Earnings Call Transcript - INMD Q3 2020

Operator, Operator

Good day and welcome to the InMode Limited Third Quarter 2020 Earnings Conference Call. All participants will be in 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 good day to everybody. I would like to welcome all of you to InMode's third quarter 2020 financial results conference call. With us on the line today are Mr. Moshe Mizrahy, Chairman of the Board & CEO; Dr. Michael Kreindel, Co-Founder and CTO; Mr. Yair Malca, CFO; and Dr. Spero Theodorou, CMO; and Mr. Shakil Lakhani, President of InMode North America. 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 view it in 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. Moshe will begin the call with a business update and pass it over to Shakil Lakhani, InMode's President of North America, to discuss our North American operations, followed by Yair Malca, InMode's CFO, with an overview of the financials. We will then open the call for the question-and-answer session. I'll now handover the call to Mr. Moshe Mizrahy, InMode's CEO. Moshe, please go ahead.

Moshe Mizrahy, CEO

Thank you, Miri. And thanks to all of you for joining our third quarter 2020 financial results conference call. In this earnings call, we will discuss our third quarter financial results in the context of the COVID-19 pandemic, our strategy during the crisis, and our outlook going forward. We are an international company. With me on the line today, Yair Malca, our CFO from California; Shakil Lakhani, our President of North America in Houston; Dr. Michael Kreindel, our CTO and Co-Founder in Toronto; and Dr. Spero Theodorou, our Chief Medical Officer from New York. In the third quarter of 2020, InMode generated record revenue of $59.7 million, a 49% increase from the third quarter of 2019, a record of $23.9 million of net income on a GAAP basis and $26.6 million of net income on a non-GAAP basis. In Q3 2020, we derived approximately 58% of our worldwide revenue from our surgical platforms engaged in minimally invasive and subdermal ablative treatment, 35% from our recently introduced proprietary hands-free platforms, and 7% from our traditional laser and non-invasive RF platforms. The record revenue in the third quarter was driven by demand for our minimally invasive and hands-free proprietary electrosurgical bipolar RF platforms, which are becoming the standard of care for a variety of surgical procedures. We have proven our organization’s adaptability and innovative leadership during the quarter as we successfully accelerated demand for our differentiated product in the US once COVID-19 restrictions eased. Internationally, we grew our sales rapidly, more than doubling the revenue on a year-over-year basis. This growth was driven by our marketing and sales activity in China, Brazil, Mexico, Korea, and through our subsidiaries in Europe and Asia. The COVID-19 pandemic has shifted our society into a new normal where social distancing and health and safety concerns are here to stay. We believe that InMode clinic-based technologies provide a superior alternative to invasive hospital procedures and will continue to attract consumers and physicians in this environment. This quarter, while we continue to succeed in capturing market share and creating awareness of our technologies and platforms, we also continue to invest in our organization by advancing our research and development capability, diversifying our product pipeline, expanding our sales and marketing team, and progressing our regulatory processes. Additionally, we introduced the groundbreaking Morpheus8 Body technology and Morpheus8 Platforms, which use our innovative RF fractional technology to treat the entire body at many depths. In addition, we were recently granted a patent covering our fractional RF technology. We intend to protect our IP against anyone who infringes our patent. Currently, our R&D pipeline is designed to bring the most innovative products to the aesthetic surgical industry and broaden the market we serve with our technology to address gynecology, ENT, and ophthalmology markets. Going forward, we plan to introduce two platforms into those markets in 2021 and beyond. As we roll out this new innovative technology, we will continue to build our brand and sales force to build interest and demand. Looking back, we are extremely pleased with our decision not to downsize our sales network due to the pandemic crisis, but instead continue supporting and growing our organization for the future. Although the market uncertainties due to COVID-19 are not yet behind us, we remain committed to investing in InMode's future success and are confident that we can continue to build our organization through even the most difficult times. As a mark for that commitment and a strong belief in our value, we announced a share repurchase program of up to 1 million InMode shares in Q3. Considering our successful performance in the third quarter of 2020 and the visibility we have into the rest of 2020, we are increasing our full-year 2020 revenue guidance range to $192 million to $195 million, and we intend to maintain a non-GAAP gross margin of 84% to 86%. Lastly, we continue to protect our employees worldwide and have followed local and regional guidelines to prioritize the health and welfare of our employees and customers. Now, I would like to turn the call over to Mr. Shakil Lakhani, who will go into more detail on our activities in our North America market. Shakil?

