InMode Ltd. (NASDAQ:INMD) Q1 2024 Earnings Call Transcript

InMode Ltd. (NASDAQ:INMD) Q1 2024 Earnings Call Transcript May 2, 2024

InMode Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the InMode First Quarter 2024 Earnings Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to hand the conference over to Miri Seagal, CEO of MS-IR. Please go ahead.

Miri Seagal: Thank you, operator and everyone for joining us today. Welcome to InMode’s first 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 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, InMoode’s of CEO. Moshe, please go ahead.

Moshe Mizrahy: 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 question. I would like to start with a review of development during the first quarter. In the beginning of 2024, we launched our two new and advanced platforms, IgniteRF and Optimus Max. Meanwhile, the macro environment continued to be challenging and we experienced slowdown all through the first quarter. As a result, we decided to decrease our guidance for the year.

We believe that industry headwinds may continue into the second quarter as well. We are excited to see high level of interest and demand for our latest platforms, the Ignite RF and the Optimus Max. Although these platforms accounted for 16% of our sales in Q1, delivery was delayed due to ongoing construction of manufacturing line that led to insufficient inventory levels. All our efforts are focused on fulfilling orders promoting and ensuring that our inventory meets the needs of customers who have already pre-order the new platforms. Let me expand on the new line – on the new line of platforms. IgniteRF is the next generation of our legacy radiofrequency-assisted lipolysis technology and minimally invasive platforms with the new Morpheus8 burst handpiece and all the new Quantum RF handpieces.

Quantum RF handpieces are expected to be FDA cleared in the second half of 2024 and patent protected for 25 years. Optimus Max is multiplication platforms with Morpheus8 burst and non-invasive RF IPL and laser-based treatment. We expect that these two platforms will play a significant role in our growth of our company. Moving to capital allocation, InMode Board of Directors has approved a third share repurchase program up to 8.37 million shares. In addition, we keep all others options on the table, including exploring strategic M&A opportunities, paying dividends as well as additional future buyback. Before I conclude, I am pleased to welcome Dr. Michael Anghel as new Chairman of the Board. Michael has been a board member since 2019. And he has served on the Board of several public companies.

He has significant financial and executive experience, including leading the Discount Investment Corporation Limited in Israel. His executive experience includes serving as the CEO of DCM, a publicly traded company. Dr. Anghel hold BA in Economics and an MBA and PhD in Finance from Columbia University. We look forward to benefiting from his financial and strategic expertise. Finally, regarding the current war situation in Israel and the status of our new platforms, management would like to assure investors that we prioritize the safety and the well-being of our employees and all of our team is safe. In addition, due to the war in Israel, assembly line of the new platforms may take longer to complete and a new platforms delivery maybe pushed to the second half of the year.

Now, I would like to turn the call over to Shakil, our President of North America. Shakil, please.

Shakil Lakhani: Thanks, Moshe and everyone for joining us. As mentioned, InMode is not immune to the headwinds in our industry. However, despite the slowdown, we are pleased to report that consumables and service grew 13% year-over-year and accounted for $22.5 million in Q1. Once again, it’s a testimony to the demand and widespread recognition of the InMode brand. We are excited about the enthusiasm and demand for our new and improved platforms and we believe there will be growth drivers for us going forward. Considering the anticipated slower markets in market demand this year, we have implemented changes within our sales team in North America. We have adjusted our infrastructure to position ourselves for accelerated growth when market conditions improve.

As a global leader in the aesthetic space with the most diversified portfolio, we continue to attract seasoned and accomplished salespeople. Our talented and dedicated team remains pivotal in driving our future success. Once again, 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: Thanks Shakil and hello everyone. Thank you for joining us. As Moshe mentioned, this quarter we launched two new platforms and started selling them on a pre-order basis. While we could not yet recognize the sales as revenue, we decided to provide pro forma results, which add to the non-GAAP results, the pre-order sales and the related expenses. We believe that the pro forma results better reflect the business activity during the quarter. Starting with the total revenue, InMode generated $80.3 million in the first quarter of 2024. However, pro forma revenue was $96 million, which includes the pre-orders of new platforms not delivered yet. GAAP and non-GAAP gross margin in Q1 2024 were 80% while pro forma gross margin was 82% compared to 83% in Q1 of 2023.

In Q1, our minimally invasive technology platforms accounted for 84% of total revenues. Moving to our international operations, first quarter sales outside of the U.S. accounted for $38 million, representing 47% of total sales, a 14% decrease compared to Q1 last year. In Q1, Europe was the largest revenue contributor from outside the U.S. and reached the record third number. To support our operations and to ensure our future growth, we currently have a sales team of more than 248 direct reps and 83 distributors worldwide. GAAP operating expenses in the first quarter were $45.8 million, a 2% decrease year-over-year. Sales and marketing expenses decreased slightly to $39.8 million in the first quarter compared to $41.7 million in the same period last year.

This decrease attributed to the revenue shortfall in Q1 of 2024. Next, we look at share-based compensation, which decreased to $4 million in the first quarter of 2024. GAAP operating margin for Q1 was 23% compared to operating margin of 39% in the first quarter of 2023. Non-GAAP operating margin for the first quarter was 27% and pro forma operating margin was 35% compared to a non-GAAP operating margin of 43% in the first quarter of 2023. GAAP diluted earnings per share for the first quarter was were $0.28 compared to $0.47 per diluted share in Q1 of 2023. Non-GAAP diluted earnings per share for this quarter were $0.32 and pro forma diluted earnings per share for this quarter were $0.45 compared to $0.52 per diluted share in the first quarter of 2023 on a non-GAAP basis.

