dedication in working longer shifts to fulfill customer commitments. Now I would like to turn the call over to Yair Malca, our CFO, to review the financial results in more detail.

Thank you, Moshe and hello everyone. Thank you for joining us. Starting with total revenue, InMode generated $130.2 million in the third quarter of 2024, out of which $31.9 million was generated from pre-orders received in the first half of 2024. This leaves us with $98.3 million of net sales received in Q3. GAAP and non-GAAP gross margins in Q3 were 82%. Moving to our international operations, third quarter sales outside of the U.S. accounted for $36.4 million, representing 28% of total sales, a 19% decrease compared to Q3 last year. To support our operations and to ensure future growth, we currently have a sales team of more than 250 direct representatives and 83 distributors worldwide. GAAP operating expenses in the third quarter were $57.9 million, a 2% increase year-over-year. Sales and marketing expenses increased to $51.9 million in the third quarter compared to $50.8 million in the same period last year. This increase was primarily driven by our recent management change costs, higher commissions, as well as additional spending on trade shows and workshops activities in Q3. Next, we look at share-based compensation, which decreased to $4 million in the third quarter of 2024. GAAP operating margin for Q3 was 37% compared to an operating margin of 38% in the third quarter of 2023. Non-GAAP operating margin for the third quarter was 40% compared to a non-GAAP operating margin of 43% in the third quarter of 2023. GAAP diluted earnings per share for the third quarter was $0.65 compared to $0.54 per diluted share in Q3 of 2023. Non-GAAP diluted earnings per share for this quarter were $0.70 compared to $0.61 per diluted share in the third quarter of 2023. Once again, we ended the quarter with a strong balance sheet. As of September 30, 2024, the Company had cash and cash equivalents, marketable securities, and deposits of $684.9 million. This quarter InMode generated $34 million from operating activities. Regarding our second share repurchase program for 2024, as of today, we have acquired 3.2 million shares at an average price of $15.86 per share. As for future capital allocation plans, we continue to carefully review and 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 full-year 2024 revenue to be between $410 million and $420 million compared to prior guidance of $430 million to $440 million. Non-GAAP gross margin is expected to be between 81% and 82% compared to prior guidance of 82% to 84%. Non-GAAP income from operations is projected to be between $140 million and $145 million compared to prior guidance of $150 million to $155 million. Non-GAAP earnings per diluted share remains the same as in previous guidance at $1.92 to $1.96. I will now turn back the call to Moshe. Thank you.

We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster and our first question will come from Matt Miksic of Barclays. Please go ahead.

Hi. Thanks so much. Can you hear me okay?

Yes, we do.

Great. And I just want a question on the full year EPS guidance and understanding the impact of the buyback. You've talked often in the past about investing through this cycle and yet, you know, obviously were able to kind of offset some of the reduction in sales with some element of cost control. So you can maybe talk a little bit about where some of those cost controls are coming through and then I have one follow up.

Well, in Q3 we did not have a lot of, we didn't do any cost cutting or cost control. Actually, we continued business as usual in R&D, marketing, etc. and we did not lay off any employees. In addition, we spent a little bit more on manufacturing due to the war in Israel. So we needed to work overtime, which cost us a little bit more money. I don't think we did any cost control or cost sharing or cost cutting in Q3. This is the structure of our profitability and although it went a little bit down, the gross margin and EBIT, that's natural because of the slowdown and the events in Israel.

Well, it's impressive and congrats on managing through that the end of the year. Maybe just as a follow-up, any color or comments you can provide or thoughts on the potential turn, the timing of a kind of improvement in some of the end markets, particularly in the U.S. in this cycle that we're kind of managing through right now? Thanks.

