InMode Ltd. (INMD) Earnings Call Transcript & Summary

Thank you. Good afternoon, everyone. Thanks for joining us. I'm Danielle Antalffy, the U.S. medtech analyst here at UBS. And very lucky to have with us the CFO of InMode, Yair Malca. Thank you, Yair, so much for joining us.

Thanks for having me.

Maybe let's start at a high level. And can you talk about what's happening in the broader aesthetic market right now and how it has evolved over the last year? There's been some softness. Maybe talk about what's going on out there.

Sure. We definitely see and feel the softness in the aesthetic space, not only with energy-based device, but I would say, all across the board, including fillers, some toxins. I think overall, our customers, the doctors see more patients and have more -- less -- see less patients, sorry, and have less procedures. And overall, over the last year, it started with some headwinds in terms of the financing environment since we deal with capital equipment sales. I would say 80%, 90% of our systems are being financed by third-party leasing companies. So what we've seen in the financing space in the past year, 1.5 years is that the underwriting process has been more difficult, I would say. If in the past, all you needed is a credit app and you would get an approval for leasing for your customer, for the doctor within a couple of hours. Now it takes longer. And if you add to that also the high interest rate, that makes actually the monthly payment a little bit higher for the doctors. So that's another reason for them to delay their purchasing decision, maybe waiting for the interest rate to come down. Even though even with the higher interest rate, the ROI is still decent, still, some of them are what we call rate-sensitive doctors and they prefer to wait. And the main thing I believe that some of them prefer to delay their equipment purchasing is what I talked about, the slower demand for procedures overall. I think that's the main thing that impacts the industry. When doctor see that he is not as busy as he used to be during COVID or a year or 2 ago, he or she would think twice before committing for $140,000, $150,000 capital equipment investment. And unfortunately, our business tends to be cyclical. Now we are in a so-called a down cycle. No one really knows how long it's going to last. One thing I know for sure is that InMode is a very strong company financially and in terms of R&D and innovative pipeline. So whatever the slowdown is going to look like, we are going to come out of that cycle much stronger on the other side. And this is not something I can say about some of our competition.

Yes. That's a very fair point. And I want to get to that in a second. But before we go there, as we are trying to look at what's happening in the macroeconomic environment, what are the sort of leading indicators that you as CFO are tracking? Because you have to put guidance out there, and I know that's probably very difficult. So what are you looking at to sort of try to call what's going to happen here?

First of all, it is very difficult. And as you noticed even for us this year, we had to lower the guidance a couple of times throughout the year. Unfortunately, the aesthetic space is known for a fairly short sales cycle. So the visibility is not too far out, unfortunately. Usually a quarter, sometimes even less than that. But we -- that's what we need to work with when we put out some guidance. We look at having some discussion with doctors, look at the demand, consumer confidence trends, unemployment, obviously, interest rate and talking to our sales team, see what the funnel is downstream. And we take all of that into consideration. But at the end of the day, unfortunately, this is more art than science. And sometimes we do better and sometimes we don't.

Yes. And can you talk a little bit about what can you say, I guess? Well, we just had Q3, still some softness. But are you seeing any of those metrics that you're tracking start to turn in the right direction? Or is it still pretty...

I don't see an improvement, but things are not getting worse.

Got it. Stable.

So hopefully, yes, it's pretty stable. And I think once we see the consumer confidence, out of the main things -- main headwinds, consumer confidence, high interest rate and underwriting financing processes, I think the consumer confidence is the most important thing. Once they start coming back to the doctor's office to get more procedures and return hopefully within a short period of time after, the doctors will start feeling more comfortable placing orders for capital equipment. So I think that's the main thing. Hopefully, sometime during 2025, we'll start seeing that turning around. But again, it's too early to say. We are monitoring the situation. Even during the quarter, majority of revenue is coming at the last couple of weeks of the quarter. So we will know only at the very end of December how this quarter would look like, and Q4 is supposed to be the strongest quarter of the year. So we'll have a better feeling of how we end up this quarter and the year. And based on that level of activity, an excitement around the quarter end, we might be in a better position to know, okay, how 2025 is going to look like. But learning for this year mistakes, I'm not talking about guidance for next year yet. It's way too early because what I just said. But I think we are going to be conservative with what happen next year because really, we don't know and no one really knows.

