InMode Ltd. ($INMD)

All right. Thanks, everybody, for joining us this afternoon. Very pleased to have with us Yair Malca, CFO at InMode.

So I think the topic for some time has been sort of, as I kind of make this shape with my hand of a down cycle and then the flat part of the cycle and then waiting for this up cycle. That's probably been something we've talked about a bunch over the last 2 years or 3 years. But maybe just to start off, I don't want to make too much of it. I don't want to get too overoptimistic, but it sounded like there were some signs of some improvement. This was, of course, before the events of last week, but it seemed like some hints that things might be starting to recover a touch in some of your end markets. So I hope I'm adding enough caveats and calibrating my enthusiasm enough. But tell me your thoughts on how you're looking at the market now and the cycle that you're in.

Sure. First of all, thanks for having us. It's always a pleasure to come here to Miami to be with you guys. Great conference. In terms of what we see and our message is that after 2 years of declining business that we've experienced, we expect 2026 to be flat. And hopefully, things will only get better from here. And that's basically what we have guided to, at least flat on the top line. We are expecting some kind of pressures on margins. We can touch on it later. But at least on the top line, we expect the decline to start. Overall, there still will be probably some areas and some pockets where we will see some decline and some growth that we see in other areas of the world. But overall, we would like to see a flat year, and we are putting the -- and building the foundation, especially in North America to prepare this organization for the recovery and the return of the demand. Overall, we still believe that demand for aesthetic procedures is not going to go away. People would want to come back and get aesthetic treatment. Yes, there was some decline in the last couple of years all across the board, not only with energy-based device procedures, also with injectables such as toxins and fillers, et cetera. But we believe that at some point, the demand will come back, and we can touch about the macro and the high interest rates and everything. But at the end of the day, our basic assumption is that demand is not going to go away. And we started restructuring the U.S. team. We have a new President. We appointed at the beginning of Q4, a new President and 2 new VPs, basically a new set of presidential suite in North America for us after having Moshe, our CEO, also carried the load as the President of North America for quite some time. I think that's a great step in the right direction. We have a dedicated new President of Sales for North America. We definitely see the excitement within the team. We put together a structure. I think we basically gave them almost all the resources they asked for, and now they need to start to deliver. In addition, one more things that we did this year is effective at the beginning of the year, we bifurcated a certain portion of the sales team to have them focus on nonaesthetic, what we call sometimes call wellness devices and business. So we have a team that exclusively sell the eye care product and nonexclusive also sell some of the women's health and male health products as well in the U.S. And again, that's part of what I was talking about putting together the new foundations for North America and that we will be able to grow upon when things start to recover.

Got it. Right. And I think we have also been talking about that as a strategy a couple of years ago. And I think maybe some of the conversations were that's what we're doing, but the market where it is, it's like -- we don't have to really -- we're not rushing out to do this. We want to get the right people. The fact that you're making those changes now, I mean, from our standpoint, is a sign of confidence in what you were describing before, like some stabilization. So preparing for improving growth and putting the right people in place to manage that.

Exactly. We believe that now we have the right people in place to allow us to move forward with executing this plan.

Great. And then just you mentioned financing and the rates, those had been coming down since the upward rate cycle that triggered some of the initial challenges on the system sales side. But that's also not -- I mean, our understanding is that's not the sort of like the big variable in the equation right now. It would be nice if rates continue to go down, but really, it's sparking that end market demand and getting that going up again.

Correct. In terms of headwinds that we see, obviously, softening demand by the patients is more significant in terms of headwinds than the high interest rate, but obviously, high interest rate because we are focused on selling capital equipment as a business that impact our business as well.

Got it. So a couple of elements of the strategy. One is going after nonaesthetic, and that's always been part of the view to get into extra sort of like verticals and call points and Envision is an example, urogyn and ophthalmology are examples. Maybe talk a bit about where things are. I'd run into some folks at a couple of eye care-related meetings from InMode and obviously, great to see in action. But maybe talk about what have you accomplished so far? Anything you're able to share in terms of like how do we measure that or how can we see that? But then also what some of the catalysts are to sort of kick that growth up and adoption further?

