Earnings Call Transcript - INMD Q1 2023

Operator, Operator

Good day, and welcome to the InMode First Quarter 2023 Financial 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'd now like to turn the conference over to Miri Segal, CEO of MS-IR. Please go ahead.

Miri Segal, CEO of MS-IR

Thank you, operator and to everyone for joining us today. Welcome to InMode’s first quarter 2023 earnings call. Before we begin, I would like to remind our listeners that certain information provided on this call may contain forward-looking statements, and the safe harbor statement outlined in today's earnings release also pertains to this call. If you have not received a copy of the release, please go to the Investor Relations section of the Company's website. Changes in business, competitive, technological, regulatory, and other factors could cause actual results to differ materially from those expressed by the forward-looking statements made today. Our historical results are not necessarily indicative of future performance. As such, we can give no assurance as to the accuracy of our forward-looking statements and assume no obligation to update them, except as required by law. With that, I'd like to pass the call over to Moshe Mizrahy, Chairman and CEO. Moshe, please go ahead.

Moshe Mizrahy, Chairman and CEO

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. We reported revenue of $106.1 million in the first quarter, an increase of 23.5% compared to the first quarter of 2022. Sales from consumable and service continued to grow in the first quarter and Shakil will go over that in more detail shortly. I would like to take the moment to recognize that 15 years ago, we started this company with a small investment of just $3.5 million and an idea that with bipolar RF technology, our expertise, and knowledge of the aesthetic industry, we can disrupt the industry and help close the treatment gap. We have been accomplishing this by providing remarkable and lasting results for patients. We are working closely with leading plastic surgeons who have endorsed our safe FDA approved technology. Today, we can say that InMode is the leading global provider of innovative minimally invasive aesthetic and wellness solutions operating in 92 countries with seven patented technologies across 10 product families and an installed base of over 8,400 platforms in the United States and over 18,300 systems globally. We are proud to recognize this 15-year anniversary as we announced a strong start to the year. We would not reach these solid consistent results without the dedication and hard work of our employees, and I would like to take the opportunity to thank them for their commitment and care. Last year, we successfully introduced the Envision platforms in Canada. Envision has innovative technology targeted for the ophthalmology and optometry markets, and we expect to launch these platforms in the U.S. in the coming months. As we mentioned last quarter, the next generation Evoke, our hands-free platform for face treatment, is planned to launch in the second half of this year and we look forward to updating you all on this progress. Now, I would like to turn the call over to Shakil, our President in North America. Shakil, please.

Shakil Lakhani, President in North America

Thanks, Moshe and everyone for joining us. We are happy to report a strong first quarter with significant growth coming from consumable sales. Revenue from consumables and service grew nearly 43% year-over-year. This is a strong indicator that the platforms we sell are being used more frequently, signifying continued positive demand and momentum. Our Morpheus A platform continues to gain traction and benefit from our brand ambassadors, strong market awareness, and positive patient results. As Moshe mentioned, we'll continue our strategy to expand into new areas of wellness such as ophthalmology and optometry markets with our Envision platform. We've begun to hire focused sales representatives for Envision and we gradually expect to establish a dedicated sales team for this market and for the women's health and wellness market in the future. Lastly, I'd like to thank our entire North American team for their continued hard work. I'll now hand over the call to Yair for a review of the financial results in more detail. Yair?