Shakil Lakhani, President of North America

Thank you, Moshe. And hello, everyone. We reported a record quarter in North America with surging demand for our minimally invasive and hands-free devices. Confirming our previous thoughts, the fact that our minimally invasive and hands-free technologies could be done in office and adhere to social distancing guidelines to physicians and consumers as restrictions eased. Due to the investment in our sales team along with the dedication of our employees, we were able to keep physicians engaged and excited during the quarantine and ultimately translate the growing interest for our technology into record sales in the third quarter. Building on this growth, we continue to expand our sales and marketing efforts. We believe that we have the right team in place to finish this year strong and strengthen our leading position as we turn to 2021. During the quarter, we were excited to launch the Morpheus8 Platform and Morpheus8 Body, followed by Morpheus8's first technology announced last month. The Morpheus8 Platform is a state-of-the-art workstation complete with dual handpieces and four fractional tips and different micro needle configurations. This provides physicians with a standalone solution for full-body fractional RF treatments. We are also able to go deeper than any other competing technology, which clearly shows InMode's commitment to true innovation. We are following the successful formula we have developed for other minimally invasive solutions and applying that to Morpheus8. We expect Morpheus8 to be a significant sales contributor in 2021. Looking to 2021, we will be preparing our team for the launch of two new additional technologies and continue to be optimistic despite the uncertainties of COVID-19 that still exist. We are very proud of our team's ability to navigate the pandemic so far. We remain focused on the future and further establishing ourselves as leaders and true innovators in the market. Now, let me hand over the call to Yair to review our financial results in detail. Yair?

Yair Malca, CFO

Thanks, Shakil. Good day, everyone. Total revenue in the third quarter of 2020 increased 49% to $59.7 million, with a gross margin of 84% on a GAAP basis. The increase in revenue was driven primarily by the expansion of InMode's direct sales organization in the United States and the continued momentum of InMode's hands-free technology as well as the recently introduced Morpheus8 by the fractional technology. InMode continued to gain traction in international markets, with international revenue growing 109% year-over-year. GAAP operating expenses in the third quarter of 2020 totaled approximately $27 million, a 42.4% increase from the third quarter of 2019. Sales and marketing expenses increased 42% in the third quarter of 2020 compared to the third quarter of 2019. Although no new stock options were granted during the third quarter, stock-based compensation increased to $2.4 million in the third quarter of 2020 compared to $1.2 million in the second quarter of 2020. This increase is due to higher-than-previously estimated vesting of our performance-based options as a result of our record revenue in the third quarter as well as our revised guidance for 2020. On a non-GAAP basis, operating expenses totaled approximately $24.8 million in the third quarter of 2020 compared to the operating expenses of $18.6 million in the third quarter of 2019, an increase of 33.1%. GAAP operating margin was 39% in the third quarter of 2020 compared to 40% in the third quarter of 2019. Non-GAAP operating margin in the third quarter of 2020 was 43% compared to 41% in the third quarter of 2019. This increase in non-GAAP operating margin was primarily attributable to decreased marketing activities in the United States, such as events and conference participation due to restrictions caused by COVID-19. GAAP diluted earnings per share in the third quarter of 2020 were $0.57 compared to $0.42 per diluted share in the third quarter of 2019. Non-GAAP diluted earnings per share in the third quarter of 2020 was $0.63 compared to $0.42 per diluted share in the third quarter of 2019. We completed the third quarter with a strong balance sheet. As of September 30, 2020, the company had cash and cash equivalents, marketable securities, and deposits of $234.3 million. Accounts receivables increased to $16.2 million as of September 30th, driven by higher international sales volume and particularly from Asia where payment cycles for our distributors are longer compared to the United States. During the quarter, we announced a share repurchase program of up to 1 million of InMode's ordinary shares. Our share repurchase program illustrates the confidence we have in InMode's future following the continued success of our new product introductions and growing cash position even in the face of global uncertainty. On the cash flow front, the company generated $30.2 million from operating activities for the third quarter of 2020, driven by the record sales volume. With that, I will turn the call back to Moshe.

