Earnings Call Transcript - INMD Q2 2021

Operator, Operator

Good morning, and welcome to the InMode Ltd. Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Miri Segal of MS-IR. Please go ahead.

Miri Segal, Investor Relations

Thank you, operator, and everyone for joining us today. Welcome to InMode's second quarter 2021 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 direct yourself 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 these 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. Today with us are Moshe Mizrahy, InMode's Chairman of the Board and CEO, who will begin the call with the business update. Then, he will turn the call over to Shakil Lakhani, InMode's President of North America, to discuss our North American operations. Finally, Yair Malca, our CFO, will discuss the financials of the company. With that, I'd like to pass the call Moshe Mizrahy. Moshe, please go ahead.

Moshe Mizrahy, Chairman and CEO

Thank you, Miri, and thank you everyone for joining our second quarter 2021 earnings call. With me today are Dr. Michael Kreindel, our Co-Founder and Chief Technology Officer; Mr. Yair Malca, our CFO; Shakil Lakhani, our President of North America; Dr. Spero Theodorou, our Chief Medical Officer; and Rafael Lickerman, our VP, Finance. Following our presentation, we will all be available for Q&A. For the second quarter of 2021, InMode is happy to report record revenue of $87.3 million, an increase of 184% compared to the second quarter of 2020. Also this quarter, net income on a GAAP basis reached $40.9 million and $43.9 million on a non-GAAP basis. During Q2 2021, sales of capital equipment accounted for 89% of our total revenue. The remaining 11% was derived from consumables and services, representing $9.5 million of total revenue, a 22% increase compared to last year. Quarter-by-quarter, over the past year, InMode has consistently posted sales of record numbers of consumables. From Q2 2020 until today, sales of consumables have more than doubled. This indicates that physicians are successfully adapting our system with greater frequency, paving the way for this segment to continue to contribute to our revenue. This ongoing demand reflects how the minimally invasive aesthetic surgical space is growing. 71% of our revenue was derived from minimally invasive and ablative procedures, 22% from our hands-free devices, and 7% from our traditional laser and non-invasive RF platform. The U.S. continued to be the biggest contributor to our top line, with total sales switching to $56.4 million compared to $24.1 million in the same quarter last year. As part of our growth strategy and following our success in the United States market, we continue to expand globally. This quarter, Asia and Europe were top contributors. Total sales outside the U.S. were $30.9 million, more than triple what we reported during the same period last year. This represents 35% of our total revenue compared to 22% of our total revenue in Q2 2020. Currently, we operate in 68 countries and we expect this number to grow. We generally manage 12 to 15 regulatory projects globally at any given time. Some of these projects go beyond the static and are medically oriented. Presently, InMode's R&D pipeline is comprised of dozens of projects in our traditional areas of activity in aesthetic surgery, gynecology, ophthalmology, ENT, and more. Our newest platform, the Empower, will be launched on August 15. This platform is expected to become the gold standard in women's health and wellness. The Empower will expand our business and mark a major step for InMode into the gynecology market. Based on our successful performance in the first half of 2021, we have updated our full-year 2021 revenue guidance and expect total revenue to be between $305 million to $315 million. In addition, we intend to maintain a non-GAAP gross margin of 84% to 86% for this year. We are continuing to make important progress in our ESG-related activity. Today, we will be publishing our business and commercial ethics, interaction with healthcare professional guidelines, and marketing ethics. All will be posted on our website. Finally, we continue to support the InMode workforce as we comply with all local and regional health and safety regulations to protect the welfare of our employees and customers. Now, I would like to turn your attention to Shakil, our President in North America. Shakil?