Yair Malca, Chief Financial Officer

Thanks, Shakil, and hello everyone. Thank you for joining us. Starting with total revenue, InMode generated $106.1 million in the first quarter of 2023, representing a 23.5% year-over-year increase with a gross margin of 83% on a GAAP basis. Traditionally, based on past seasonality, our first quarter is the slowest quarter of the year. We expect 2023 to behave in a similar way to last year. First quarter sales outside of the U.S. accounted for $43.8 million or 41% of sales, compared to 38% in Q1 of last year. We see growth coming from different regions with sales in Europe hitting a new record in Q1. We are planning to establish at least one additional subsidiary in Europe or Asia later this year. To support our operations and growth, InMode now operates in a total of over 90 countries, with a sales team of more than 236 direct representatives and over 81 distributors worldwide. Capital equipment in the first quarter represented 81% of total revenue while consumer business service revenues accounted for the remaining 19%. GAAP operating expenses in the first quarter were $46.8 million, a 30% increase year-over-year. Sales and marketing expenses increased to $41.7 million in the first quarter compared to $30.8 million in the same period last year. This increase is attributed to the addition of new sales representatives as well as investment in direct-to-consumer advertising campaigns and hosting in-person events to support the company's growth projections. Share-based compensation accounted for $4.2 million in the first quarter of 2023, an increase compared to $3.1 million in the first quarter of 2022. On a non-GAAP basis, operating expenses were $43 million in the quarter, compared to a total of $33.4 million in the same quarter of 2022, representing a 29% increase. GAAP operating margin for Q1 was 39%, compared to an operating margin of 41% in the first quarter of 2022. Non-GAAP operating margin for the first quarter of 2023 was 43%, a slight decrease from 44% in the first quarter of 2022. GAAP diluted earnings per share for the first quarter were $0.47 compared to $0.36 per diluted share in Q1 of 2022. Non-GAAP diluted earnings per share for this quarter were $0.52 compared to $0.40 per diluted share in the first quarter of 2022. Once again, we ended the quarter with a strong balance sheet. As of March 31, 2023, the company had cash and cash equivalents, marketable securities and deposits of $574.5 million. This quarter, excluding a one-time tax payment of $15 million, InMode generated $36.1 million from operating activities. Before I turn the call back to Moshe to take your questions, I'd like to reiterate our guidance for 2023. Revenues between $525 million and $530 million, non-GAAP gross margin between 83% and 85%. Non-GAAP income from operations between $236 million and $238 million. Non-GAAP earnings per diluted share between $2.58 and $2.60. I will now turn over the call back to Moshe.

Moshe Mizrahy, Chairman and CEO

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

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Michael Sarcone with Jefferies. Please go ahead.

Michael Sarcone, Analyst

Thanks and good morning. This is Mike on for Matt this morning. So just the first question on guidance. You had a really strong start to the year, nearly 24% growth in the first quarter, and that was on the toughest comp of the year. Can you just talk about how you think about guidance and some of the key assumptions there? I know you got Envision launching in the U.S. soon and the next-gen Evoke in the second half. So again, just some key assumptions around guidance. Is it fair to characterize the guidance as conservative?

Moshe Mizrahy, Chairman and CEO

Yes. I would say, as always we claim, we try to be very conservative with guidance. Although we did a little bit better than the consensus on Q1 2023, we decided to keep the guidance until the end of Q2 to see how Q2 will be. As you know, there is some seasonality in this business. The first quarter is the slowest one, and the second quarter must be much stronger than the first quarter. If we successfully end the second quarter with expectations that are above the consensus of the analysts, then we will consider increasing the guidance. But on the first quarter, I mean, we did $106 million, compared with $102 million, $101 million consensus estimate. We felt like it would be better and more conservative to stay with this guidance and wait another quarter to see what the situation in the U.S. and in the rest of the world will be regarding the slowdown, recession, increased interest rates, and then we will feel much better to raise the guidance sometime at the end of Q2.

Michael Sarcone, Analyst

Okay. Thanks, Moshe, that makes sense. And then, are you seeing any changes in your customers’ ability to finance the system?

Moshe Mizrahy, Chairman and CEO

No, we don't. Although it's taking a little longer, especially in the U.S., and Shakil will elaborate on that. But in Europe, for example, we signed an agreement with a bank that is helping us to finance customers in Europe, something that we didn't have in the last, I would say, three years, which will make it easier for customers in Europe to finance the system. In the United States, Shakil, do you want to say a few words on that?

Shakil Lakhani, President in North America

Yes, sure. So like Moshe said, we're not seeing too much on that end. We are seeing it taking a little longer than we're used to, just kind of looking at risks, so on and so forth. But right now, we haven't seen that as a prohibitive factor.

Michael Sarcone, Analyst

Got it. And when you say a little bit longer, that's just kind of the selling cycle?

