InMode Ltd. (INMD) Earnings Call Transcript & Summary

All right. Thanks for joining us for this next session. So we're going to have a 45-minute Q&A chat with management from InMode. Really pleased that you guys can join us here in person. Thanks a lot for coming, and welcome to the stage. So for those of you who don't know going in order here, we've got Moshe Mizrahy, who's the CEO and Founder; Spero Theodorou, the CMO; Yair Malca, CFO; and Alon Yaari, who's the COO. So all the Cs are here, except for Shak. But I hope he's out selling boxes. Anyway so guys, if you want to ask any questions, as always, just throw them up through the iPad here. And let me get started with a big picture question. Moshe, maybe you can just talk about your vision for InMode and touch on some of the founding principles that now allowed you to carve out such a strong position in the aesthetic market.

Okay. Basically, you asked 2 questions. Currently, InMode is the biggest company in the medical aesthetic, aesthetic surgical market. Probably this year, we will be over $300 million. We are growing this year by at least $100 million, 50% growth, and we're maintaining very nice gross margin and also net profit. Our vision basically in the aesthetic market and the reason why we grew that fast is because we came up with the new technology to the market. For more than 20 years, the aesthetic market was starving for new technology. Everybody was tired from IPL, laser, et cetera. And when we came up with a new technology, which is based on bipolar RF energy, minimally invasive and ablative, we basically replaced some of the operations which used to be in the hospital and brought them into the clinic instead of face lift people are doing Face Time; instead of tummy tuck, people are doing BodyTite. And that was a huge advantage to the doctor and to the patients as well. Our vision for the future that was part 2 of the question is to take this technology and this approach of taking operation from the hospital to the clinic of the doctor and implement that in gynecology, ENT, ophthalmology, urology and others. Whenever we can use the technology that we have developed, we will continue to develop solution for an unmet need and bring them to the doctor office, which make it easier for the doctors and for the patient.

Fantastic. Okay. Yes, I wanted to ask another one to follow up on that. Why don't we just talk about some of the core platforms and the things that really make them special. Because you mentioned the market had been starving for something new. So what really makes these core platforms so special?

Okay. Well, the core platforms that we have are doing minimal invasive. What that means? That means that we apply energy inside and outside the body. We can penetrate just because we're using RF technology, we can penetrate any depth we want. So we also can control the temperature inside and outside. And by doing so, for example, we can melt the fat if we apply 65 degrees centigrade inside subdermal fat and keeping 43%, 44% on the skin. So on one hand, we melt the fat either take it out, reposition it. On the other hand, we contract the collagen in the skin. And that's basically what plastic surgeon are doing. But instead of doing it with energy, they do it with knife. That's the basic technology of the platforms. Of course, we developed from that one platform for the face, one platform for the body, one platform only for fractional RF, one platform which are hand free for noninvasive using the same bipolar technology. We also make all kinds of laser equipment as a complementary product and as a complementary platform. But our base and the most important technology is based on bipolar RF technology.

Fantastic. Okay. Well, let's talk about your progress so far and how penetrated you currently are with some of the core physicians like the plastics and the derm. Spero, do you want to take that?

Yes, sure, Matt. First of all, thank you for inviting us. Certainly appreciate being here. Traditionally, the plastic surgeons have been sort of the most resistant energy-based devices in general and the penetration has been a little under 10% traditionally over the years. I'd say we're at 20% currently. So we have a lot of runway still to go. It's becoming evident that this is not one of those things that just not becomes another coat hanger, so to speak. That's the way most plastic surgeons look at these devices. And our goal from the very beginning was to have a paradigm shift where every single plastic surgery office has this as a tool. And so in that respect, we have a long way to go. Same thing with the dermatologists, which have not been our main focus, but this -- it's starting over the last couple of years. We went for the plastic surgeons first because they're the most toughest market to get into. They're the most skeptical but they also have a lot of purchasing power. So we took the hard way and it's paid off dividends. We learned a lot from mistakes in the past with other companies. Shak and I were with Cynosure. So we saw that reverse happening which was problematic. So the fact that we're well published, we're well established in this sector, we have the best opinion leaders in this sector allows us to create unprecedented adoption for an energy-based device company, and that's sort of where we are right now.

Great. And as a follow-up to that, I get a lot of questions about penetration and how much room you have left to go. How do you think about that from a platform perspective? Maybe you could talk about some of the different platforms. Kind of what inning they're in, how penetrated they are and how much runway you have?

