InMode Ltd. (NASDAQ:INMD) Q3 2023 Earnings Call Transcript

InMode Ltd. (NASDAQ:INMD) Q3 2023 Earnings Call Transcript November 2, 2023

InMode Ltd. beats earnings expectations. Reported EPS is $0.61, expectations were $0.6.

Operator: Good day, and welcome to the InMode Third Quarter 2023 Earnings Results Conference Call. [Operator instructions] Please note today’s event is being recorded. I’d now like to turn the conference over to Miri Segal of MS-IR. Please go ahead.

Miri Segal: Thank you, operator, and to everyone for joining us today. Welcome to InMode’s third 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 visit 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: Thank you, Miri, and thank 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 the prepared remarks, we will all be available to answer your question. The third quarter was the first time that we saw a slowdown and experienced normal seasonality that is common in the medical device industry in general and specifically in the static space. We ended Q3 with revenue of $123.1 million, a slight increase of 2% compared to the third quarter of 2022. Until the third quarter, InMode has been in an accelerator growth rate as we establish our presence in the US and globally.

Furthermore, the last three years of the COVID pandemic led to abnormal environment in the aesthetic space, resulting in pent-up demand and different aesthetic treatment patterns. Pre-pandemic, summertime hasn’t been a popular time for aesthetic treatment due to travel and the requirement to avoid sun post-treatment. This summer, patients and physicians in the US and in Europe returned to normal seasonality cycle and this trend was reflected in our Q3 financial results. In addition, record interest rate impacted the financing environment of new leasing agreement in our industry. Salespeople often say time-killed deals, and as the credit clearance process takes longer, less platforms were sold in the United States. However, despite these macro challenges, we were pleased to see that demand for InMode treatment has not been slowed down and remain high.

Patent and gold standard technology and innovation are InMode key differentiator. We constantly improve and upgrade our technology. We remain committed to developing new minimally invasive technology and platforms, as well as upgrading our existing platforms. In addition, we will aggressively enhance and protect our IP and patent. This will ensure our long-term position as leader in the industry and will enable us to benefit and become stronger following the current challenges in the market. Before I turn the call over to Shakil, I would like to reiterate our message regarding the conflict in Israel. As we said in our press release, our employees are safe and together with their management team in Israel and in the United States. We are all as committed as we have always been to the success of this company.

InMode is committed supporting all customers, distributors, employees, and salespeople worldwide. We prioritize the safety and the well-being of our employees and will continue to do so as we execute our strategy. We don’t anticipate any interruption to production. Our inventory levels globally and in Israel are sufficient and include component and sub-assembly for the next three quarters. As a result, we expect all platforms and consumables will be delivered on time and will meet the highest standard. In addition, InMode take all required measures to ensure continuous customer support and exceptional service, we are all as committed as we have ever been to the company success. Now I would like to turn the call over to Shakil Lakhani, our President in North America.

Shakil?

Shakil Lakhani: Thanks, Moshe and everyone for joining us. InMode’s third quarter was challenging for North America. Despite the headwinds of lower platform sales in North America in the third quarter, we are encouraged by the strength in consumable sales and view this year-over-year increase as an indication of continued demand for InMode’s treatments. Revenue from consumables and service accounted for 15% of total Q3 revenues and grew 28% year-over-year. We are pleased with the successful launch of Envision, our non-surgical ophthalmic platform in Q3. It is progressing well in North America and is gaining traction among leading optometrists and ophthalmologists. Additionally, at the very end of Q3, we successfully launched [Define], the new and improved version of our hands-free technology for the face.

We expect early revenues to be in Q4. As always, I’d like to thank our entire North American team and all employees everywhere for their continued hard work during these challenging times. I will now turn the call over to Yair for a review of the financial results in more detail. Yair?

Yair Malca: Thanks, Shakil and hello everyone. Thanks again for joining us. InMode generated revenue of $123.1 million in the third quarter of 2023, representing a 2% year-over-year increase with a gross margin of 84% on a GAAP basis within the company model of 83% to 85%. Third quarter sales outside of the U.S. accounted for $44.9 million, or 36% of sales, compared to $39.8 million, or 33% in Q3 of last year. We continue to see growth coming from different regions around the world, and in Q3, sales from Asia hit a new record. To support our operations and growth, InMode now operates in a total of 93 countries with a sales team of more than 267 direct reps and 82 distributors worldwide. Capital equipment in the third quarter represented 85$% of total revenue, while consumer business service revenues accounted for the remaining 15%.