Yes. If things are -- just to follow on that track, though, if things are stable, and I appreciate you want to be conservative, but at the very least, is the implication that you won't continue to see sales decline next year? Or you're not even ready to say that because who knows what can happen?

I hope so. Again, I want to see how Q4 would look like, assuming Q4 will be the stronger quarter of the year, which we expect to be seasonally, that's what we expect Q4 to be. Let's see how it ends up like, and then we'll come up with the guidance. Hopefully, it will be a strong quarter and maybe 2025, we'll be conservative and go with a flat guidance. We don't know yet. We need to wait.

Yes. Understood. Okay. And I want to follow up on something you talked about earlier. You guys have always been committed to continue investing in the business despite downturns. COVID was a time when you last did that. So maybe talk a little bit about once these macroeconomic headwinds do ease, whenever that happens, it will happen, how will InMode be better positioned to take advantage of that?

Great question. We actually are a long-term player in this space. As I mentioned, this space, we know that it tends to be cyclical. And we continue to invest even during the slowdowns because we know that at the end of the day, demand for aesthetic procedures in the U.S. and around the world is not going to go away. It will come back. And we want to continue to invest and make sure we are ready that as soon as the market start turn around and the demand is coming back, we are ready to take over the market. And as you mentioned, we've done this before, exactly the same thing during COVID when all the other companies and the competitors cut down cost, terminated employees, put them on furlough. We are the only one that kept everybody on the payroll, continue to invest, continue almost business as usual as much as we can, and we even hired some of the talent that were released to the market at that time. And as soon as the market started opening up, we were very ready to take over market shares from the competitors that they were struggling rebuild their sales team. And that played off very well last time around. And luckily, we are in a very strong financial position, and we can afford doing that. Yes, we took a hit on the operating margins. For example, last year, operating margin -- non-GAAP operating margin was 45%. This year, it's probably will be around 35%. Again, it's a big hit, but I would argue that 35% operating margin in a disaster year, many companies will take it. And that's the problem that many of them don't have these kind of margins, and they cannot afford doing that. And if you listen to their earnings calls, you'll see that they are talking about cost cutting, and we are the only ones that don't.

To follow up on that, how do you keep like the sales force, for example, engaged during downturns like this? And how do you approach R&D investment because you do have to keep new products coming to market on a fairly regular basis?

Absolutely. So with the R&D projects and the initiatives, we just tell them, we continue business as usual. We don't cut any project. We continue to launch the products that we plan to launch. Even this year, we launched 2 very important products for us, even though it wasn't a strong year. And some may say that you may want to wait with launching a product to better -- when the economy is doing better. But we decide no, we continue business as usual. So same with R&D. We continue all the projects. We don't cut on any project. And regarding the sales team, we keep them engaged by telling them about what's coming, exciting products we have in the R&D pipeline. And the fact that they see what's going on with the competitors in the industry. The fact that it's really scary out there help us keep them in-house. And also the fact that we are able to -- we don't cut also on the sales and marketing programs. We give them all the support they need when they see that their friends working with competitors don't have the tools that we give -- we provide to them to make their life easier when they sell. Another great example is the financing program that we put together earlier this year. It's a risk sharing program where InMode is taking part of the risk, like a fraction of the risk from every deal and the leasing companies take still the majority of it. We are a strong company financially. We could afford doing that. Their friends and the other companies could not. This is another big advantage and another way for us to retain them with InMode because we also give them the tools that they would not get in any other company.

Right. Okay. And you mentioned like we've been through this before during COVID. How much -- can you help quantify for us how much market share you guys did gain given your position? Is that -- and is it fair to maybe expect the same this time around?

It's very hard to say exactly how much market share we took because many of the companies are private.

Yes. So you don't have the numbers.

You don't really know. But I can tell you, a big part of our growth back in 2020, 2021 was related to the fact that we made this investment. And moving forward, as I said, I think some companies -- the entire industry shrunk. Some companies will not even survive. If this slowdown continue for more than a couple of quarters, some of them will not survive. So almost by definition, we'll gain more market share. And I think overall, customers also understand that. And when they make an investment in capital equipment, they want to make this investment as a company, that they know and feel comfortable that they will stick around for many years. And they look at InMode as the strongest company in the business, which helps a lot as well.