Moshe Mizrahy, CEO

Thank you. Thank you, Yair. I believe now we need to go to the Q&A.

Operator, Operator

The first question today comes from Matt Taylor of UBS. Please go ahead.

Matt Taylor, Analyst

Good morning. Thanks for taking the question. Congrats on a good quarter. I wanted to ask you about a couple of things. So, the first one is, you mentioned this decision that you made to continue investing. And it seems like it's paid off for you. I was wondering if you could talk about the commercial organization, how you've added to that, how you plan to add to that over time, given you continue to have this really strong growth.

Moshe Mizrahy, CEO

Hi Matt, this is Moshe. I hope you are well. We will keep investing across various areas. We are committed to our R&D efforts, with around five key projects currently underway. Additionally, we're enhancing our sales team. We launched a subsidiary in France in April, and after a brief pause, we are now expanding the team to build momentum in France and other European markets. Our investment in China is also yielding positive results since obtaining our first CFDA approval. We're actively engaging in marketing despite the limitations, including virtual conferences in South America and China, and upcoming distributor meetings in Asia on December 3. Overall, it's business as usual for us. Even with restrictions compared to normal operations, our R&D has led to a 25% increase in manufacturing capacity, producing over 1,000 platforms in the last quarter. We have no indications of slowing down in our activities, and this trend continues into the fourth quarter. Despite COVID still being a challenge, particularly in Europe with renewed lockdowns in countries like Italy and the UK, we are doing as much as possible to sustain our operations while adhering to local regulations.

Matt Taylor, Analyst

Thanks, Moshe. The other thing I wanted to ask about was the buyback that you announced. You now have over $200 million in cash and securities and I was wondering how you plan to use that. Do you see yourself as buying shares steadily? Is it something that you'd be more opportunistic about? What are your thoughts on capital allocation in general?

Moshe Mizrahy, CEO

We have announced a program approved by our Board of Directors to repurchase 1 million shares. So far, we have made limited progress and have not utilized all the available funds for this purpose. We do not intend to spend the entire $234 million on share repurchases at once; we will first focus on the 1 million shares and may consider additional purchases later, keeping in mind the tax regulations that apply to us as an Israeli company, which differ from those for American companies. However, I can tell you that we do not have plans to allocate or invest the full $230 million at this time.

Matt Taylor, Analyst

Okay. I have one last question. Can you discuss the recent peer-reviewed studies on the safety and efficacy of some of your treatments? Specifically, I’m interested in the Plume study that compared laser and RF treatments in relation to COVID. How significant are these studies, and in what ways could they assist in your marketing efforts and influence behavior?

Spero Theodorou, CMO

Okay. Sure, Moshe. Thank you, Matt. I appreciate the question. The philosophy behind our organization is that most of our marketing spend is actually in backing up our sales force with proper studies, peer-reviewed studies in good journals that the doctors can read and adopt the technology. So, this has been probably the biggest differentiator between us and all our competitors. So, we make a very, very large effort with Moshe's support to get this body of work published and out there. And especially if we're the leader in radio frequency, it's almost something that we have to do as leaders in this space. As far as COVID and the Plume study we did, it's very simple, it's out there now. It's basically comparing our radio frequency technology to lasers. And we know with lasers, it is a very well-established fact, there's plume and there's virus in there. Plume, now, we don't know if COVID is in the skin. However, using Morpheus microneedling, this thing does not exist. The particles are not in the plume or very, very little. So, from a safety purpose, all these, you have to consider. The large number of aesthetic procedures being done right now, we also have to instruct the doctors that not only are we a company that innovates, but we are also a company that takes safety very, very, very seriously. And putting a body of work behind that safety and how we do it and providing this literature to our doctors is probably the best and strongest marketing tool we have. Does that answer your question, Matt?