Sales and marketing expenses increased to $50.8 million in the third quarter, compared to $43.1 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. The share-based compensation accounted for $6.6 million in the third quarter of 2023, a decrease compared to $7.9 million in the third quarter of 2022. GAAP operating expenses in the third quarter were $56.6 million, a 16% increase year-over-year. On a non- GAAP basis, operating expenses were $50.6 million in this quarter, compared to a total of $41.4 million in the same quarter of 2022, representing a 22% increase. GAAP operating margin for the third quarter of 2023 was 38%, compared to operating margin of 44% in the third quarter of 2022.

Non-GAAP operating margin for the third quarter of 2023 was 43%, compared to 51%, for the third quarter of 2022. GAAP diluted earnings per share for the third quarter were $0.54 compared to $0.58 per diluted share in Q3 of 2022. Non-GAAP diluted earnings per share for this quarter were $0.61, compared to $0.66 per diluted share in the third quarter of 2022. Once again, we ended the quarter with a strong balance sheet. As of September 30th, 2023, the company had cash and cash equivalents, marketable securities, and deposits of $675.8 million. Before I turn the call back to Moshe to take your questions, I’d like to reiterate our revised guidance for 2023. Revenue between $500 million and $510 million, Non-GAAP gross margin between 83% and 85%, Non-GAAP income from operations between $220 million and $225 million, Non-GAAP earnings per diluted share between $2.53 and $2.57.

I will now turn over the call back to Moshe.

Moshe Mizrahy: Thank you, Yair. Thank you, Shakil. Operator, we now can get Q&A.

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Q&A Session

Operator: [Operator Instructions] Today’s first question comes from Matt Miksic with Barclays.

Matt Miksic: Thanks so much for taking the questions and for the call around the results. I’m wondering if we could start with some of the things that caused the shortfall to the third quarter relative to street estimates, even though I think directionally it was in line with your increased seasonality. And I’m speaking of the pressure around financing and leasing costs and how that affected Q3. On that topic, just wondering if you have any additional color to share as we progressed into Q4 here. And any thoughts across the management team as to how, what InMode can do to potentially alleviate some of those delays or pressures that caused a little bit of a slowdown there in Q3? And they have one follow-up.

Moshe Mizrahy: Okay, hi, this is Moshe. I’d going to answer and I believe my colleagues will complement me. I believe we specified the three main reasons why we are a little bit short on what the market expects. First, I believe the seasonality, which is now normal in the medical aesthetic, as you probably know, in 2021 and ‘22 was COVID year and the COVID was in the beginning of the year and therefore Q3 was much stronger than expected and sometimes stronger than Q2. But that’s not normal in the medical aesthetic. I’ve been in the medical aesthetic for 25 years all the way for me at C-Luminous, Syneron and now InMode. And it’s always the case that the third quarter because summertime, because people don’t want to get treatment during the summer and exposed to the sun on their vacation, it’s a slower quarter and the fourth quarter usually is the strongest one.

So this is one of the reasons and I mean we cannot avoid it. Second, as far as financing, what we said is that today a leasing cost is 14% to 15% annually. That’s the interest rate of leasing company charging customers. So I’m sure that you will not take a mortgage with 14% to 15% interest rate. Although, this is a working machine that generates money, but the return on investment with this kind of interest rate will take longer. And of course doctors are afraid what will happen. The economy is slowing down. Everybody can see that. It’s not just in the medical aesthetic or in the medical field. And therefore when the interest rate is still going up, or at least did not start to go down, and the leasing financing will cost 14% to 15%, I don’t know for how long.

We believe that doctors will think twice if they want to do it. Third reason is the fact that leasing company are tightening their procedure and their screening. They are afraid doctors will go bankrupt and they will not see the money. And therefore before the issue of purchase order to us to actually take the order, they do a very long, I would say, a very long processing time. Sometimes it takes two to three weeks. And when you have two to three weeks, some of our competitors are coming. Doctors think twice. They already think maybe I need to wait a little bit. All this process is taking place now. How we overcome it? I mean we have a lot of resources, especially we have a lot of money. And therefore we’re working with the leasing company to come up with some solution.