Right. So BodyTite, the foundation of what we made is radio-frequency-assisted liposuction. So anybody who does liposuction off the bat has -- now has a tool that the limitations of liposuction have been how much skin can be retracted or not and how the quality of the skin is what the limitations are. That's 350,000 to 380,000 procedures a year, according to American Society of Plastic Surgery. So it's #1 or #2 most popular procedure out there. And if you're looking at the obesity wave across the country, United States, we're partners with McDonald's, right? So we suck out the fat. So we're following that trend. So that's very, very positive. But that's been our flagship. As we move along, we found that that's not the only thing we can modulate. And having the ability to modulate the tissues like Moshe has said because the RF goes deeper and be able to do that, whether it's minimally invasively or noninvasively, such as Evoke and Evolve are noninvasive platforms. We're starting to push the limits on that. So the nice thing is that we're the only company that can say, look, you bring your patient in a noninvasive. We have these modalities. Traditionally, noninvasive gives you a result of 25% according to the past numbers, with Coolsculpting and so forth. We're seeing a lot higher changes in that. And then if you want to go. That's the gateway sort of drug. But if you want to do more, we have minimally invasive, and that's where we're kings. So being able to control from the very beginning of the patient experience that patient walks through the door all the way to the end and not having to send them to other companies or other products or other doctors, that gives our physicians a distinct advantage. So noninvasive, minimally invasive. And then the fully invasive procedures, you still use our technology as an adjunct in the operating room. So it's not just minimally invasive. You can use it just like you use a bovie cautery, but now you have controlled a situation where people are doing faces and they're combining our technology with it. So it's an energy. We've harnessed this energy, which has been around forever. It's not new, but we've harnessed it in such a way where we've applied to aesthetic, right? You look at Medtronic, you look at all the RF companies out there. We just did it for aesthetics. So that's why it's -- the sky is the limit because you keep on applying new operations and new applications for it.

And that you're able to get into the plastics is they are tough customers. Maybe you can talk about how you're starting to expand beyond the core markets and leverage that position to get into some new adjacencies from the physician perspective.

Right. The plastic surgeons are a tough customer. I know I am one. But here is a thing. And for Moshe, when he found me, he had to convince me that this was something, and he did a good job, obviously, today, right? So if you look at the noncore, the noncore has been traditionally with other companies in the past, have been to major place to go because of the lack of acceptance because of a lot of the pushback, right? And with Cynosure and Smartlipo, the plastic surgeons did not buy that at all. And they went to the noncore immediately. And if you go to the noncore, it's okay, but you have to have the proper training. And -- but that wasn't in place either, right? You buy a laser, you're trained. So our training program is probably the most robust training program out there. So when we approach a noncore, we have a hands-on training program. We have a physician guidance. We have InMode University of all these tools where the noncores can actually learn a lot and not have complications. And how do we say that? We could just say that, right? But the proof is in the pudding. Complication rates across the board for liposuction, for example, are about 1%. Energy-based devices are around 2%. And we're seeing that those numbers -- that's exactly where we are. We're less than 2%. And considering at this point that we do more than 100,000 procedures a year, that was the numbers almost 2 years ago, right? We should expect a high number of complications. And yet, are there complications out there? Of course. Are we perfect? We try to do whatever we can. But just because you have a machine does not mean that they'll teach you how to operate, right? So -- but I'm proud of the fact that we do our best, and no one devotes more training to this segment than us. And that makes them successful because when they don't have complications, when they got happy patients, then they buy more stuff from us, right? They buy another machine. And Moshe will tell you about the disposables because I think that's the proof of everything, right, Moshe? What's the number for the disposables?

Yes. Well, from the second quarter of 2020 until the second quarter of 2021, we tripled the numbers of disposable that we're selling. Now these disposable are onetime use because they penetrate the skin. You cannot reuse them, either minimally invasive or ablative when you go even with the Morpheus today, you go 7-millimeter deep into the body, to the subdermal fat. So the numbers of disposable that we are selling that tell us that the doctors are using the system more and more. And this is on those platforms that need disposable because we have another portfolio of platforms, the hand-free and others that don't use disposable, but the feedback that we get from the doctor all over the world is that they are using them a lot as a complementary technology for minimally invasive or as a separate technology, not just in the United States, in the ROW by the way, ROW right now for us grow faster than the growth in the United States. We grew -- ROW today is 35% of our business, dollar-wise. System wise, it's more like 65% -- 60%, 40% because we do not recognize all the value of the system when we sell to distributors. So we are growing on disposable. We are growing on platforms, but we're growing faster on disposable. That means that the system are being used even faster than the original plan that we had.