Matt Taylor, Analyst

Yes. Thanks, Spero. Appreciate that. Thanks, guys.

Operator, Operator

Next question comes from Kyle Rose of Canaccord Genuity. Please go ahead.

Kyle Rose, Analyst

Great, thank you for taking the questions. So, I wanted to ask just a little bit more about what you're seeing in the marketplace. Obviously, a very strong quarter here. So, congrats on that, given all of the COVID headwinds. But maybe help us understand what your customers are seeing in the actual market. Obviously, you're placing a lot of systems, but maybe what utilization for the systems looks like. And then maybe with just the overall market trends you're seeing there: people are traveling less, they're spending less on vacations, maybe they're going out to fewer dinners; is there increased interest in pursuing aesthetic procedures? Are you seeing higher consumer demand? Just trying to understand what the recurring revenue trends look like in the business.

Moshe Mizrahy, CEO

Shakil, why don't you start and then I will add?

Shakil Lakhani, President of North America

Yes, of course. Thank you for the question, Kyle. We have definitely observed what we believe to be pent-up demand. Looking at retail sales for certain items that people usually wouldn’t prioritize, it seems that since people are not traveling, they have some extra disposable income and are beginning to invest in themselves. Initially, we thought this might just be a temporary spike, but we’ve actually seen it continue as things have slowly returned to a sense of normalcy, or what Moshe refers to as the new normal. Many of our clinics are busier than ever, although this isn’t true for all of them, it is a trend we’re noticing across North America. This increased activity allows them to introduce new types of procedures. Our hands-free and minimally invasive technologies have gained significant popularity, particularly with the new regulations in place. Spero, would you like to share your observations from the clinics?

Spero Theodorou, CMO

Yes, thank you, Shak. Absolutely. We're seeing a lot of demand. Can you hear me?

Kyle Rose, Analyst

Yes.

Spero Theodorou, CMO

Yes. So, we're actually seeing a lot of demand. We thought the demand initially was compressed demand for back in the spring and we kind of expected it to sort of taper off in the months of September and October. But these are unusual times and demand has continued. And exactly like Shak said, it's not necessarily everywhere the same, but the continued demand is an aberration because traditionally, in the aesthetic world, usually, September things typically drop off from the more plastic surgery procedures and the mothers usually take the kids back to school. It's a large element of the practices. But we haven't seen that. This is continuing demand. I think it's because of people having what Shak said: definitely have more income and sitting around and not spending on other things, but we've continued to see this demand through this period of time, which is definitely unprecedented. And we welcome it, of course.

Moshe Mizrahy, CEO

I just want to add one thing, which would give you some more detail regarding your question. The only way for us to measure the demand for procedures is by tracking how many disposables we are selling. In our surgical devices, which are minimally invasive and ablative, everything that penetrates the skin consists of one-time disposables per treatment. Last quarter, we achieved record sales of disposables, and this trend has continued into the fourth quarter. We have 6,400 systems already installed worldwide, and we observe an increase every month. There is growing demand for disposables, indicating that doctors are using the system effectively and generating profits from it. If they perform even two treatments per week, they can recoup their investment in the system in less than 7 to 8 months. I believe I have done this calculation before and can certainly revisit it if needed. Each month, we have seen continued growth in disposables, which serves as the best indicator of how the systems are being utilized. Does that answer your question?