Absolutely. Yes. So as you mentioned, we are expanded outside of the traditional aesthetic into those new segments. We started with women's health, then we moved to ophthalmology, optometrists. And then the next one would be probably ENT sometime next year. As you mentioned, the ophthalmology team that we have, we have the indication for treating dry eye only in Canada. We are in the process and doing the studies that we need to in order to get a similar indication in the U.S. I think once we get this indication in the U.S., it will be easier for our sales team to sell. So we will see some uptick in sales once we get the indication, hopefully, later this year or probably next year, I think it's a more reasonable time frame. Until then, they are able to somewhat sell, but they are limited. And once we get the full indication and full clearance for dry eye, we will be able, I think, to expand more into this space. Same with women health. We are working on some interesting clinical studies around some women health procedures. I think once we get those, this might take a little bit more time, but this is a big market. It's actually even a bigger market than ophthalmology or optometrist. What we've seen in ophthalmology and optometrists in Canada, where we do have the indication make us actually think positive, very positive. We have a lot of confidence about this space. In Canada, we see that dry eye is mainly being treated by optometrists rather than ophthalmologists. And we need to see what -- we are still trying to figure out what's going to be -- how things are going to look like here in the U.S. It also depends on the state. Some states optometrists can treat the dry eye, some states only ophthalmologist. So we need to see how that plays out when we get the indication.

Okay. And platform known for Morpheus and skin tightening and less for laser, but laser has been something that you added to the portfolio recently. Maybe talk a little bit about that decision and then where the uptake has been, what the advantages are of bringing that into the mix.

Yes, you're correct. So in the last couple of years, starting actually mainly last year, we start offering more lasers. What we have seen in the market is this trend that providers offer combination treatments to their patients. And what it means is that when the patients come to the doctor, oftentimes they offer them Morpheus8 procedures together with a laser procedure. So the Morpheus8, they treat deep into the skin and maybe sometimes it's needed all the way to the fat layer. And with laser, they treat superficially the skin and do some sort of resurfacing. And that's what creates some sort of a 3D effect. That's how they used to present it to the patients when you have -- you are treating both the deeper layer of the skin and then the superficial layers of the skin. And we've seen a lot of customers -- the competitors calling on our customers and try to sell them lasers to all the Morpheus8 customers. And we realized that laser is pretty much a commodity nowadays, and we should be able to sell it ourselves. We would like to become a one-stop shop for our customers where they don't need to go to other competitors in order to get their energy-based device needs. And I think that's the direction. We started with the CO2 laser last year. We introduced about a month ago, the pico laser here in the U.S. And later on the year, we'll introduce our own Erbium laser. So this is part of our direction right now. We are still -- most of our revenue is still coming from radio-frequency-based procedures and devices, but we wanted to add these lasers. So as I mentioned, we would like to be a one-stop shop for our customers and keep the competition out of our [indiscernible]. The price that we paid for that is on the margin. We get a hit on the margins because of that because laser is a commodity and it's fairly expensive energy to work with and ASPs because of the competitive nature of the market is not significantly high. We see some pressure on the margins, unfortunately, but that's part of the cost that we need to pay in order to be a dominant player all across the market.

Yes. And that's on the gross margin and the operating margin or just...

It's mainly on the gross margin.

Mainly on the gross. So cash contribution or contribution margin to the operating line because your rep is there, because you're in the account is still a positive for -- I mean, obviously, it would be better to be selling more skin tightening...

Yes. It's always more profitable for us to sell radio-frequency-based devices than laser. But again, there is a market for laser, and we want to take over this market as well.

Right. And then any cost benefits of some of the laser products you're planning on launching in terms of -- it's never going to be as profitable as RF...

We try to combine it with some of our actual bundle deals. For us, it's a very lucrative deal to do. So in those cases where we can, at the same transaction, bundle an RF device together with a laser device, that's usually what we want to see. And that's kind of where it makes sense for us the most.