Well, at the beginning of this year we thought that in the third quarter we would start seeing some relief from the slowdown. But you know, to be honest, unfortunately, we don't see any change in the slowdown, especially regarding the interest rates on lease packages, and we don't expect that in the fourth quarter as well. So I hope that it will start sometime next year. I don't think it will be in the first quarter, maybe the second quarter. We don't know, and we don't want to make any predictions about that because, you know, in the last two quarters' earnings calls we said we believed it would start in the third quarter, but as I said, we don't see it yet.

Thanks so much for the color.

The next question comes from Mike Matson of Needham and Company. Please go ahead.

Hi. Hi guys. This is Joseph on from Mike. If maybe you could give us a little color on how maybe the last rate cuts helped leasing in your business and you know, looking forward into 2025, can you kind of frame us how another rate cut, maybe a similar size would help customers financing or do you think maybe the financing problem is going to be alleviated by multiple rate cuts from here, not just one?

Well, the rate cuts, or the interest cuts, the general ones did not affect yet the lease interest rates, the lease packages that doctors are using to purchase our equipment. It's still very high, and the process takes much longer because leasing companies want to ensure that they are providing financing to the right customers. As we said last quarter, we helped by pooling and sharing some of the risks with the leasing company. But as you can see from the results in the third quarter, we did less than $100 million when the expectation was to go to $104 million, $105 million or whatever, and we did only $98 million, which is less than what we expected. So, I want to be cautious and say that I cannot predict if the interest rates will start coming down sometime early next year. We really don't know.

Okay. Yes, that's helpful. And then I guess maybe around gross margin. How can you guys, or what is your expectation around returning to the mid-80s gross margin? Is that at the current revenue level, is a lot of this being driven by overtime and what have you in the manufacturing facilities? Do you need consumables to really return to growth to get back to the mid-80s?

I don't think we will go to the mid-80s, which is around 85% or 86%. It would be very difficult. I still believe that 80% to 82% is a good gross margin for a company like us, given the size of InMode today. Costs of transportation are increasing. The ongoing war in Israel, which has lasted too long, is not helping us with costs or with the manufacturing process. So going back to 85% may be possible in the future, but we don't see that in the fourth quarter or in 2025.

Okay, thank you very much.

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

Hi, thank you for taking the questions. Just a quick one. Not sure if I heard if you guys said, but if you could just give us the U.S. consumables growth for the quarter, that would be great.

No, on the contrary, we know that consumables in the U.S. went down, not up, and the total was again less than expected. And I said that in my speech because fewer minimally invasive treatments are being performed right now. The reason for that is that our treatments with InMode equipment are relatively expensive, costing thousands of dollars rather than hundreds. We believe the macroeconomic conditions are reflected in that, which did not help doctors to perform more treatments. Therefore, we have realized that doctors in North America are performing 40% less treatments than last year.

Okay, makes sense. And then I think you mentioned in your preannouncement press release about moving some operations away from Israel. Can you provide a little more color on what that means, the timing, when?

Currently, we are manufacturing only in Israel. We have two major facilities and three smaller ones that produce subcomponents, but the two main ones assemble the products. We have to remember that in order to manufacture medical platforms or medical devices, which must be regulated by 27 different regulatory bodies around the world, it's not easy to find a facility that can handle it. We are trying to explore several opportunities with some companies in Europe, mainly in Europe to remain close to us. If we go to China, it's almost impossible to control. Unfortunately, we have no facility that can handle our product with the right regulatory approvals from those regulatory bodies. Therefore, even with the war in Israel, we believe we can manage from Israel. Although it's difficult and there is uncertainty, I agree, but we have no other alternative.

Okay, thanks so much.

The next question comes from Tommy Han of Baird. Please go ahead.

Great. Can you guys hear me?

Yes.

Great. Thanks so much for taking the questions. Your U.S. systems installation number this quarter jumped to 610 versus 350 last quarter. Does that third-quarter systems place number include all of the pre-orders delivered in the third quarter, or were those pre-orders booked in the first half of the year? And could you remind us how you counted the old systems you placed in offices in anticipation of the delivery of the pre-orders? Thanks.