Shakil Lakhani, President of North America

Thank you, Moshe and hello everyone. Once again, we delivered a record performance in the second quarter with exciting developments on several fronts. Strong sales from capital equipment drove revenue for the quarter to $87.3 million. Consumables and services continued their consistent upward trajectory. In light of lockdown limitations being lifted, North American physicians returned to some semblance of normal capacity, and we were able to treat more patients at a given time. This had a direct impact on consumer demand and ultimately more patients returned to physician offices seeking our treatments. We continue to see physicians adopting our platforms frequently and successfully. Moreover, pent-up consumer demand and industry trends in the aesthetic space enabled InMode to offset much of the market's post-pandemic deficit. As these demands and trends materialize and strengthen, consumers are seeking previously delayed treatments. During this time, our Salesforce has exceeded expectations, and we played a major role in transitioning the company to a new normal. We plan to reinforce our growth by hosting a number of in-person events throughout the year. These events provide an opportunity to educate the medical and wellness community on the variety of InMode's minimally invasive and hands-free applications. As Moshe mentioned, we will be launching our women's health and wellness platform Empower, which we're confident will be a one-of-a-kind technology in the market. Finally, we commend our North American team for their continued impressive performance, and we appreciate their loyalty, dedication, and hard work. Their efforts were pivotal in helping us achieve another strong quarter. Now, I'd like to hand over the call to Yair for review of the financial results. Yair?

Yair Malca, CFO

Thanks Shakil. Good day everyone. Total revenue in the second quarter of 2021 increased 184% year-over-year to $87.3 million, with a gross margin of 85% on a GAAP basis. The increase in revenues was primarily due to the impact of the global COVID-19 pandemic, which significantly reduced economic activity and caused shutdowns in the U.S. in Q2 of 2020. Highlighting significant growth in each of our segments, year-over-year minimally invasive and subdermal ablative technologies grew 247%, hands-free platforms increased by 64%, and laser and non-invasive grew 397%. In addition, international sales continued to significantly increase year-over-year, as we successfully implement our U.S. growth strategy across the globe. Geographically, we saw the highest growth rate in Asia and Europe, which increased by 253% and 467% year-over-year, respectively. Our capital equipment accounted for 89% of our revenue, while consumables and service revenue were 11%. GAAP operating expenses in the second quarter of 2021 totaled approximately $33.1 million, an 84% increase from the second quarter of 2020. Sales and marketing expenses increased 97% in the second quarter of 2021 compared to the second quarter of 2020. Stock-based compensation increased to $2.9 million in the second quarter of 2021 compared to $1.2 million in the second quarter of 2020. On a non-GAAP basis, operating expenses totaled approximately $30.4 million in the second quarter of 2021 compared to operating expenses of $17 million in the same quarter of 2020, an increase of 79%. GAAP operating margin was 48% in the second quarter of 2021 compared to 26% in the second quarter of 2020. Non-GAAP operating margin in the second quarter of 2021 was 51% compared to 30% in the second quarter of 2020. This increase derived primarily from the interruption of the sales cycle in April and May of 2020 due to the COVID-19 pandemic, while the company continued to incur non-variable sales and marketing expenditures during those months. In addition, the company's accelerated growth increased profit more than operating expenses, which translated to higher operating margin for the quarter. Also in the second quarter of 2021, marketing activities were lower than expected in some regions due to public health restrictions prompted by the COVID-19 pandemic. GAAP diluted earnings per share in the second quarter of 2021 were $0.95 compared to $0.21 per diluted share in the second quarter of 2020. Non-GAAP diluted earnings per share in the second quarter of 2021 were $1.02 compared to $0.24 per diluted share for the same quarter of 2020. We completed the second quarter with a strong balance sheet. As of June 30th, 2021, the company had cash and cash equivalents, marketable securities, and deposits of $332.9 million. On the cash flow front, the company generated $46.8 million from operating activities for the second quarter of 2021. With that, I will turn the call back over to Moshe.

Moshe Mizrahy, Chairman and CEO

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

Operator, Operator

We will now begin the question-and-answer session. Our first question today will come from Travis Steed with Barclays. Please go ahead.

