InMode Ltd. (NASDAQ:INMD) Q4 2022 Earnings Call Transcript

InMode Ltd. (NASDAQ:INMD) Q4 2022 Earnings Call Transcript February 14, 2023

Operator: Good morning, and welcome to InMode Fourth Quarter and Full Year Financial Results Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I’d now like to turn the conference over to Miri Segal, MS IR. Please go ahead.

Miri Segal: Thank you, operator and everyone, for joining us today. Welcome to our conference call. Before we begin, I would like to remind our listeners that certain information provided on this call may contain forward-looking statements, and that 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: Thank you, Miri, and to everybody who 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 Likaman, our VP of Finance. Following our prepared remarks, we will all be available to answer your questions. We are pleased to report another record quarter with Q4 revenue of $133.6 million and $454.3 million for the full year, an increase of 21% as compared to Q4 of 2021, and an increase of 27% compared to the full year 2021. This is a record level of revenue for an aesthetic medical company, and was especially remarkable and exciting since we are achieving this milestone during challenging global time.

We believe our unique technology, strong dedication to the highest industry standard, our employee commitment, focused growth strategy in the U.S. and globally and our diversified portfolio, all contribute to our leadership position in the market. We value the trust of physician and patient as we experienced a growing demand across the board. The success of the EmpowerRF platforms in 2022 continued to exceed our expectations. In fact, revenue from this platform’s exceeding $45 million in 2022, well above our original guidance of $20 million. As we mentioned last quarter, the Morpheus8 device is becoming the gold standard in the aesthetic category, and we believe that it will be — it will continue to be one of our biggest growth driver going forward, this play a major role in major platforms that we launch.

In 2022, we announced an exciting new addition to our portfolio and the Envision platforms for dry eye treatment, which received certification in Canada last November. InMode Envision is an innovative technology that delivered targeted bipolar radio frequency energy to small dedicated ocular area. We plan to launch the Envision platforms in the United States in the first half of this year to focus on ophthalmology market, and we are encouraged from the positive feedback that we have received from Canadian market. Additionally, the next generation of Evoke, our hand-free platforms for face treatment, is planned to be launched in the second half of 2023. As part of our growth strategy, we continue to innovate as we launch new platforms or modality every year, and we continue to explore potential acquisitions that could complement our presence in the aesthetic and wellness market.

Now, I would like to turn the call over to Shakil, our President in North America. Shakil, go ahead.

Shakil Lakhani: Thanks, Moshe, and everyone, for joining us. Once again, we are pleased to report another record quarter with continued positive momentum due to our diversified portfolio, growing market demand and more frequent use of our platforms. InMode’s growing installed base and the increase in the number of treatments performed led to the increase in consumable sales that reached 230,000 units in the fourth quarter, more than 749,000 in 2022. To support increased market demand, we continue to grow our sales team in North America and globally. In 2022, we enhanced our initiative to strengthen InMode’s brand recognition. We sponsored several well-attended marketing events throughout the year and made a concentrated effort in expanding consumer awareness.

We can say with confidence that our strong brand recognition, especially in North America, leads to a new situation where our platforms are being sought after and bought rather than sold. We expect this paradigm shift to continue and support our future growth. As mentioned by Moshe, the EmpowerRF platform has once again outperformed our projections. In addition, as we continue our strategy and expand into new areas of wellness, we plan on launching the Envision platform for the ophthalmology and optometry market during the first half of 2023, followed by the second generation of our hands-free platform for facial treatments during the latter half of the year. We believe that InMode’s success in 2022 demonstrated our ability to expand into new categories and solidified our leadership position in the aesthetic and wellness market.

Lastly, I’d like to thank our entire North American team for their continued hard work. I will now hand over the call to Yair for a review of the financial results in more detail. Yair?

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Yair Malca: Thanks, Shakil, and hello, everyone. Thank you for joining us. Starting with total revenue, InMode generated a record $133.6 million in the fourth quarter of 2022, representing a 21% year-over-year increase, with a gross margin of 84% on a GAAP basis. For the full year of 2022, revenue totaled $454.3 million, an increase of 27% compared to 2021. Fourth quarter sales outside the U.S. accounted for $42.3 million or 32% of sales compared to 33% in Q4 last year. For the full year of 2022, sales outside the U.S. accounted for $155.7 million or 34% of sales, same as 2021. We are seeing growth coming from many different countries, and we are planning to establish at least one additional subsidiary later this year. To support our operations and growth, InMode now operates in total of 80 countries with a sales team of more than 220 direct reps and over 69 distributors worldwide.