Kyle Rose, Analyst

It absolutely does. I appreciate the insights from everyone on that. That's very helpful. The other question I have, before I hop back in the queue, is regarding the international markets and your entry into China. So, it’s a two-part question. First, how has the launch in China progressed? What are your expectations for the period leading up to the end of 2021? Secondly, we've observed an increase in case volumes and some significant shutdowns of procedures in European markets. Could you help us understand how we should consider the international markets as we approach Q4?

Moshe Mizrahy, CEO

Okay. Well, as we said, the international market, what we call outside the US, doubled itself year-over-year in Q3. And this is because of all the regulation processes that we have completed during the last two quarters. As you probably know, in the second quarter, beginning, we started to sell in China after getting the approval for two out of the nine platforms that we have. Not everything is yet approved in China and we started to sell. We have an office in Guangzhou, a subsidiary. We have a distributor in Beijing who are doing a good job in introducing the product and the technology into the Chinese market. And in the third quarter, we grew in China compared to the second quarter. And I believe in the fourth quarter, we will continue the momentum. Other countries that will see some growth are Brazil, although Brazil is under difficult situation today because of the COVID-19. All of South America are in terrible shape today as everybody knows because the leaders in Brazil do not accept that there was a pandemic, but we managed to do a big introduction and virtual conference to many plastic surgeons, especially for the surgical procedures and the surgical platforms. And we started to sell there in the second quarter and we see momentum growth in the third quarter as well in Mexico, as well as in Korea and in Asia. India, although we have a subsidiary there, but the situation is just now getting some improvement from the COVID-19. Europe, you are right, we're experiencing a second wave in Europe, but the third quarter was better than the second quarter and I believe the fourth quarter, although right now, the situation is a little bit more difficult, we have commitment from our subsidiary and distributors to do everything they can, taking into consideration, of course, the situation and the restrictions. But we're not stopping there. Although the second wave is tough in Europe right now and we follow it on a daily basis, but this is not the same as the first wave of COVID-19 because they managed to know how to control it a little bit better. So, what I'm saying is, we're not stopping the development and the activity in any country, not even in Israel where the situation is not the best. And the fourth quarter, I believe, will not be a slowdown; on the contrary.

Kyle Rose, Analyst

Great. Thank you very much for taking the questions.

Operator, Operator

The next question comes from Jeff Johnson of Baird. Please go ahead.

Jeff Johnson, Analyst

Thank you. Good morning, everyone. Moshe, you mentioned a 6400 installed base a few minutes ago. Could you provide the breakdown between the US and international markets? Additionally, it would be great to hear from you or Shak about the Morpheus8 Platform. Given that Evolve and Evoke are performing so well, along with the various Tite platforms, is there an increase in the number of platforms utilized per office? Are we seeing the average number of platforms per office rise from 1.2 to 1.3 to 1.4? How do you foresee that trend over the next year or two?

Moshe Mizrahy, CEO

Shakil, would you answer that?

Shakil Lakhani, President of North America

Yes, sure. So, you're bang on. And we're actually in the process of a few things right now to further enable that. But we are seeing more two, three system, what we call bundle deals that are going in. It's increased. But at the same time, what's nice about it is a lot of these technologies are technologies that they can delegate, that physicians can delegate. And so, with that being said, it allows them to generate passive income versus, say, the minimally invasive where they have to be the ones actually performing the procedure. So, when you combine the two of those together and it's a nice one-two punch, it's a nice return on investment for the physician; the patients get the results that they are very, very happy with. We've heard some great success on Morpheus8 Body so far. Obviously, Morpheus8 for quite some time, but we do see it overall. There are different areas depending on what specialties that we go after. If it's, say, an OB-GYN, while they can start treating people with a Votiva for women's health and wellness, but then at the same time, they might have certain patients that are going to be in a position where they want to have something done with skin tightening. So, the Evoke or the Evolve kind of come into place. So, our team has been very well versed and prepared in terms of how to actually take it to a certain degree where we ensure that the actual physician themselves, it's a good fit for them where they're going to be doing well. And as Moshe said, utilization in consumables has been increasing, which is a very positive sign for us because they're using their devices and our default rates on leases have been minimal, which is extremely good.