Shakil Lakhani, President in North America

It's not exactly a selling cycle; lenders are just requesting additional documentation from buyers to ensure accuracy. It's not at the level we saw during the financial crisis in 2008-2009, but banks are being more selective about who they lend to. They want to make sure they receive the right information. Previously, you could get a specific amount approved with just a credit application, but now additional documentation may be required. This could extend the process by 12 to 24 hours.

Michael Sarcone, Analyst

Got it. Thank you. And I'll just sneak one more in there. Interesting disclosure in the press release just about the impact of popular weight loss drugs. It was going to be one of my questions, whether you're seeing an influx of loose skin patients. Is there any offset there like when you factor that in, the weight loss drugs, do you expect to see lower demand for liposuction and kind of what's the net impact on demand for InMode procedures that you're expecting?

Moshe Mizrahy, Chairman and CEO

Spero, could you please answer that?

Spero Theodorou, Chief Medical Officer

Sure. That's a great question. On the contrary, weight loss actually helps us because, first of all, we're the skin tightening company, right? So when patients have loose skin, they have already lost the weight; they come to us to be able to tighten that. So what it actually does is increases the number of patients you can do with liposuction, right? They still have some fat pockets or fat areas that need removal. But if you have loose skin, it kind of limits them in the aesthetic result. So adding a tightening procedure in addition to the liposuction capabilities we have increases the size of that market. What the drugs have done is increased awareness. I mean, they use this marketing thing like Ozempic space, right? That's a cool name, but at the end of the day, it's just weight loss and we deal with that, and our plastic surgeons and doctors across the board are always dealing with loose skin. I'll remind you that the holy grail of plastic surgery is the ability to tighten skin without scars. And even though a lot of these patients might end up needing excisional procedures perhaps, if they are depending on the amount of weight loss, we are perfectly positioned to take advantage of this and our clinics have seen a large influx of patients since this has taken off like wildfire. So net, net benefit. Did that answer your question?

Michael Sarcone, Analyst

It does. Very helpful, thank you.

Spero Theodorou, Chief Medical Officer

You're welcome.

Operator, Operator

Our next question comes from Matt Miksic with Barclays. Please go ahead.

Unidentified Analyst, Analyst

Hi, this is Sarah speaking for Matt. Thank you for taking our question. To clarify on the guidance, can we say that there are no specific concerns for the remainder of the year, and it is simply a matter of general conservatism?

Moshe Mizrahy, Chairman and CEO

I didn't understand the question. Do you ask if we see any concern in the market?

Unidentified Analyst, Analyst

Yes, just based on the answer you’ve provided earlier, I just wanted to clarify, is it fair to say that we don't see any specific concerns, and it's just general conservatism in your current guidance?

Moshe Mizrahy, Chairman and CEO

Well, I believe we said it very clearly, we don't see any signs of slowdown, any sign of recession in the market that we operate. Maybe now the market is different. But just because our technology today is in the very embryonic stage. I mean, we have less than 20,000 systems installed and the potential is a few hundred. If you take into account only doctors who are doing medical aesthetics using lasers and others, all of them in the future will need bipolar RF because with lasers they do only topical treatments and if they do body and face reshaping, they will need us. So we don't see any slowdown. On the contrary, I have to say that we sold more disposables this quarter than in the fourth quarter of 2022, and usually the fourth quarter is the strongest one. So we don't see any slowdown. The reason why we did not change the guidance is because we wanted to wait another quarter before we change. We just gave the guidance a quarter ago, and if everything looks according to our expectations in the second quarter, then the guidance will be raised.

Unidentified Analyst, Analyst

Understood, that’s helpful. And then I guess, shifting gears to Empower, just curious on how has that been tracking and if 20% growth in 2023 is still the right way to think about this, or do you expect a bit more acceleration this year?

Moshe Mizrahy, Chairman and CEO

Well, we didn't give any guidance on Empower this quarter, but I can tell you that we sold in the first quarter more than in the first quarter of 2022.

Operator, Operator

Your next question comes from Danielle Antalffy with UBS. Please go ahead.

