InMode Ltd. (INMD) Earnings Call Transcript & Summary

Good afternoon. Thanks, everybody, for joining us. I'm pleased to have with us the CFO and Chief Medical Officer of InMode, Yair Malca and Dr. Spero Theodorou. Gosh, I'm terrible. This is Matt Miksic. I am the U.S. medical device analyst here at Barclays.

So I wanted to maybe jump right into a couple of sort of with some high-level topics and then kind of drill down. The biggest -- at the highest level, I think, we came into this year with InMode. And I think you spent a fair amount of time on this in November, December and contemplating given some changes in end market demand given some continued challenges in financing systems and so on, how to set the bar for '24. And I would characterize it as tempered appropriately tempered perhaps, but tempered and based on a certain set of assumptions. And so maybe if you start with what's baked into that number and what we can look for maybe in the first and second quarter to see if is this a number that you could do better then, depending on how things start to shift? Or is this actually where you're going to come in for the year?

Makes sense. First of all, Matt, thank you for having us. We appreciate that. As you mentioned, we had some headwinds ending in 2023, especially in Q4, maybe it started already in Q3, but it was kind of covered up together with -- this is analysis that we experienced or the stronger than expected seasonality that we reported in Q3. But obviously, whatever we saw in Q3 and definitely in Q4, that was usually supposed to be the strongest quarter of the year and it wasn't. We saw some headwinds. One of them is higher interest rates and the financing environment, the underwriting processes in the financing space has been significantly more strict than what we've seen in prior years. It starts the shakeup in the banking system. The Silicon Valley bank falling out and some others exactly a year ago. So this has started then this process and then [indiscernible] climbing up. And also what we see some slowdown in the underlying demand to procedures in the aesthetic space. For us, we can see it from the consumables. If you look at Q1 and Q2 2023, consumables grew year-over-year around -- over 40% 4-0. This went down to 28% year-over-year growth in Q3 in consumables and to under 20% in Q4. So still very respect full growth year-over-year, double digit, very nice. But you see that trend decelerating. And for us, that was a sign that there is something going on with the underlying demand. Some are talking about some concern of consumer confidence. And this is something that's not unique to InMode, we see that all across the space. And the competitors and other players in the space reporting the same headwinds that we are experiencing. So to answer your question about 2024, we don't see any improvement. We definitely see those trends continue into 2024. We hope that in the second part of 2024 things might get better, I understand that the estimate now is that interest rates would start going down in the second half of the year, hopefully, June and on, maybe we will see. I hope to see interest rate cost this year after June. So that definitely can help to some extent. But mostly, we are looking to launch 3 new products this year, and these are main technologies for us next generation of our best-selling technologies. This is exciting. And definitely, we expect to see the contribution coming in the second half of the year. So overall, we believe the year will be pretty much flat 2024 compared to 2023 because of all the headwinds. And we don't usually provide split between quarters but it's going to be heavier on the second half of the year just because of this major launch that we plan to do in the middle of year.

Got it. And so maybe taking those things sort of breaking them down. So we get a fair amount of questions -- had gotten questions like into the back half of last year is what you can do, should do or shouldn't do maybe with the financing challenge and delays in that what you can do to sort of smooth those over, speed those up without necessarily taking on the liability of these systems. Maybe talk a little bit about, you mentioned some programs and pilots that you're running. Anything you can tell us about those and whether and when we might start to see benefits on that particular issue.

All right. So as I mentioned, there were 3 main headwinds. One is the demand in the underlying market. One is the higher interest rate and one is the underwriting process for those financing companies. We are able to put some together problems that will [indiscernible]. We cannot solve the other 2. We have no control over interest rates or the macro overall. But here, we did put together some programs with some of our leasing companies that we work with our partners, under which we offload a small portion of the risk. And in return, they will provide fast improvements, and we'll be able to buy deeper into the credit profile of our customers. We introduced this program only months ago. Based on the initial response, things are looking good. It is helping out. But as I said, this is only one headwinds that we see it's not going to solve everything, but definitely headwind.

And obviously, speeding up the process of financing new systems, making that easier to get done in a timely manner. It doesn't exactly help if the end market remains a little bit soft, which it felt like it softened into the back end of last year. That is some -- one of my colleagues covers specialty pharma and you're sort of seeing that maybe kind of bottoming a little bit. Wondering if that's what you're starting to see any idea as to how far away we are from sort of the bottoming stabilization or recovery in sort of volume demand out of these centers, not necessarily tied directly to you, guys, but just general utilization.