Yes. Okay. Got it. You have had some key executive departures recently. Can you talk about what drove those decisions and how those -- how we should think about those departures, impacting the business or not impacting the business?

Sure, absolutely. I think overall, what -- high level, what we need to understand is that the same team and the same structure that we had back in 2017 when we were $50 million revenue company cannot be the same structure. Last year, we were a $500 million revenue company and much bigger company in terms of head count. So we are no longer a start-up. I think it makes sense to start looking at changing the structure a little bit, creating some focus areas into different medical communities, start bifurcating the sales team, having more professional physicians cover their respective areas. So we have plastic surgeons that will cover the aesthetic but have urogynecologists to cover women's health, for example, and ophthalmologists to cover the ophthalmology space and et cetera, an ENT expert when we get to the ENT space. So I think that's kind of creating the specialization and focus in the organization. I think that's the right way forward if we now want to take the company from a $500 million in revenue last year towards $1 billion.

Yes. Okay. Got it. Okay. Let's maybe talk about the business model because I think that is a key differentiating factor, and we were talking a little bit about it before we got up here on stage. So you guys are capital intensive. And maybe talk about why that is the right approach versus what is typically in aesthetic, a razor-razor blade model.

Right. Again, we looked at the razor and razorblade model for a couple of times. And our conclusion is that it's very hard to make it work in the aesthetic space. In order to have a successful razor and razorblade model, you need to sell the capital equipment for a very low price and then increase -- significantly increase the price per procedure. And in order to make this work, you need to do a massive spend on sales and marketing, which sometimes cannot even make these things worthwhile because when patients come into the physician and they want to get a treatment, even if they come in asking for a specific treatment, the physician have sets of procedures that he can -- he or she can offer to them. And if in one procedure, the physician is supposed to pay the manufacturer 1/3 of what he's collecting from the patient and for InMode, for example, he's supposed to pay only 10%, so 30% and 10%, guess what he will feel more comfortable offering to their patients. And in most cases, the patient has those relationship with the physicians that even if they got exposed to the marketing activities that the company did and they came and asked for that specific product, they would listen and follow whatever their physicians will recommend. So in our space, unfortunately, many companies try to implement this model. Most of them are unsuccessful. And I think we decided to take a different approach, and that kind of is one of the key reasons for why we were so successful. We charge full price on the device, 6 figures, and we charge a very reasonable price on the disposable. It's very inexpensive. We want the physician to make a lot of money on the InMode procedures. And by making sure that, that's the case, we make it very easy for the physician to offer the InMode procedures to their patients almost as much as they can.

Yes, yes. And what is the sales pitch to a physician? Like when you're talking to or a rep is talking to a physician about buying a system, a Morpheus8, for example, and what do you tell them as far as like average number of procedures before you get -- you basically pay for the system? Like what's that conversation like?

So the Morpheus8 luckily has such a strong brand-name.

It does, yes.

So we don't need to tell them a lot. Sometimes they're calling us asking about the Morpheus8 because they have patients coming in and asking for the Morpheus8. So luckily, we have that going on for us. So again, it's not an easy sell, but the fact that we have a strong brand-name with Morpheus makes it easier. And if you look at Morpheus8, we usually try to sell it in a package of 3 to 4 -- we recommend that they sell it to their patients in a package of 3 to 4 procedures, treatments, roughly around $3,000 per package. I think we, as I said, charge probably 10% of it, like around $300, $350. So this is a very profitable business for the doctor. They keep 90% of the proceeds in their pocket. So it's very profitable. And again, it's up to them. As much as they sell it to their customers, the sooner they will return the investment.

Right, right. So yes. So basically, even if they're paying 6 figures for the capital equipment when you're making $2,500 plus per procedure, yes.

Yes. So usually, you're talking about less -- well less than 1 year.

1 year, yes.

ROI.

Okay. Maybe let's talk about from an installed base perspective, how much runway is left for InMode to place systems in the market? And I guess we tend to think about this as like, oh, x percent of plastic surgeons already have a system. And then how do you get them to buy multiple systems? And so maybe talk a little bit about where we are from a penetration perspective.