Danielle Antalffy, Analyst

Hey, good morning, everyone. Thanks so much for taking the question. Just a question, Moshe, on capital allocation. You guys have talked in the past about how to think about potential M&A here. Any updates there on how you're thinking about capital allocation and the potential for a deal to happen sometime this year?

Moshe Mizrahy, Chairman and CEO

Well, that's the $64,000 question, I would say. Yes, we are exploring opportunities, more than one. Some of them, we even spend money to check due diligence, et cetera. One thing I want to say, it's very difficult to find a company that has the same profitability structure as InMode. So any company that we acquire should not dilute the shareholders. It should be accretive and not dilutive. And it's not easy because of the profitability structure of InMode. So we're very careful in the analysis that we're doing on companies that we would like or that we're exploring a possibility to do M&A. I cannot announce anything special today. The only thing I can say is that we spend time, money, management attention, and we're looking for acquisition.

Danielle Antalffy, Analyst

Okay, got it. That's helpful. And then just a question on indication expansion. So Empower is obviously doing well. Beyond that, as we think about stress, urinary incontinence, et cetera, any updates or next steps we should be looking for to measure InMode's progress in making progress there? Thanks so much.

Moshe Mizrahy, Chairman and CEO

InMode against what? Against whom? I don't think we have any...

Danielle Antalffy, Analyst

No, no, no, just whether like anything, any milestones we should be looking for to measure progress in getting those indications we're launching in those markets.

Moshe Mizrahy, Chairman and CEO

I believe we said a quarter ago that we'll be happy and expect to do 20% more on Empower than last year. We're not changing this guidance today.

Operator, Operator

Your next question comes from Dane Reinhardt with Baird. Please go ahead.

Dane Reinhardt, Analyst

Hey, good morning, guys. Thanks for the questions. Just wondering if you can maybe give any more color on the U.S. placements just being up 10%. I think that was a little bit lighter than what you and some other investors had kind of been expecting? So I know seasonality definitely plays a factor; is there anything else there impacting? And I know you have both Evoke and Envision launching later this year. What might we be able to expect for those two contributions to U.S. placements later this year?

Moshe Mizrahy, Chairman and CEO

Shakil, could you please elaborate on that?

Shakil Lakhani, President in North America

Sure. Yes, as far as placements go, when it comes down to revenue, we still had a pretty significant amount of growth. If you're looking at placements again, I'm not sure what model you guys have in place, but we don't see too many economic factors affecting things right now or changing the growth path that we're on. Of course, we anticipate further growth, as I mentioned in the script in building out Envision and a sales force dedicated to that. We do have plans to obviously see some pretty substantial growth. Can't give you a number, really; we're kind of feeling out the market and getting things ready, but we're extremely excited about it and we think there's going to be a nice runway for us.

Dane Reinhardt, Analyst

Okay. Thank you.

Shakil Lakhani, President in North America

I think it was mainly seasonality. It was mainly due to seasonality; Q1 tends to be the slowest in the year and especially, we see this effect in the U.S. So, that's something that I would like to add.

Moshe Mizrahy, Chairman and CEO

It's not something new; it's been like that in the medical aesthetic category or industry or whatever, so I don't think that InMode can change that.

Spero Theodorou, Chief Medical Officer

I think what’s important to outline is that there is a discrepancy between the macro picture and what people are saying and what we're seeing on the ground for demand from patients and doctors. We don’t see any slowdown; the demand is very high. Most of the physicians are booked solidly two to three months in advance. So if there is something that people are concerned about, we're not seeing it, and that’s what we're hearing from all the offices we talked to. I hope that helps.

Dane Reinhardt, Analyst

Okay, yes. Thank you. And then on the Morpheus8 new burst and 3D modes, I know we've been kind of seeing some more competition here in micro needling just over the past year or two with some other competitive launches. So can you just maybe give us a little bit more color on how you believe these new Morpheus8 options and its bipolar designer help differentiate from the competition?