Jeff Johnson, Analyst

Thank you. And I know you might not want to share numbers, but can you split that 6,400 installed base US/OUS, if you could anyway? Or Shak, any kind of systems per office number?

Shakil Lakhani, President of North America

I'll let Moshe handle that.

Moshe Mizrahy, CEO

Yes, we can. It's in the presentation that we share with everybody on the IR section. We gave this information. There are 6,400 systems installed worldwide, out of which 3,500 are in the US.

Jeff Johnson, Analyst

Thank you. I guess I missed that. I apologize. And then, Moshe, my last question is if I look now over the last three years, each of the last three years, assuming guidance here is fairly accurate for 2020, you've increased revenue about $40 million to $50 million per year on an absolute basis. I know you're not providing 2021 guidance, but is that how we should think about kind of what the market can absorb each year and kind of how absolute revenue trend should maintain into 2021? Just the typical $40 million to $50 million increase each year?

Moshe Mizrahy, CEO

Well, we have not yet given the guidance for 2021. We will give the guidance for 2021 in the next earning call, which will take place in February, which will be on February next year. But, yes, you can follow the same growth that we had in the last three years or even four years for 50 to 100 to 150 to close to 300 this year and probably will be the same in the next year. Yes, we are introducing the same amount of new products every year or new platforms. And I believe your estimate is right.

Jeff Johnson, Analyst

Thank you, guys. I appreciate it.

Operator, Operator

The next question comes from Asaf Barel Chandali of Oppenheimer. Please go ahead.

Asaf Barel Chandali, Analyst

First of all, again, congratulations on really an exceptional quarter and a strong full-year guidance. Just a couple of questions here. Most of them have been asked. On the pipeline, is there any further color you can give us on either the timing or maybe further color on the use cases for the 2021 launches? And then, where we should be looking in terms of use cases for 2022 onward?

Moshe Mizrahy, CEO

We are unable to provide the specific timing of the new product launch due to regulatory issues, not due to our inability to disclose it. As you know, we will not launch any product until we complete a thorough study to demonstrate safety and efficacy, followed by filing submissions with the FDA and CE in Europe for clearance. This is medical equipment, and we cannot market it without the necessary approvals for the specific medical indications we are requesting. Sometimes, the process takes longer than initially anticipated because the FDA may have additional questions or request more clinical work to ensure safety and effectiveness for our claims. Generally, we aim to release one product in the first quarter if all goes well, and a second platform before the end of the third quarter, around Christmas, or in the fourth quarter.

Asaf Barel Chandali, Analyst

Okay, great. That's helpful. I have a couple of more technical questions. First, regarding the tax rate, should we expect the effective tax rate to approach 11% next year? Any updates on that would be appreciated. Second, on accounts receivable, it might be a minor issue, but since international revenues are now a larger part of the business and are expected to grow, should we consider accounts receivable to be closer to the current levels? Although it's still a relatively low number, it has increased slightly.

Yair Malca, CFO

Yes. I'll take this question. So, as for the tax rate, in 2021, we believe the tax is going to stay pretty much similar to what we've seen in 2020 as our tax exemption expires only at the end of 2021. So, only starting in 2022, we will go up to maybe the 11% to 12% that you've mentioned. Regarding the accounts receivable, yes, it's probably now that international markets started doing much better, it will probably go up. And yes, it might be reasonable to assume that it will remain in pretty much the same level.

Asaf Barel Chandali, Analyst

Okay, I'll return to the queue. Thank you. If no one else has any other questions, I'll ask another. Thank you.

Operator, Operator

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

Moshe Mizrahy, CEO

Okay. Thank you, operator. Thank you, everybody, for joining us for the third quarter of 2020 financial results. Hope to see you in the next conference call. Stay healthy and be safe. Thank you, all.

Operator, Operator

The conference has now concluded. Thank you.