Once again, we ended the quarter with a strong balance sheet. As of March 31, 2024, the company had cash and cash equivalents, marketable securities and the proceeds of $770.5 million. This quarter, InMode generated $24.1 million from operating activities. Before I turn the call back to Moshe, I’d like to share with you our guidance for 2024. Full year 2024 revenue will be $485 million to $495 million compared to previous guidance of $495 million to $505 million; non-GAAP gross margins between 82% and 84% compared to previous guidance of 83% to 85%; non-GAAP income from operations between $169 million to $174 million compared to previous guidance of $217 million to $222 million; non-GAAP earnings per diluted share between $2.01 to $2.05 compared to previous guidance of $2.53 to $2.57.

I will now turn over the call back to Moshe.

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

See also 20 Most Air Polluted Cities in Asia and The 25 Best Sportswear Brands in the World.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Matt Miksic of Barclays. Please go ahead.

Matt Miksic: Great. Thanks so much. I appreciate taking the questions. Maybe first, I think it’s the topic that we talked most about when we do talk about InMode as the confidence in the direction of travel for things like the major factors that have been most challenging for you in the last 6 to 9 months, financing delays and sort of end market demand if you could talk about just that competence? And then I have one follow-up.

Moshe Mizrahy: You mean, how confident are we on the market demand? I didn’t hear the question.

Matt Miksic: Yes, I’m sorry, competence in – in, the trajectory of stabilization and improvements. And anything that you did, you can give investors on sort of the timing of how to play out this year?

Moshe Mizrahy: Okay. At the beginning of the year, at the beginning of 2024, I believe in the last earning call, I said that we expect that the interest rate in the United States and all over the world will start to come down in the second half of 2024. Most of our doctors are financing there – acquisition of our capital equipment, with the lease of 5 years, a package lease of 5 years, the interest rate today on lease financing, have reached a very high rate something like 14% and 15%. And that’s something that caused a delay in the decision of the doctors. We were under the impression that maybe in the second half of the year, interest rate will go down and the interest rate on lease packages will go down as well. But in the last month what we have seen in April, that inflation in the United States starting to rise again, and the announcement of the chairman was that he doesn’t know where he will start cutting down the rate.

Therefore we’re not sure that – that will happen in the second half of the year. We hope so, once this, one-day economy will start to grow again, especially when the interest rates will go down, then we believe we will start to see another momentum in the medical field. But right now, if we want to focus the second quarter, and maybe the beginning of the third quarter, we don’t see a major change. And I believe I said that in my testimonial. Is that answer your question?

Matt Miksic: Yes, very much. It’s helpful. And then, and so I guess, while you’re waiting for things that you can’t control, which some of the things you just described, maybe a talk, if you could a little bit about, things that you can control, what can you advance in the next couple of quarters, in terms of the new product launches? What are the venues geographically, potentially to sort of offset some of the kind of macro backdrop issues that you’re – that you just described.

Moshe Mizrahy: Okay, there are basically three venues that I will describe. The first one is we’re trying to work with the leasing companies, and work with them to ease the risk of the leasing company, by creating some kind of a pool in order to enable them – in order to share the risk with them, and enable them to finance more deals, we did that in the first quarter. It was successful, partially successful, we cannot include all the deals under the pool program. But that’s helped. Because we have a very strong balance sheet. And we can share the risk with the leasing company in order to enable them to finance small deals. And we did that and I believe we will continue to do it in the second quarter. The second venue is the new platforms that are always what we call the first doctors to buy new equipment.

We came up with two, I would say break through two new platforms break through to technology on two new platforms. And we believe that some doctors even if the interest rate is high, and even if those platforms are new, all kinds of technology, I would say users that they will buy the new equipment. And that will help a little bit the growth or maintaining the revenue generation – generating revenue in the second and maybe on the third quarter. The third venue is I’m sure everybody knows that in 20 – in the late 2023, we have established two new subsidiaries, one in Germany, that cover us too, as well, and one in Japan. So these two subsidiaries started to work on the first quarter. It’s not on a full momentum yet it’s take time to ride on the learning curve and build the momentum in those countries.

But when we go direct, we recognize the full value of the sales, and not just the transfer price because we’re direct. And that’s also I would say a help to increase the top line. Other than that, I don’t think we can do something that might change the macro economics. I believe we’re too small to do something like that.

Matt Miksic: Yes, of course. Thanks so much for the color.

Operator: The next question comes from Danielle Antalffy of UBS. Please go ahead.

Unidentified Analyst: Hi, everyone. This is [indiscernible] on for Danielle. Just want to dig into your operating margin a little bit. It looks like general administrative expenses ticked up a bit more than expected wondering if you could just get some color there.

Moshe Mizrahy: I don’t think G&A was higher than the first quarter of 2023. Our G&A is relatively very, very, I would say slim or very, very low. What went up was the marketing as marketing and sales and marketing. And this is because of two reasons. One when you measure percentage and we did not cut marketing and sales expenses, we continue to do all the marketing activity and all the sales activity that basically was planned late last year, when we develop the budget or the beginning of this year. We did not say okay, we’re selling less we’re cutting marketing and sales. We did not – we didn’t cut R&D. We continue to do the R&D as we plan in the beginning of the year. So when you are marketing and sales expenses are combined fixed cost and the Commission, which is not fixed cost, but the fixed cost is the same.

When you sell $80 million or when you sell $120 million. So percentage wise it’s a little bit higher. The second, the first quarter is usually a tough quarter as far as marketing expense, because we have at least three major event, the sales meeting of North America, Incas in Europe and the distributor meeting. And therefore the cost of those marketing expenses are a little bit higher than in the regular quarter. Overall, if you look on the – overall, if you look on the performer, marketing and sales expense. With that everything that I said, I believe that we will be able to adjust that to the original number or to the previous number in once we get – once we reach again above $100 million of revenue. Because percentage wise this will come down.