Great. All good signs. Okay. So I did want to cover some questions about the market itself. So you all know during COVID, a lot of people focused on health, we saw kind of a mini boom for aesthetics. It seems like we're still seeing very strong demand. So I wanted you to comment on the underlying demand that you're still seeing. I think there had been some concern by people that once people start traveling and spending money on other things that, that might deflate the balloon, so to speak, but it doesn't seem that way. So can you comment on the trends in the aesthetic market? And maybe Spero can talk about his practice.

I will start and then Spero will continue. 2020 -- typically, the third quarter is the slowest quarter. The fourth quarter is the strongest quarter because during the summertime, people don't do aesthetic surgical or any elective surgical procedure. 2020 was not a typical year because of the COVID. The second quarter was very slow and the third quarter was very, very high. This year, in 2021, I can judge -- we can judge only by 1 month, July, because the third quarter just started. And I can tell you that we see similar effect that -- like we had in Q2 -- in 2020. We don't see a big growth in the third quarter, which was in the typical seasonality of the year. Do you want to add something Spero?

Yes. I mean it's -- our practice in New York City, we're busy like we would be in the spring. And that hasn't stopped. And we thought it would stop, to be honest. I think what's driving that is people are still not traveling the way they used to. Considering the new variants and everything that's going on, they're staying home. And that's the majority of people. And -- so what are they doing? They're doing self-improvement and home improvement and all those things are still going. And all that income has to go somewhere. So that continues to drive it. But what's interesting is that 1/3 of patients coming in nowadays are new patients that would never consider anything. And I think that's what's driving a lot of this. While you sit around you know, you're like, well, I guess ever I was thinking about it. I could have died this year, I'm going to go ahead and do it, right? So it's not an impulse buy. But in a way, it is an impulse buy, right? It's a luxury product, but a lot of the luxury products where are you going to wear them, where are you going to go and show them off, where are you going to get together, you can't. But your face on Zoom is a huge deal. So that Zoom itself should be our partner because it's created a lot of volume for us because especially the way the cameras are, they're looking right under at you and everyone is just freaking out. So that drives a lot of the call it, Zoom-face, Zoom phenomenon, but all those things really help us. And what we've seen right now is that virtual consultations have increased. About in 2008, my partner and I were the first to use a platform at that time to use Face Time just to do consultations like virtually and see an inroad about it. We're all excited. But all the people doing it where people next door. They're still in their office, taking off their shirts in New York, right? They're too lazy to walk 2 blocks over. So what we found is now this has become mainstream. So out of, say, 10 consults per half a day or 20 consults coming in, it's almost at least 1/3, if not more, are virtual. So it's so easy. It's become so seamless. That's accelerated the process and the people that tend to do virtual consultations tend to be more motivated and are higher booking rate. But even the people that used to walk in and say, why? Because these are first-timers. So all those things have accelerated the volume out. Is this going to stop? We have no idea. It hasn't abated at all. And that's, I think, the influx of the new people coming in. And I'm pretty confident they'll continue at least for the next year.

And you talked about, I guess, 30% or 1/3 of the patients are new. What did that used to be 5 years ago typically?

Look, your traditional plastic surgery practice anywhere between 10% and so 20% if you're super aggressive. But usually, it's patients who already had something done or know someone that has something done. That's how traditionally practices grow, unless you have technology. If you have technology, and when Smartlipo came out, it taught us a lot of things. The majority of the patients, 50% of your consults, 60% of your consults never had anything done because it was lipo and it was smart. It had a great name and it was technology. So everyone got excited about it. And then it slowly die down and everything went back to where it is again. With BodyTite and new technology, yes, that continues to be helping it. So if you have a combination of people staying at home, thinking they'll go, I almost die this year, who knows what happened and there are practices that have technology they can deliver it in the office in a minimally invasive fashion. Those are the 2 combinations that work. Because if you're sticking to your guns and doing hospital-based surgery for aesthetics, you're done because everyone and their mothers at this point knows what a ventilator is. No one wants to go to hospital before. There was a healthy fear of it. But nowadays, it's a paranoia. So that really helped us because they're like, okay, office space. And that's become run into our hands. So our practices have done great, and it's spilled over to general procedures as well, right? It's not just someone who comes in for FaceTite end up having a real tongue tug, for example. So like anything else, people look for the latest thing. And if you don't have it, they go somewhere else to find it, just like an iPhone. Everyone's got an iPhone. And the old-fashioned doctors say, "Well, why don't you use a BlackBerry, it looks great. And they blew in the face until you tell them, and then people is like you're crazy. I don't care if it's the same thing here. Everything you search online is a niche search. And that's where we are at.