Just because of the capital nature of our business, we sell mostly capital equipment. And most of the deals and revenue is being generated in the last few weeks of the quarter. I will have a better answer for you whether we are bottoming or not, only after I see the full numbers for the quarter that most of them will come in the last couple of weeks. So only in a couple of weeks, I'll be able to say that. It looks like things are not getting better. It looks like they are not getting worse. I want to believe so. I will know in a few weeks. But they are not getting better, and I expect things to stay the same for another quarter on the [indiscernible].

Dr. Theodorou things I can imagine, aside from the capital, the actual transactions that are coming in that might be related to InMode conversations you had with clinics, colleagues or networks of clinics that you're aware of? I mean, is there any sense of InMode volumes with your general volumes? What is the aging look like use of fillers, these are kind of like proxy indicators of maybe demand flows?

It's great question, Matt. I think Q1 traditionally is a slow month for plastic surgery in these type of situations and usually picks up right now. So this is -- so up to now, no, we haven't really -- and I understand what you're saying, but on the ground, we haven't seen a slowdown. In January, we did, but that's also -- we were going back into the seasonality patterns we saw before COVID. And everyone is a little surprised like what happen what happened? No, this is the way it's always been. The problem is that InMode has never experienced it because we're a young company. And we always -- we did what we did and we went to post-COVID and everybody expected that. So nothing concerning at this point. There's always a lag behind interest rates that are high and the actual consumer, at least in our space to know this. Back in '08 and '09, the biggest impact was felt in 2010, 2012. That's when everyone got hit, which shows that chances are like people's better know their priorities. So maybe they're not feeding milk to their children and they are getting BOTOX instead. But unfortunately or fortunately, that's the way it is. So there is a lag, lipstick and cigarettes. I'm not surprised that this lagging filing now. We've been talking about a recession for more than a year now, and we finally felt it. So there is a lag. Is it going to be like '08, '09? No, I think the worst is behind us. We'll probably have a couple more quarters, which will be difficult on the ground, but looking at the clinics and talking to them. But this is a high season all the way until May and June. And then the summer predictably, it's going to slow down, but these are regular patterns. Nothing -- I haven't been called by anyone saying, we're alarmed or [indiscernible] are really down or no one's complaining, they're like standard stuff.

Okay. And [indiscernible] from some of the sort of signals of caution back in November, December or...

I didn't see it. I saw it in August, but that was seasonality, and no one was surprised. Okay. So usually, I got a call and say, "Hey, are you busy?" you, guys -- we haven't gotten those calls. Okay. No one has. So I think it's back to a normal pattern. For the young guys who just started their practices, I'm sure this is a big shock. But for guys and girls who have been up there for 18 to 20 years. Things falling back into the pattern when it shows. Now some of our biggest Morpheus clinic users did say, yes, we saw it drop a little bit, there's a lot of uncertainty also with the election, even where things are going and where people are going to spend their money and that happens. But if I had to say we're alarmed. No.

Okay. All right. So these programs on the financing process may help, we'll find out in the next quarter or 2? Maybe more importantly, this sort of like volume consumer behavior may pick up in the first half if traditional seasonality holds, is that fair? And then so whether it's signs of that in Q1 or more indication of that in Q2, That's kind of the cadence that I guess, leads you to your back half guidance of likely to be stronger. Is that in addition to the products. So maybe...

The product is a big thing. The launch -- the timing of the launch of the product, we plan to do it midyear. If it will come into June or May, maybe make or break the Q2 because Q2 will be a strong quarter or not, depending on the timing of the launch of the product. But definitely, you're going to feel it, most of the contribution would come in the second half.

Got it.

What you see is, people forget it, after COVID, 30% of all new patients coming into the offices were new patients, people who would never consider plastic surgery before. And I think that group has kind of held things in place so as not to have some steep drop off because of that increase. So now that we're going into seasonality, we're not going, oh my God, we're like, okay, we're okay. If we hadn't had that increase, I think we would have been maybe a different picture will be more felt. Does that make sense?

Yes.

You look at first-time boat buyers. Well, the majority of people who bought boats were after COVID, now the boat prices have dropped because what the hell did I do, right?