Moshe Mizrahy, Chairman and CEO

I want to discuss our Morpheus8, the only fractional RF technology available, which is well-protected against other micro needling options. Morpheus, as a brand, operates with a bipolar RF device that delivers energy deep into the skin, affecting all layers. This is unlike other micro needling techniques that only target the surface. This difference leads to superior results. As for the 3D mode, we developed it specifically for body treatments, using 40 pin tips to create a larger treatment area. Since the return electrode of the bipolar system is on the skin, we ensured that energy distribution across all four pins is even, preventing any uneven treatment results. While this is a minor adjustment, it provides advantages for doctors and reduces treatment time, but fundamentally, it remains the same Morpheus technology.

Dane Reinhardt, Analyst

Okay, thank you. And then if I can just sneak one last one. And I think every quarter you kind of have given an absolute number of consumables sold. I think last quarter it was like 2,030 and 1,080 the two quarters prior to that. I was just wondering if you could update that for the first quarter.

Moshe Mizrahy, Chairman and CEO

We did 237,000 pieces.

Operator, Operator

Our next question comes from Mike Matson with Needham & Company. Please go ahead.

Mike Matson, Analyst

Yes, thanks for taking my questions. Just starting with Empower, wondering if you could give us an update on where you're at, launching that product outside the U.S., which markets it has been launched in? And then I guess a similar question for Envision, when you do launch that product, will it be first in the U.S., and is that going to follow a similar pattern as Empower outside the U.S.?

Moshe Mizrahy, Chairman and CEO

Okay. The Empower right now is approved only in certain countries. It's approved in Mexico and we're now working in Argentina, not yet in Brazil, which is a big market, and not in other countries in Latin America. We have to deal with these platforms and individual regulatory bodies. In Europe, it's already approved in several countries, but due to the fact that in Europe, the regulation system is changing from what they call MDD to MDR, which I will not try to explain the difference, because it's complicated, we have to go again and do some re-approval in certain countries and we're doing it right now. But in most countries in Europe, we're in the process of introducing it. This quarter it will be introduced by some luminary doctors that we would bring from the U.S. in three main countries, Spain, the U.K., and France. Following that, we will introduce it in Italy. In Italy, it's a special regulation, and we don't have the clearance yet. In Asia, we cleared the system only in one country, which is Australia. Also in India we're starting now. China, Korea, and Japan, the system is not cleared yet from a regulatory standpoint, but it's in process; it takes time. So that's the situation outside the U.S. In Canada, it's already cleared; in the U.S., as you know, we are selling there. As far as Envision, outside the U.S., as you know, we did a soft launch in Canada before we start in the U.S., and the other part of the world, we have not started yet.

Mike Matson, Analyst

Okay, got it. Thank you. And then just within the minimally invasive category, I mean, I know you don't break out detailed sales by the product lines, but you have BodyTite, FaceTite, Morpheus8, probably some other things in there. Are they kind of all contributing equally to the growth, or is Morpheus8 the primary driver there?

Moshe Mizrahy, Chairman and CEO

Well, Morpheus8 is the star, but it's not the only one. We continue to sell the Optimas with all the other handpieces. We have good results in Asia with the body effects, mini effects. We're doing very well with the minimally invasive BodyTite, FaceTite in Europe. Yes, Morpheus is not a platform; Morpheus is a technology, which basically is the handpiece that can go into different types of platforms, and we try to incorporate Morpheus into the platforms that we're developing in order to make everything more attractive. In addition, we're developing combination treatment of Morpheus and Forma, body effects and Forma, body mini effects and plus. So we continue to develop in growing markets with the existing portfolio by combining and by synergizing between the technologies and the handpieces.

Mike Matson, Analyst

Okay.

Spero Theodorou, Chief Medical Officer

Mike, this is Spero. I want to provide some insight. We primarily operate as an aesthetics company, and it's crucial for us to expand our total addressable market. That's the reason we are entering the OBGYN and gynecology sectors, as well as ophthalmology. Our goal is to educate doctors on aesthetics. With Empower, we engage with something familiar to them; they already treat patients with stress urinary incontinence, which gives us a captive audience that isn't accustomed to charging for these services. We then introduce additional technologies to teach them about aesthetics. Our analysis of Morpheus tips in the United States and North America reveals that for every intravascular Morpheus tip used, six are utilized for aesthetic purposes on the Empower platform. This supports our narrative that we enter with something they know and have a pre-existing patient base, which is confirmed by the Morpheus tip data. Additionally, we found that across all accounts, there are 2.5 Morpheus tips used cosmetically for each intravascular tip. It’s important to remember that we are an aesthetics company. The rising use of consumables indicates growing adoption and aligns with our narrative, which we aim to replicate with Envision. Does that clarify things for you, Mike?