Right. So right now, I think our installed base overall worldwide is about 24,000, 11,000, 12,000 out of them are in the U.S. And keep in mind, at least in the U.S., around 30% of our customers have more than one device. So if you're looking at 11,000 to 12,000 units installed in the U.S., you are talking about roughly 7,500 physicians. And then you can start looking into what kind of category because of the minimally invasive nature of our procedures, and we started with the RFAL technology, which is focused on plastic surgeon. So we started with a plastic surgeon. Our Chief Medical Officer was a plastic surgeon. Everything was geared towards the plastic surgeon community. I would say that this is the community we are mostly penetrated with around probably 25%, if not more, of plastic surgeons have our devices.

Okay. But that's still low.

Yes. We still have a long way to -- or some way to go there in two ways. One, for example, the new Ignite platform that we launched. The new Ignite platform has -- is the next generation of the BodyTite. It has the BodyTite Turbo and the FaceTite Turbo, which are similar handpieces to the BodyTite and FaceTite but with much, much stronger energy, 50% more in energy. In addition to that, we have the Quantum, which is a unique cannula that has 2 electrodes at the [ tip steel bipolar ]. And for example, this is a rigid cannula, unlike BodyTite and FaceTite that was a flexible cannula. So there were plastic surgeons that didn't like the fact that it's flexible because they are used to work with a rigid cannula. That's what they used for liposuction procedure. Most of the liposuction procedures are rigid. So now we -- the ones that didn't want it because it was flexible, they can consider the Ignite now because we have something with a rigid cannula, for example. And going back to all the ones that already purchased the old BodyTite, they are candidates for an upgrade to the Ignite, right, the next generation. And that's a big thing. I can tell you coming from the laser industry, laser companies usually after so many years, they sell most of the new products to the existing installed base as an upgrading to the next generation. So if you look at the typical laser companies, 70% of their sales are coming from existing products. For InMode, it's still the other way around. People forget we are still a fairly young company. This is our first true replacement cycle this year with the Ignite and the OptimasMax. Still 70% of our revenue, 65% to 70% of our sales in the U.S. are coming from new customers. So we are still in the phase of bringing new customers to the InMode family. Yes, we are probably highly penetrated or penetrated the highest with the plastic surgeons. But with dermatologists, for example, which is the largest community than plastic surgeon, we are not because we didn't focus on them at the beginning. We started focusing on them only in the last couple of years. So with them, we are probably 5%, 6% penetrated. We still have a long way to go there. In addition to med spas, in addition to the new categories that we are after, the women's health, ophthalmologists, ENTs, et cetera.

Yes. And just on the point of I think you said 70% of your sales are to new customers...

In the U.S., yes, certainly.

In the U.S., yes. And so in this sort of downturn, that hasn't changed at all. It's held steady.

Correct. Yes.

Okay. That's interesting. And what about the international markets? Like what are the big markets for you internationally? And what's the incremental runway for growth there?

So obviously, looking at some of the veteran companies in the space, they make most of the revenue actually from the international markets. We are still not there. We started with focusing, as I said, in the plastic surgery community in the U.S. So in the last couple of years, we start expanding in the international markets. This is definitely a growth engine for us, all over the international markets. Europe, Asia, even Latin America, we still have a long way to go there. We started putting some resources towards those markets. During COVID, we didn't see too much because the international markets got severely impacted by COVID. But now we start seeing some of the results. We are still -- I can tell you, there's no single country outside of North America that is responsible for more than 3% of the revenue. But I think overall, this is definitely one of the growth engine of the company. We made some changes in Europe, went direct in some more countries. Same in Asia. We went direct in Japan. It takes some time from the point when you start going direct in certain countries until you start seeing meaningful contribution. But overall, long term, international market is going to be a growth factor for us. Even though right now, same in the U.S., some countries are suffering similar headwinds as we experienced here in the U.S. short term.

Yes. Okay. Maybe also you alluded to this earlier, but I appreciate you guys are very committed to being an aesthetic company, but you have made a foray into women's health. You will in ophthalmology. Maybe talk a little bit about how to think about those markets and how they're additive to your TAM and your go-to-market strategy. And anything you can say about Empower and how successful that's been in women's health?