Travis Steed, Analyst

Hi. Thanks for the question. Just curious if you could talk about some of the trends of the quarter and how July is shaping up. Just curious to think about how to think about Q3 and the difficult seasonality, particularly in light of your guidance. Looking at the full year guidance and basically the full year assumes about zero to 7% growth in the back half versus the front half, which is well below the 2019 trends. So, I didn't know if that was this conservatism or if you're actually seeing something there on the seasonality part.

Moshe Mizrahy, Chairman and CEO

Well, this is Moshe. I will try to answer the question. Usually going forward, the third quarter is usually the slowest quarter in this business because during the summer, people take vacations and patients do not like to do major aesthetic procedures. So, the third quarter in Europe has a month and a half down vacation, and in other countries as well. So, the third quarter is the slowest one. The fourth quarter is usually the strongest one for several reasons. This is what we have seen in the last 20 years in the medical aesthetic field. As far as visibility, this business is not a backlog business, so we don't have that visibility. We know who we want to approach. We have the budget. We know what kind of marketing activity we're going to focus on this quarter and the fourth quarter. The guidance that we gave, stating between $305 million and $315 million, yes, you're right, it's conservative. We try to be conservative and aim to deliver better numbers rather than provide a number that we may not be able to achieve.

Travis Steed, Analyst

Do you think the Q3 revenue dollars will be able to grow versus Q2? Or do you think they're going to be down versus Q2?

Moshe Mizrahy, Chairman and CEO

I don't know now. It's just the beginning of the quarter. We're not even one month into the quarter. And I don't know. We are growing overall. In 2000, the third quarter was stronger than the second quarter, but this was because of the situation with COVID. In the second quarter of 2020, during the months of March and April, most doctors around the world, not just in the United States, closed their clinics, and we had revenue for only one month. Therefore, the third quarter, once the clinics opened, was stronger than the second quarter. However, 2020 is not a typical year as far as seasonality. What will happen this year? I cannot say. We're doing our best to perform better than the second quarter, but it all depends on how the markets behave and, of course, the seasonality in the aesthetic business.

Travis Steed, Analyst

Okay. And last question, I'll jump back in the queue. That's on the hands-free products, which looks like as a percent of the U.S. revenue peaked in Q2 of last year around 46%. Now we're down to about 29%. Just curious how you think about the hands-free growth moving forward? And if you could give a U.S. versus OUS installed base number total, that'd be great too. Thank you.

Shakil Lakhani, President of North America

Yeah, Travis. So, we do see it actually continuing to be a strong portion of the segment. As we mentioned, we do have Empower coming out, so of course, it's not going to be a cannibalistic technology in any way. However, I still see hands-free being a main driver. Yair, if you want to jump in and answer the question regarding the installed base, that'd be great too.

Yair Malca, CFO

Sure. Absolutely. We have 9,150 units installed worldwide, of which 4,650 are in the U.S.

Travis Steed, Analyst

Thank you.

Operator, Operator

Our next question will come from Matt Taylor with UBS. Please go ahead.

Matt Taylor, Analyst

Hi, guys. Thanks for taking the question and congrats on a nice quarter. I guess the first one, I just wanted to see if I could get more color on the quarter. We've gotten used to good results from you, but this was a particularly strong quarter, and I wanted to know if there's anything special that happened. Were there any big orders or new countries, or was this just the continuation of momentum that we've seen building here?

Moshe Mizrahy, Chairman and CEO

Well, Matt, hi. This is Moshe. I think it's a combination of everything that you mentioned. We had a strong quarter in several countries. The leading countries were Korea, China, where the market is starting to open, and Russia. I would say that even the U.K. was very strong this quarter, in addition, of course, to the U.S. and Canada, along with two countries in South America, Brazil and Mexico, where we performed better than expected. Overall, the good news is that outside the U.S., we are growing faster than what we foresaw and faster than our projections. But overall this quarter was strong because I believe the market is open due to the fact that in most countries, people start to understand that they have to live with COVID and business is returning to normal. In the United States, I will ask Shakil to answer and explain how we did and what was the main reason.