So I wanted to ask about one other thing related to this that you brought up, that is concept of recurring revenue. So I don't think people necessarily think of a lot of your revenue is recurring. But it is, in some ways, right? Because you've mentioned people come in, they get one thing done. Then either they get touch-ups or they get something else done. So could you talk about that aspect of recurring revenue, recurring patients?

That's an excellent question, Matt. So BOTOX is recurring revenue, right? Surgical specialties never really had it locked down like that. We looked at it when Smartlipo days back in the day, and we -- study of 1,000 patients. So the female body has 11 areas, right? And I know this sounds a little salesy, but has 11 areas you can bill for a procedure, right? And in Smartlipo, the average person was getting 3.8 areas done a year, which means they do love handles come in, do another area come in, and you're starting at $4,500 down to $3,500 on average. That's recurring revenue. So for surgeons, lipo under local anesthesia, with technology is -- would be an equivalent of a BOTOX recurring revenue coming in. We look at it with BodyTite, it's the same thing, anywhere between 3 to 4 procedures a year coming in for a little here and a little there, because it's no longer an operation, it's -- now it's a procedure. So that has really, really helped us. Now you look at Morpheus, look at all our minimally invasive stuff like microneedling, right off the bat, you have 3 treatments for that, right, a space to month apart. Then a year later, you'll have a maintenance. So what's changed is people are accustomed to it. They're used to it nowadays. The whole aesthetic market is set up for that. And in our case, yes, the recurring revenue and the synergy of these things whether it's noninvasive or minimal invasive talking to each other is what's given a really big advantage. Everything is set up for 3 treatments, but you still can't combat aging and you're going to age year after year, so you'll come in for something more. So that's the same thing for our stuff.

Great. Okay. Let's start transition and talk about another topic, it's somewhat related, but it's capital versus disposables. And so today, majority of your business is capital, although the disposable has been growing. I guess maybe just talk about that strategy that you have to make it really easy on the doctor. And then also where do you see the disposables going over time as a percentage of rate?

Okay. Today, it's about 90% platforms between capital equipment and 10% disposable. But this is only because our total installed base worldwide is about 10,000 systems out of which maybe 5,000 systems or 6,000 systems need disposable and the others without disposable. But the disposable numbers, we see always growing. Since we grow in platforms as well, then we don't see the ratio changing. But once we will have 30,000 installed base of surgical and ablative platforms, I believe disposable will be in the neighborhood of 20%, 25% versus 75% the platform itself. So it will become 75-25. And that will happen, I will say, sometime in 2025 or something like that. Now one thing I want to say, we're not a razor and razor blade company. We don't give the system for free in order to sell high price disposable. We decided that we want to sell the system and to sell disposable as well. By the way, the disposable prices are reasonable to the doctors because we want doctor hate to buy disposable for very high price even if you got the system for very low price. So we sell disposable in a very reasonable price to encourage the doctor to do more and more treatment. And the fact that we're selling and growing fast, the ratio is still 90-10. But I would say, once we get into the I would say, 25,000, 30,000 systems installed, which will happen in the next few years, then the ratio will be more 20-80, 75-25.

Great. And then on this part about recurring as well, you can also argue that the capital is quasi recurring. So I wanted to talk about that theme too, because if I'm a doctor and I buy a box, you both have opportunities to upgrade that box or over time, I want to get the latest and greatest so I want to turn mine in. So maybe talk about the quasi recurring nature of the capital and how you're able to manage that capital cycle?

Okay. Well, each one of our platforms has more than one modality. So doctor can use it not for one application or one indication. He can use it for several indications. Now once we come up with something which can fit on the platform that the doctor already bought, we came up with what we call an upgrade package, which is the hand piece that it can perform the new indication and a software plug. And that's something that -- plus training, that's something that we can buy from us in order to grow with the platforms. Now I think it's important also to mention here, Matt, is the mathematic, it's the math. Because when doctors buy in the United States system from us, he properly pay around $130,000. Usually, they buy it with a 5-year lease package, which is about $3,000 a month, okay? Now if it does only 5 treatment a month, he pay additional $2,000 for disposable. So altogether, $5,000. Today, they charge how much between $5,000 to $7,000 per treatment. So if 5 treatment, even $5,000 per treatment, that's $25,000. So he left over with $20,000. The payback on the system, it's 6, 7 months. In addition to that, as you said, if he buy an upgrade and now he can perform another indication, it will enable him to do more treatment per month. So from the return on investment point of view, the proposition that we bring to the doctor is very high ROI, return on investment. That's something that's important. He cannot get it with any other laser equipment or IPL equipment. So basically, the new technology that we have invented enable the doctor to have a very nice return on the investment.