Sell me those boats.

Sell me those boats. So we are -- we belong in that category of disposable income. But because the increase, I think we're not feeling it's there, but we're probably not feeling it as strong as we thought we would. Kind of just to see the whole picture.

Got it. And then on the new products, maybe any -- it's sort of in the first half, maybe in the second quarter? Is that the right way to think about timing? And should we think of what happens sometimes with these new product launches as folks hear about any product coming and they pause on, well, we're not going to get assisted now because we got the new system. Should we expect that? How are you managing those behaviors by some of your customers?

We are trying to manage that, obviously, the word is out about the new products. We are trying to manage that, and we're trying to put together some programs that will help us who's managing that. And we've seen a couple of quarters in a couple of weeks, so if we're successful. And even if, we're not that successful, this is meaning shift of revenue between quarters. I don't expect that to be anything significant.

We've been down this road before historically. I think more often than not, and call it, early launches, call it, soft launches, it's all you hear about it as you look at it historically. So the guys know and girls know how to preposition those things. Whether they have a list, whether they put them on the list or they take deposits, little things like that. But they're used to navigate that.

Okay. And are these just not to ask you to preview with these next-gen platforms or systems are going to be, but is this going to be a full console, new console or a new attachment.

3 new platform.

So entirely new, so you have a...

So we don't have manufactured [indiscernible] in our devices. They're very hardy to have less than 28% breakdown. That [indiscernible] generate is simple. However, this is a year in the year, I will tell you the number is that leases are coming up. So this is the first time we're actually renewing our first flagship product, which is BodyTite, and we're putting new things on it. Morpheus is going to be brand new, which is a big deal for us. Brand-new abilities that it has, new handpieces, new box. So looking at the handpieces we have out there, Morpheus facing about 8,000 handpieces. Morpheus bought another 2,500, 3,000, those will have to be replaced broadly in all these other things because the new devices will not work to be old. So -- and the third one is our Optimas, which has had a strong IPL. So all these might not be the most exciting thing ever, but it's time for the refresh everything and give us an excuse to go back in and launch these products. But we're very good about it, and I think it will have an impact for sure.

Okay. And then sort of in terms of your customers talking to their customers, what, if anything is, should we look for in terms of these are some of the exciting incremental benefits of these new platforms.

Okay. So I can line up a couple of things. For BodyTite, we'll have the old BodyTite handpieces. But BodyTite, it's a surgical platform. So the surgeons are always complaining about speed. We chose safety over speed on the initial gen. Now we're putting speed inside. So faster, more powerful than we have something called Quantum, which is single bipolar 1. So just like I said, so no outside device, very quick for small areas, fractional BodyTite essentially RF energy.

So not like a pinch...

Just one insight. So eventually, the surgeons will have a whole [indiscernible] products and they'll probably end up using these more often than the older ones. But the platform will still maintain everything on it. Then they have Morpheus. We have Morpheus first technology, which is blaring the energy one shop, make it very efficient. that was only present in [indiscernible] before, now it's coming to the face. And that's a big deal because now you don't have to do 2, 3 passive procedure may take you half an hour, 40 minutes will take you 15 minutes or 10 minutes. So that's a big advantage. And the second part is something called scale, which allows you to deposit energy deep without hitting the superficial as much as superficial, so like a pyramid. That's really important for patient have sensitive skin, but more so for patients that are a skin of color. As we know, skin of color is the fastest-growing segment in aesthetics. Allergan noses. We know it. Lasers cause problems with hypopigmentation or change of color in the skin. So we already are good there, but we're doing even better. So when you approach your practice and say, "Hey, how do you want to track skin-colored patients, use Morpheus." And now we have Morpheus scale, which is less energy causing any issues whatsoever on surface more deep. That's a big advantage of our new Morpheus handpieces. And then, of course, we have our Optimas, which is a best-seller, which has a stronger IPL, 25% stronger and but just as safe. So yes, there are 3 distinct platforms that are in upgrades of our previous technology. And we're going to do well with them.

And so it sounds like a big -- and one of the key benefits here for both is speed, like as the alternative to not being able to do layering it was like a 3-step process or something before. Now you could do that in one and then obviously in [indiscernible] and faster. And can you give a sense of like how much faster from this to that.