Shakil Lakhani, President of North America

Yeah, Matt. So, thanks for the question. I do think that particularly in the U.S. and Canada, we saw the same kind of demand that we had seen in Q2, but we've also seen that a lot of the training that we've done as a group has really started to pay off. A lot of our teams set up throughout the country have been working synergistically to get to the point where we now have a very, very solid force, and we're still growing that, which is great. We also did see some of the in-person events that I mentioned earlier, which was a very big driver for this success, and we do have that back-loaded into Q3 and Q4 as well. So, I think that'll be a nice cushion to help us reach the next level.

Matt Taylor, Analyst

Okay. Thanks for that. And I think we're all anticipating the Empower launch here in ophthalmology. I was wondering if you could discuss A, commercially, how should we think about those launches? How quickly can they ramp versus being gated by training or the need for new ophthalmologists, especially in new call points? And then, can you discuss any data that you've seen around the different packages within Empower in ophthalmology that we can consider in terms of effectiveness for different indications?

Shakil Lakhani, President of North America

Yeah. Sure, Matt, I'll let Spero jump in on the second part of the question, but with Empower and the ophthalmology applications, we've always prioritized getting our technologies into the right hands. We've established proven technologies. We’re not looking to rush this launch; thankfully, we're in a position where we don’t need this product to keep growing. But it does create a huge opportunity because the women's health and wellness market has been neglected for quite some time, and we see a huge window for growth. As for training, it'll be the same as with all our other technologies. We have thought-leaders already working with it, and they're very enthusiastic about what they're seeing so far. So, overall, we are not rushing into this but expect it to contribute positively to numbers in Q3 and Q4.

Spero Theodorou, Chief Medical Officer

Sure, Matt, good to hear from you. Thanks for your question. I think it's important to note that, just like in plastic surgery, we have set the foundation differentiating ourselves within the RF community. Bipolar technology is far superior to unipolar devices, which the market used before. Our first study was published recently, showing a statistical difference between bipolar and unipolar. We believe that our technology offers a far more effective and targeted treatment. We're seeing positive responses from study group patients, particularly related to symptoms like overactive bladder and vaginal dryness. With our rollout to luminaries, they’re thrilled with the results. We feel confident about our technology and its reception in the market, and we believe there will be continued demand.

Matt Taylor, Analyst

Yeah, that's perfect. Thanks Spero. Thanks, guys. And congrats on a good quarter.

Moshe Mizrahy, Chairman and CEO

Thanks, Matt.

Operator, Operator

Our next question will come from Kyle Rose with Canaccord Genuity. Please go ahead.

Kyle Rose, Analyst

Great. Thank you for taking the questions, everyone. So, I just want to start from a more thematic, big picture question. You have really strong expense control again in the quarter. No surprise there given lower activity from a commercial perspective during COVID. But can you just maybe frame out OpEx expectations on a longer-term basis? You've put up stellar results, despite these restrictions in the pandemic. How have your thoughts towards the spend required for this commercial model changed moving forward? You've established 51% non-GAAP operating margins in this record revenue quarter. How much do you need to continue to spend to drive this growth?

Moshe Mizrahy, Chairman and CEO

Well, this is Moshe. I think the typical P&L is what we're showing. We will continue to maintain an 85% gross margin. However, I have to say that it's becoming more difficult due to various expenses like shipping and logistics increasing significantly. There are also supply chain issues for components around the world. We work around the clock to ensure we have enough components and subassemblies to keep our production line running. However, we aim to maintain a non-GAAP gross margin of 84% to 86%. R&D and G&A will stay the same. We're spending around $2 million a quarter on R&D, which is enough to maintain our pipeline of at least two indications or platforms and two products every year. In G&A, we operate very leanly with $1.5 million to $1.7 million per quarter. The main question is how much we need to spend on marketing and sales. As our business normalizes, I believe we'll spend more on marketing and sales, especially on marketing. We’ve spent less on marketing due to pandemic restrictions, but should expect marketing expenses to be around 37% to 38% year-over-year as we grow.