So yes, overall, maybe I'll start by saying that both the Empower and the Envision products are also suffering from the same headwinds that the entire portfolio on the entire industry is suffering. They are maybe doing slightly better than the rest, but still they're suffering from the same headwinds. But overall, I think this is part of our growth strategy as well, going into those categories with specific indications, and we continue to work on some additional indications, especially in the women's health. We are working on some exciting indications in the future. So we are definitely going to continue to develop this space. But we don't forget for one second that we are an aesthetic company. So in addition to the new products that we bring to the aesthetic space, when we launch a product to a certain community of doctors, let's say, women's health or ophthalmology, in addition to the applications that's specific to their field of use, we also have the aesthetic application. And by doing that, we're attracting more physicians into the aesthetic world. And in this current environment where reimbursement are going down, those doctors are looking for ways to increase their revenue, to grow their practice. And we try to teach them, educate them that one of the best ways for them would be to introduce cash-based procedures to the practice. And I would argue that there is no better cash-based procedure for them to offer to their patients other than aesthetic. So this is definitely something that they discover at some point, and then we can upsell them additional devices that are pure aesthetic. And that's the plan, to attract them into the aesthetic space.

Yes. And so Empower -- I'm going to focus on Empower because that is one, I think you guys launched that in '23, was it last year or 2022?

Yes, yes, '22 or '23, yes.

And you had a lot of success right out of the gate. I mean I think you guys exceeded your initial guidance, but now you haven't talked -- you don't break it out anymore. I mean how has Empower -- I don't think it's because it's not important, I think.

No, it is important. We did ramp up pretty quickly. We always said it can be a $40 million, $50 million product a year.

And you got there...

And we got it in 1 year instead of over 2, 3 years, we got it in year 1 already. We are pretty much at that level. As I said, it still suffer from the headwinds. I think once we are able to see the economy recover and when we'll bring additional handpieces and additional application with hopefully additional indication to this product, that actually will give it another boost.

Yes. Well, and my question was less about, I guess, Empower too, but how it's grown your physician base. Is there a way to quantify? Like I don't know if you have what percentage of your treating physicians are GYNs? And then also how much beyond Empower those physicians are doing because I think that's the point, right?

Yes. We have several hundreds of them. It's not small.

Out of that like 7,500, it's a few hundred.

Yes, probably around 500, maybe more physicians, OB/GYN. I would say, many of them, we see -- when we track the disposable orders, we see that they order also purely aesthetic tips as well. So we did some analysis at some point, it was almost 1 to 2. In every vaginal tip that they order for vaginal procedure, they order 2 purely aesthetic tips. So in every vaginal treatment, they upsold 2 traditional aesthetic treatment. So we see that this thesis is working, the fact that we are able to attract them into the aesthetic space.

For the Envision product, is there any reason to think that would be different, faster, slower?

Again, we need to learn the market a little bit more to see if optometrists are a little bit more conservative. But overall, the same thing, we have on the Envision also 2 pure aesthetic procedures to take care of periorbital wrinkles, brown spots on the face. So definitely, we are going to give them this opportunity to upsell also aesthetic procedures to their patients. And it makes sense because they have this relationship with the patients. They're already there, coming to treat their dry eye problems. And the doctors can tell them, "Hey, I have this new procedure that can help you with the wrinkles around here. If you are treating your eye, let's do a complete rehaul of your eye."

Of your face, yes.

Let's start with the eye, yes, but technically, yes. Technically, they can do a Morpheus and IPL on the entire face. They have the capabilities and they can definitely do that.

Okay. And in the minute we have left, I do want to ask you about capital deployment priorities. I appreciate this has been a tough year. And prior to this year, you were pretty transparent about searching for potential acquisitions. Where do you stand with that now?

So we were pretty transparent that our priority is M&A. However, we couldn't find anything. So we moved to the second thing on our priority, which is buyback. We completed already one program earlier this year. We are in the middle of completing the second program. Again, we did not give up on M&A. Just in the current environment, we couldn't find anything that would make sense for our shareholders that would not be dilutive for the EPS. But we will keep looking. But in the meantime, we keep accumulating cash. And we understand this case belongs to the shareholders, and we try to return it in a way of a buyback.

Yes. And just thinking about as you search for M&A, like how we should be thinking about sort of what the criteria are that you're looking for?

I think we are looking into not only aesthetic, also into the new spaces we are after, women health, ophthalmology, ENTs. We wanted to be accretive at least to our EPS. Obviously, a very high margin. It's almost impossible to find something that will not be dilutive to our margin. But we wanted to be accretive to our EPS within, let's say, at least 1 year.

Okay. Okay, great. Well, we went a little bit over. Thank you so much, Yair. Thanks, everyone.