Moving on, capital equipment in the fourth quarter represented 87% of total revenue, while consumables and service revenues accounted for the remaining 13%, identical to the ratio for the full year. GAAP operating expenses in the fourth quarter were $52.7 million and $183 million for the full year, a 33% and 34% increase year-over-year, respectively. Sales and marketing expenses increased slightly to $47 million in the fourth quarter compared to $35.3 million in the same period last year. Sales and marketing expenses for the full year of 2022 were $160.6 million compared to $119.4 million for 2021. This increase is attributed to hiring more sales representatives, increasing our presence in the U.S. and globally. Next, we look at share-based compensation, which increased to $7.1 million in the fourth quarter of 2022 and $24.5 million in the full year of 2022.

On a non-GAAP basis, operating expenses were $46.1 million in this quarter compared to a total of $37.5 million in the same quarter of 2021, representing a 23% increase. For 2022, non-GAAP operating expenses were $160.4 million compared to $126.4 million for 2021. GAAP operating margin for Q4 was 45% and 44% for the full year of 2022. Non-GAAP operating margin for the fourth quarter of 2022 was 50% and 49% for the full year 2022. GAAP diluted earnings per share for the fourth quarter were $0.44 compared to $0.61 per diluted share in Q4 of 2021 and $1.89 in 2022 compared to $1.92 in 2021. Non-GAAP diluted earnings per share for this quarter were a record $0.78 compared to $0.64 per diluted share in the fourth quarter of 2021, and $2.42 for 2022 compared to $2.05 for 2021.

Once again, we ended the quarter with a strong balance sheet. As of December 31, 2022, the Company had cash and cash equivalents, marketable securities and deposits of $547.4 million. This quarter, InMode generated $57.2 million from operating activities. I would like to mention that this quarter, it is more important than ever to focus on our non-GAAP results since, in our GAAP P&L, we have recorded a couple of one-time tax entries that were adjusted for non-GAAP purposes. With regard to taxes, InMode multiplied the provisions of the amendment to the investment law to its exempt profits accrued prior to 2020 and made a one-time payment of $12 million to the Israeli Tax Authority. In addition, the Company reached an agreement with the Israel Tax Authority under which the Company paid due in January approximately $14.3 million on its undistributed exempt income for the year ended December 31, 2021.

As a result, we expect to save up to $28.5 million in potential future tax payments, and our entire cash balance is now free and clear of any additional corporate tax requirements. Before I turn the call back to Moshe, I’d like to reiterate our guidance for 2023. We 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: Thank you, Yair. Thank you, Shakil. Operator, we are ready for Q&A session. Hello, operator?

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Q&A Session

Operator: First question will be from Matt Miksic of Barclays. Please go ahead.

Matt Miksic: Can you hear me okay?

Moshe Mizrahy: Yes, we hear you okay.

Matt Miksic: Great. So I have one question on the upcoming launches and then sort of a follow-up on sort of the tone and flow of your current business in the U.S. On Envision, I’m curious what sort of uptake, how should we think about the pace of that launch? And what sort of investments are you making behind it in terms of your field force or training, might be notable here as you laid out your 2023 guide? And then I have one follow-up.

Moshe Mizrahy: Well, Envision, we’re starting to launch it in the U.S. So I will ask Shakil to answer your question.

Shakil Lakhani: Sure. So we’re going to put some pretty substantial resources behind it. Obviously, as we’ve discussed in the past, bifurcating the sales force is something that we like to do a little different than what you’d expect. So, we will be building out specialty reps that are going to be specifically focused on Envision. And obviously, with the size of the market, the TAM for it is huge in terms of the ophthalmology and optometry world. So, we do see a large potential in terms of what we can kind of maximize out of this, but like anything else that we do, we’re going to roll it out slowly. So, we’re doing a soft launch start. And then as we start seeing proof of concept in terms of efficacy, in terms of marketing success for the practitioners, so on and so forth, will slowly start to invest further funds and resources into it.