Kyle Rose, Analyst

Thank you, Moshe. That's very helpful. And then maybe can you discuss, at least within North America, the great growth, how much of that is coming from the historical core market? When we think about plastics and derms, and how much of that is coming from other medical specialties? I know that'll likely change as you launch more therapeutic products moving forward, but where do we stand now with respect to the installed base in core versus non-core?

Shakil Lakhani, President of North America

Great question, Kyle. We started off with a minimally invasive line and we've penetrated the plastic surgery market well. We continue to have strong brand recognition. Consumers are actually requesting our products by name. As we've rolled out hands-free technology and other easy-to-implement solutions, we've seen growth in several different specialties, including dermatology. Once we have those core specialties onboard, we have opportunities with the non-core markets as we introduce our therapeutic devices such as in women's health, ophthalmology, and so forth. The managed care and insurance-based medicine structure adds an opportunity because the overhead keeps increasing. So there's plenty of opportunities for growth in that area.

Kyle Rose, Analyst

Thank you. And just one final question, and I'll keep spreading it around, for Spero. What are you seeing in your patient volumes with respect to demand and waiting lists? Have there been any changes in demand as the economy reopens? Or are patients reallocating discretionary spend towards activities like vacations? Are you still seeing robust demand in your practice?

Spero Theodorou, Chief Medical Officer

No. That's a great question. I'm based in New York City, and considering what's happened here is reflective of big urban cities as well. Our demand is strong. It's really unusual for this time of year, but things are coming in heavy. Last year, the high demand was due to pent-up need. This year, even with travel starting back up, I don't think it's at a critical mass. There are still a lot of people scared and preferring to stay home or not travel. Our demand remains strong. Waiting lists look no different than before, about a month out. Surprisingly, there’s still good demand, and I think it has more to do with staying home. Interestingly enough, a significant percentage of new patients coming in have never had anything done before. This opened the market up and I'm seeing a lot of new confidence.

Moshe Mizrahy, Chairman and CEO

Just to correct what Spero said, the best way to measure our success is by looking at how many disposables we're selling every quarter. We're getting close to selling 100,000 disposables each quarter, just from the surgical aspect of minimally invasive and ablative procedures. Other platforms we manufacture do not need disposable equipment. We're growing about 20% quarter-over-quarter in disposable sales worldwide, which is a good measure of our users' engagement with the systems.

Kyle Rose, Analyst

Thank you very much. It's very helpful. Congrats on another strong quarter.

Moshe Mizrahy, Chairman and CEO

Thank you.

Operator, Operator

The next question will come from Mike Matson with Needham & Company. Please go ahead.

Mike Matson, Analyst

Yeah. Good morning. Thanks for taking my questions. So, just on Empower, there's obviously a large population of OB/GYN. How do you plan to target the ones that are most likely to be interested in a product like this? And then do you have a sense of the fraction of the OB/GYN population that would consider this type of product?

Shakil Lakhani, President of North America

Yeah. So, good question. This isn't the first time many of our North American Salesforce has approached the OB/GYN market; when MonaLisa Touch was launched at Cynosure, a good percentage of people had experience with that launch. This time, we're offering multiple benefits beyond voracious atrophy. We’ll begin with OB/GYNs, urologists, and urogynecologists. The challenge here for them is to convince patients to spend $2,000 on a treatment when their copays are only $30. However, many of these solutions genuinely improve quality of life and wellness. We’ve established key thought leaders to help guide this transition, balancing academia with speakers that can lead discussions.

Mike Matson, Analyst

Okay. Thanks. And then I didn't hear any mention of Envision in the ophthalmology area. I think you were targeting a launch in the second half of this year; is that still the case?

Moshe Mizrahy, Chairman and CEO

The Envision platforms are planned for launch toward the end of the year. We have already received clearances for all the applicators from the FDA and are working on registrations for other countries as well. We expect to launch sometime in November or December, assuming the next wave of COVID does not lead to closing countries.