I believe that in the third quarter we delivered all the pre-orders. We don't have more pre-orders to deliver.

Yes, we exclude them from the install base installation in the first half of the year and we include everything in Q3.

As you can see, the total revenue number is $130.2 million, out of which $32 million are pre-orders. The net sales of the fourth quarter, as I said before, was only $98 million less than expected, but we managed to deliver all the rest.

Perfect. Thanks for clearing that up. System ASP also jumped up to $140,000 from $115,000 previously. Were there any one-timers driving that, or have you been able to take price with your new systems? Thanks for the questions.

I mean the new systems, the Ignite and the Optimus Max, just because they are early bird offerings, we can charge a little bit more. We raised prices a little bit, and that helps us improve the price per platform. However, looking forward, it will be difficult to maintain the same price per platform. But we are raising prices slightly on the new platforms, while we cannot raise prices on the current portfolio.

The next question comes from Sam Eiber of BTIG. Please go ahead.

Hi, good morning everyone. Thanks so much for taking the questions here. Maybe I can start on some of the changes to the commercial organization. It sounded more like a realignment and maybe splitting up some territories a little bit differently, but I guess any changes to the go-to-market strategy? Is the selling approach any differently or is it really just a realignment in terms of territories?

Well, it depends. In Europe, we changed management in Spain, the UK and France, and the reason why we changed management in these two countries is that we were not happy with the results and the dedication of the management in those territories. We decided that we needed to change them and we hired new management. I believe that the new management is more dedicated and more eager to succeed. In the United States, it's a little different. In the U.S., we will leave two major VP Sales in place, one earlier in the year and one right now, as well as the President and the Chief Medical Officer, who was replaced with the VP of Clinical Affairs in Israel. The President of North America, Shakil, was with us for almost seven years. He did a great job, and after seven years in the same position, I thought it was necessary to make some changes to realign the organization. So right now we don't have a President in North America. Canada reports directly to me, and the two new VPs for the East and West in the United States also report to me. So actually, in the meantime, I am also the President of North America. I intend to spend at least a week every month in Irvine at our office, visit doctors and work with them to realign the organization. In the meantime, I want to keep it that way. I'm not looking for a President for the United States. Canada will continue to report to me until we determine the exact organizational changes we want to make with the new and current portfolios. It takes time, but we're in the process.

Okay, that makes a lot of sense. And maybe just following up on some of the newer products, we'd love to just hear any early feedback. Maybe you've heard from some of the early customers who adopted IgniteRF and Optimus Max. I guess, how many of these are upgrades versus new customers that are now excited about the new platforms? And I guess just the third part of the question is, are these allowing you to perhaps go beyond the core plastic surgeons that you've typically targeted? Thanks for taking the questions.

Well, the two platforms are different. The first one, IgniteRF, is minimally invasive and ablative platforms mainly for surgeons, plastic surgeons, aesthetic surgeons, dermatologists, and any doctor who can perform surgical procedures. The second platform, Optimus Max, is a platform with different types of handpieces ranging from laser to IPL and also ablative with the Morpheus. We have not done many upgrades yet, or very little. We sold most of them to new doctors or to doctors who wanted a second system. We will be putting together a promotion in the fourth quarter and possibly early next year to encourage upgrades for doctors who currently have the body type that will be replaced with IgniteRF and Optimus, which will be replaced with the Optimus Max.

Really helpful. Thanks for taking the questions.

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

Well, thank you everybody. Thank you to all the shareholders and to all InMode employees in Israel and worldwide. Especially, I want to thank the Israeli employees that, as everybody knows, the headquarters and the two manufacturing facilities are close to the northern border, and the war is ongoing, yet they continue to come to work, and everyone is dedicated so we can continue to serve our customers. I want to thank all InMode customers for their loyalty. I want to thank all the luminary doctors and I look forward to seeing you in the next earnings call. Hopefully, in Israel, it will be a better day.