Matt Miksic: Great. And that — and I mean, if there was one element of the guide, it seems like there was a little bit of a lift in some of the OpEx lines compared to expectations for the coming year. And I’m assuming that, that that’s a factor in that dynamic. Is that fair?

Shakil Lakhani: I would say that’s accurate.

Matt Miksic: Okay. Great. And then just on the tone and the flow of business in the U.S. if you could — you’ve gotten a couple of questions around sort of the mix of your — I think everyone is curious about the sort of health and sustainability of what’s been a pretty strong U.S. business in light of what might have been a spend-ahead environment a couple of years ago and what on the horizon could be some softening. I’d say that’s consistent with any capital equipment market that we cover, is there’s a nagging concern about what if spending starts to ease here or we have to do some sort of demand catch-up. Can you talk a little bit about the flow of that, and in particular, some of the dynamics around the percent of those businesses of the capital equipment sales that are being financed and how that has shifted over the past year or two?

Shakil Lakhani: Sure. So, we actually haven’t seen that. It’s actually gotten better. Funds become a little easier. I mean, if you look at some of the stats, even for the Super Bowl and the average spending per family for people making a certain amount of income per year, it all went up by like 20% or 30%. So hopefully, with that, they’ll keep eating, and we’ll be able to help them with some of their weight loss goals and things of that nature. But it’s — we’ve seen the U.S. market just as strong as it’s ever been from our perspective, and the way we finished it was extremely good. We’ve had a good start to Q1 so far. So, we don’t anticipate anything changing there. In terms of the funding environment or the financing environment, we haven’t seen much of a slowdown.

We’ve got some really great partners, and we have some really good programs that are put together to help some of the physicians kind of get through. But in terms of spending, we haven’t seen anything cut down. If everyone is talking about a potential recession, if we haven’t already been in one per se, but we — as of now, we haven’t seen anything. If things change, we’ll obviously keep you guys posted on that. Does that answer your question?

Matt Miksic: Yes, it does. Thank you.

Operator: Thank you. Next question will be from Matt Taylor of Jefferies. Please go ahead.

Jon Lee: This is Jon Lee in for Matt. Maybe I wanted to hear a little bit more on the guidance. Just the level of conservatism that’s built in, any color on quarterly cadence, we should expect. And can you talk about Empower growth or the dollars embedded within the guidance?

Moshe Mizrahy: Well, as always, every year, we try to be very conservative in the guidance. For example, last year, the guidance was to — we started with 220 million, and we went all the way up to $455 million, $420 million that — the guidance we — the guidance that we gave for 2023 is conservative, is built bottom up, territory by territory. I believe that the final will be better than that, but it all depends how 2023 will be as far as demand and other country, like the international market, what will happen between Russia and Ukraine, how the market in China will evolve with all the COVID issue there, what will be with the supply chain. I believe we are prepared, but the guidance that we gave this year is similar to other years, very conservative. And we believe that eventually, hopefully, we will do better. Regarding the Empower, the embedded number is 20% higher than 2022.

Jon Lee: Okay. Great. Anything on quarterly cadence we should be aware of?

Moshe Mizrahy: Usually, we don’t give quarterly guidance. But basically, you can take the same seasonality like in 2022 and apply the quality guidance. By the way, every quarter, we will update the total guidance as we did in 2022 and as we did in 2021. But typically, we are not giving guidance per quarter, Matt.

Jon Lee: Okay. Great. I guess maybe just one follow-up, just on the M&A environment. You guys are definitely more focused on aesthetics and wellness. Was wondering if you can give us an update there now that you’ve been a little bit more public on what you’re looking for? How is valuation? How is the conversations with targets been?

Moshe Mizrahy: Well, currently, we are exploring several opportunities. We’re not yet in the stage of doing official due diligence, and we have not yet involved any legal team. But we’re looking into two, three companies in the wellness and aesthetic business, which complement our portfolio. We cannot give any time line or any timetable to the process, but we’re actually searching right now and we’re doing it very seriously.

Operator: Thank you. Next question will be from Kyle Rose with Canaccord Genuity. Please go ahead.