Mike Matson, Analyst

Okay. Thanks. And then, this is probably a difficult question, but how should we think about market penetration among plastic surgeons for the more aesthetic type products? You've sold many units in plastic surgery, but you still see robust growth. Could growth suddenly slow down unexpectedly due to market saturation?

Shakil Lakhani, President of North America

That's a good question. I think the way to look at it is, regarding market penetration, we've achieved a significant presence among plastic surgeons, but we still have opportunities to grow in dermatology and other non-core markets through our therapeutic new devices. However, the key differentiator for us is that we are not a one-trick pony. We're constantly innovating with various platforms, which allows our Salesforce to customize their approach to practices. Our post-sale team has done a fantastic job ensuring that customers see success with our technology, leading to repeat purchases. Those companies that have become stagnant often are rebranding obsolete technology. We’re not worried about saturation because our ongoing innovation and Dr. Kreindel's ingenuity keeps us ahead.

Spero Theodorou, Chief Medical Officer

Mike, this is Spero. Just to reiterate, the average plastic surgeon typically reaches around 10% market penetration for energy-based devices. That rate has not changed until we started making significant strides. We are committed to establishing these devices as standards of care in clinics. We’re at the start of something big with our RF technology, which comprehensively penetrates the market for various procedures. The fact that we have significant innovations and protection means we have room to grow. Our competition's attempts to develop RF alternatives further affirm RF's market potential. Overall, we are confident about our continued growth.

Mike Matson, Analyst

Okay. That's helpful. Thanks.

Operator, Operator

Our last question today will come from Jeff Johnson with Baird. Please go ahead.

Jeff Johnson, Analyst

Thank you. Good morning, guys. Spero and Shak, maybe I could put some numbers on some of the conversations that just took place. If I look at your 4,650 installed U.S. base, we know there are about 17,000 derm, plastic, and aesthetics in the U.S., suggesting a penetration rate around 25% to 27%. Some of those docs own two platforms, so do you think that penetration is closer to 20% instead of mid to upper 20s? Do you think that penetration can reach 40% or 50% over the next three to five years?

Shakil Lakhani, President of North America

Yeah, Jeff. Good question. When you look at it, our penetration is indeed closer to the low 20% range. However, keep in mind that with 17,000 core specialties, many of them own multiple units, which indicates more runway for growth. We are optimistic about solifications and our mission to enhance these practices and drive continued innovation.

Spero Theodorou, Chief Medical Officer

Sure, Jeff, this is Spero. In terms of the average plastic surgeon, most do both reconstructive and cosmetic surgeries. Our applications in reconstructive areas haven't been capitalized on yet. There's a large opportunity that remains untapped. Couple that with our RF technology being superior, there is enormous demand potential ahead. Looking at the laser industry back in the 1990s, we believe that the RF market has the same potential, and we're focused on developing cutting-edge technology.

Jeff Johnson, Analyst

Yeah. Fair enough. And then last question from me just on the GYN market. Are you seeing some of the SUI data points and overactive bladder? Is that the focus for the new platform? How much do you anticipate off-label use for rejuvenation procedures, and will it appeal to both therapeutic and cosmetic intents?

Spero Theodorou, Chief Medical Officer

That's a great question. We must approach this carefully due to regulatory concerns. While we often see a demand for cosmetic treatments, the focus of Empower will be to address therapeutic needs. However, we definitely treat this innovation as a multifaceted tool with multiple benefits. We always start on the therapeutic side, followed by building a cosmetic argument once the technology is established. With a population of women who could benefit from this, we feel confident that the Empower platform will have a lasting impact in both realms.

Moshe Mizrahy, Chairman and CEO

Thank you, operator. I'd like to thank everyone who joined us today for the second quarter earnings call. I want to express gratitude to all of our employees worldwide. Many of them are likely listening to us today. I also want to thank our investors for their trust and loyalty. Our management team and I look forward to an exciting third quarter. Thank you all.

Operator, Operator

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