Mike Matson, Analyst

Yes, it does. And I guess it's a good point because your platforms have multiple capabilities, so it's a little hard to separate them, I guess, in terms of what's actually driving the growth at least on the terms of platform sales. Got it. Thank you.

Spero Theodorou, Chief Medical Officer

No problem.

Operator, Operator

Your next question comes from Kyle Rose with Canaccord. Please go ahead.

Kyle Rose, Analyst

Thank you for the commentary. I wanted to ask about the discussion regarding weight loss drugs in patients. Should we anticipate increased usage of Morpheus body in BodyTite, or do you think that might lead to more hands-free options given the new products you have coming?

Shakil Lakhani, President in North America

Hey, Kyle. I believe it's going to be a combination of both. As Spero mentioned, the ideal outcome in plastic surgery is achieving skin tightening. Our aim is to equip each physician or surgeon with the right tools to address the specific issues they are treating. If a patient has some degree of laxity, as Spero pointed out, there will still be individuals who have experienced significant weight loss and will require an excisional procedure. We don't intend to diminish that aspect, but we are exploring ways to intervene using techniques like BodyTite, FaceTite, our hands-free technology, or Morpheus8. Ultimately, our responsibility is to provide the right tools for each surgeon or provider so they can select what's necessary to enhance patient outcomes. Does that make sense, Kyle?

Kyle Rose, Analyst

Yes, it's helpful. I think you've mentioned that as you enter some of the wellness or non-core markets, there are plans to potentially expand sales and commercial teams. What is the current status of those initiatives? Additionally, how should we consider those investments throughout the year in relation to your guidance on operating expenses?

Shakil Lakhani, President in North America

Sure. So in terms of distribution standpoint, we're actually already in the process of hiring, as I mentioned. So, we've made several recent hires, some from competitors, some from outside that we’ll bring them and train the InMode way. And we're obviously looking for that to materialize over the next few quarters. Again, as you know, Kyle, you've been following us for quite a while. We like to do things slow and steady to start. We don't like rushing right out the gate. So we want to do it right. We want to do it in a way where it makes sense for reps, to make sense for the company, and at the end of the day, it's going to contribute to the bottom line and top line. So from that standpoint, we look at it that way. I don't see anything major in terms of any extraordinary from what we already do in expanding distribution that's going to lead to any major costs.

Kyle Rose, Analyst

Okay. The last question I have is about the core business and the core commercial team. There is a competitor facing some drama. Is there an opportunity to attract commercial or R&D talent from them? I would appreciate your thoughts on acquiring some commercial talent in the market to gain market share.

Shakil Lakhani, President in North America

Sure. I guess we'll leave them as a secret. No, so we’re...

Spero Theodorou, Chief Medical Officer

Why do you think that is, Kyle?

Shakil Lakhani, President in North America

We recognize that amidst the current chaos, there are opportunities. Therefore, we are being very selective about the individuals we choose to bring on board. We want to ensure they can conduct business in a manner consistent with our values. We are actively seeking top talent and will only bring on the most qualified candidates. Our goal is to help them adapt and learn to operate in alignment with our company culture. We're focused on this effort, dedicating around 30 to 60 minutes to it, but it's not a monumental undertaking. If candidates are exploring new opportunities, we want to ensure we attract the right individuals, providing them with compelling reasons to join us. Ultimately, we want them to embrace our business practices and values.

Kyle Rose, Analyst

Great. Thank you for taking the questions.

Shakil Lakhani, President in North America

Of course.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Moshe Mizrahy for any closing remarks.

Moshe Mizrahy, Chairman and CEO

Thank you, operator. I want to thank everybody for joining us today. I will be happy and I'm sure that everybody will join us next time. Thank you for your time and thank you for all the questions that you asked us. See you next quarter. Thanks all.

Operator, Operator

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