First, to optimize the processing. So it will not take three weeks. It might take a few days as it used to. We might do some other activity of in-house financing and other programs to ease the financing to certain doctors. The main project is to work with the leasing company to find solutions. We have some ideas. We already discussed with them when the process to implement that, hopefully in Q4, it will ease a little bit. Not ease the rate. The rate will stay 14% to 15%, but at least ease the process and work better. That’s the only thing that we can do. In addition to continue R&D, continue marketing, continue development, on the third quarter, this third quarter with the slowdown, we had 1,000 doctors user meeting in Chicago in August. We have 400 doctors summit in Cyprus for 40 countries, OW.

We actually continue to invest in IP and continue to invest in marketing. We participated in 12 medical conferences around the world. So we’re not basically, we’re doubling down. We’re doubling down on any marketing, any sales promotion, R&D, we hired three more people in R&D in order to expedite coming with a new product to the market. We’re not sitting down and cutting costs. That’s the last thing that we will do. Although it’s a challenging time, but the company DNA is different. We will not fire people. We will not lay off people. We will keep everybody. On the contrary, we’re hiring people this quarter and we will continue to invest in marketing, in sales, in R&D, in regulation, in product development. We received two FDA approval this quarter and which will enhance our position in the fourth quarter and next year.

So overall, although we’re taking the slowdown and the situation seriously, but we’re not sitting down and wait to see what will happen in the market.

Matt Miksic: That’s a super helpful color. I just have one follow-up, if I could, on some of the events that have unfolded, unfortunately, in the past months in Israel. And you issued some comments around the time that this conflict began about your ability to supply and your supply chains, your risk of disruption, ability to deliver products and so on, if you could maybe walk us through. And any updates that you have on that and how far into ‘24 do you feel confident that you’re positioned to deliver given the current status of course. Thanks.

Moshe Mizrahy: Yes, okay. Thank you for your question. Yes, it’s a very difficult time in Israel, but we try to run the company business as usual. We have two production facilities, both of them on the north part of Israel, which are not affected currently. They are not affected with the war, but it’s mainly on the south part of Israel. All the team in Israel is safe. We are located in the northern part of Israel in a city called Yokneam, which is relatively not close to the war area. All the team in Israel is safe and their families, we are taking care of them. We have accumulated inventory in the US and in Israel and in some countries in Europe in order to take care of the supply for at least two quarters of finished goods and three quarters of component and subassembly.

So we will cover everything. I’m optimistic, but I cannot — I’m not a prophet. I’m not — I don’t tell you that everything is 100%. Hopefully, the war will not extend to the northern part of Israel where we are located. And as far as that, if that will not happen and we will continue to have the situation as it is right now, everything will be okay. Also in fourth quarter and the beginning of 2024. We have some employees on their army reserve duty, especially in the manufacturing side, but we took care of that by switching to work two shifts. We hired more people and that are not going to the reserve duty on the army and we’re working two shifts in order to keep the capacity the same as we planned. It’s a 24-hour a day challenge, 24 -hour a day working.

I mean, although it’s not easy, but we’re managing.

Operator: And our next question today comes from Young Li with Jefferies.

Matthew Taylor : Hey guys, it’s Matt on for Young. How are you doing? I just wanted to ask a couple questions about your forecast. Maybe you could talk to us about how you arrived at the 4Q forecast after seeing the seasonality and low growth in Q3, what are some of the key assumptions that you looked at in developing that? And as an extension, can you talk about your confidence in growing in 2024?

Moshe Mizrahy: When you said the focus, you meant the guidance that we gave for last time?

Matthew Taylor : Well, for Q4 and implying by full year guidance.

Moshe Mizrahy: Okay. Well, in order to meet the $500 million target, to be above the $500 million target, as we stated, we need to do $140 million revenue in the fourth quarter. Okay, I can tell you that I have worked with all the territories, North America, Europe, Asia, Latin America. And currently, I believe we are going to meet this target of $140 million in the fourth quarter in order to be above the $500 million, 2023 target that we gave. As far as Israel, we have all the capacity to supply everybody in the territories with the $140 million of platforms, handpieces, disposable. It’s all in inventory. So from that size, we are not going to have a problem. From a sales point of view, I can tell you that October is always the first quarter of that quarter.