Yes. So BodyTite, on average will take about 45 minutes to an hour. When you added to your procedure, which is probably the most negative thing about it. So we listen to our surgeons, the procedure time is going to go down from 45 to an hour to 15 to 20 minutes. So it's a big drop.

Excellent. All right. And then I guess the other side of the sort of outlook in this, it's understandable, but it's sort of margins, how are you thinking about these situations sort of temper the guidance kind of flattish as you're describing it. But wanting to continue to spend in key areas like investment in sales and marketing, investment in R&D. How are you managing that and coming up with the numbers that you put out?

So if you remember, we did take a step up in our investment in sales and marketing in 2023. We went up from about 31% of sales in 2022 to 36% of 2023, and this will continue into 2024. And that's why we say that things will stay flat and also on the spending side. R&D, same thing. We'll have a more increase in R&D. We continue to those business, we don't let headwinds and macro challenges that we see may change our plans, right? We keep everybody on board. We continue to spend what we need to spend on the R&D, continue to develop new products. We don't delay any launch because the macro is not so great. We continue business as usual and to execute on our plans. And we know that at the end of the day, sooner or later, the market will come back and the economy will improve, and we will be then ready to take over the market.

Sounds good. And that seems to continue on a -- so you're not cutting there sort of tighten your belt, but you're maintaining, say, on a dollar basis to spend into this year for the moment or any areas from a shareholder -- managing shareholder value or whatever that you're looking to sort of trim back on discretionary expenses or anything like that or on a dollar basis, could you just think about flat SG&A, flat R&D?

Yes. It's going to stay pretty much flat. Again, I think it's in the best -- it's best for the company that we continue like that we have the cash, we have the profitability to afford it, even if we need to take a cut of 1% or 2% in profitability, but to put us in a position that will enable us to take over the market because those are the other competitors, they are helping significantly, and they don't have the resources, the strong balance sheet and the profitability that we have. So if we are able to continue according to our plans, even if we need to take a hit of 1% or 2% in profitability, I think it will be -- it will pay off big time. Same thing happened in COVID by the way. We took a hit fourth quarter of 2%. We kept everybody on board. We didn't determine or lay off people. And as soon as the market came back, we were able to take over the market because all the other companies that did lay off, trying to rebuild their teams.

I think that what's important is the whole geopolitical thing with Israel. And I think investors probably need to hear about that because they're probably concerned because we're an Israeli company. And I can tell you right now, this is where Moshe excels. So the bigger the crisis, the better we do, we've got logistics plan, contingency plans, 3 different types of manufacturing plants, 30 miles from the border up north, you get rocketed still moving through double shifts. So this is not a concern, and I want to make sure that people understand that because maybe for other companies, it is in Israel, but the one that Moshe runs it's not. So I want to put people at ease about that.

Yes, mandatory military service kind of comes in handy in the situations like this because a lot of you have some involvement or experience in the military. No, that's helpful color. I appreciate that because that was a bit of a -- I mean, it's still a scary situation over there and tough in a lot of ways. But in those early weeks and months, we didn't really know which way that was going to go. So I appreciate the color. Just one other question on geography. I think the expected was for OUS do a little bit better just because some of the financing and maybe cyclical volatility in demand was really the U.S. Is that still the way to think about that?

I think one of the reasons the U.S. -- the OUS is going to grow faster is because we started developing the OUS market only later, less -- so we still have a long way to go there. We will invest in heavily in developing the international market after the IPO immediately after COVID happens, and it's tough to develop at international countries, during COVID only now with [indiscernible] of what we did, and we expect this to continue.

So [indiscernible] remiss not to squeeze in a question on, it's like with your cash generative. We get the question often in this situation, does it make sense to tuck something in and what are some of the parameters to think about make something a good fit or a bad fit?

So I think in terms of priority, we really think M&A is a main priority for us for location. We are trying to be very methodic about it and every opportunity that we're looking at, we want to make sure that it would be accretive to the EPS within 1 year. So in the second year, we expect this to be accretive. Again, it's challenging. I'll give you that. Just because of the [indiscernible] so profitable. And we have a very healthy EPS. It's really challenging to find something that within a year will be accretive, but we are very disciplined about it. And I hope that the investment community appreciate that.

So thanks so much for your time. We're at time here, but thanks for coming again this year.

Thank you very much. Thanks for having us.