So not a new segment just from a standing start, but an adjacency that's tied into, which makes sense. And I know business generates a fair amount of cash. I mean I'll just say that there's not many companies of your size that we've seen buy back as much shares as you have in the last 2 or 3 years. But one of the struggles and pressure that you've gotten from folks, investors and analysts is like going back even like 3 or 4 years is like why not do a deal? What can you add? And the challenge has been what are we going to find that doesn't start to drag down our P&L. And so this has been, I think, a positive. Any other opportunities? Or do we -- should we expect to see more opportunities on the business development front that sort of expand the bag and maybe capture more adjacencies even though they may be plus or -- hard to beat the 80-plus percent margin?

Yes. In terms of margin, you're absolutely right. Our margins are relatively very high. It's hard to find something that's getting close to what we do. But it's not only about the margins. It's also about market expansion. And we continue to look at all the alternatives. We continue to consider -- our Board continue to consider additional buybacks, maybe even dividend and, of course, M&A. What M&A can help us is either expansion into those new areas where we entered the women's health, ophthalmology, ENT, et cetera, or in the existing business. And it doesn't have to be a traditional M&A. It can be some kind of distribution agreement that we might sign, exclusive distribution agreement with some products that we believe might be beneficial for us to add to our portfolio, at least as a first step. And if we see that it makes sense later on, we definitely have the ability to buy them if we think that's the right move for us. So we keep all the options open, and we'll see what happens.

Okay. One of the things about the business that I remember the first couple of times we talked about it, it was sort of like, well, it's capital, but then when does the recurring revenue kind of overtake the capital because that's the classic kind of med tech robot-like business model. And you have to explain to me several times and I think other ask like that's not really what we're doing. We want to create a business model for a clinic that purchases the device to run a more profitable consumer-facing business essentially by keeping the consumable costs like under control. I'm thinking of Envision, there's been some, call it, med device Envision folks pursuing dry eye. And I think some of them, no disrespect, of course, because some have been quite successful, but they are kind of taking that like consumable. Yes, like we're going to charge you, but then our business, really, we make our money off the consumables, whereas yours does not have a consumable and sort of how that -- how the response in that channel has been to a more profitable commercial opportunity they can offer their patients.

So you're absolutely right. In the aesthetic space where we know the space very well, we decided that we don't want to implement a razor and razorblade model in this space. And I think that was a big part of our success so far. Expanding into those new areas, at the moment, we still keep the same model of no razor and razorblade. However, in the future, we might consider other things. We are new to the space. We are still trying to build relationship, learn who's the different players, what are the most successful business models in the space. And if we see that we need to make changes, we will. At this particular moment, we still keep the same model we have in aesthetic that work for us very well in aesthetic and see if it's going to work there, too.

Okay. So on the -- back to margins for a second, you had been taking down as the market slowed, declining revenues year-over-year, but declining margins because you're sort of holding on to the commercial organization, staying in place and ready for the turn. Maybe talk about what happens not to get ahead of ourselves here, but when this goes from flat to 2% to 4% to 7% growth or some sort of recovery to sort of more historically standard aesthetics volumes. What does that look like on the margin front?

Okay. Great question. It also depends a lot on the mix, okay? And one of the reasons for the decline that we've experienced was the mix because most of the decline came from North America and from the U.S., where it is -- it used to be and still is the most profitable region that we have by far in terms of the margins, right? So it depends also where this growth, 2%, 3%, 4%, 7% as you're talking about is coming from. If it will come from the U.S., so yes, we should expect to see some improvement in margins. If it comes from international or from consumables, maybe less so much. So we need to see. But again, we do believe that with us putting together this new structure and new foundations in the U.S., hopefully, in future years, the U.S. will return to growth. If it will be flat this year, that will be great and then start coming back to growth in future years, 2027 and on. I think that would definitely help with improving some of the margins. We are also following very closely what's going on with the tariffs. If they are going to go away for good, maybe we can see also some improvement on the margins as well. So yes, I don't want to commit to anything, but if we play the cards right and the U.S. continue to grow and the tariffs will go away for good, maybe we might see in the future some improvement -- slight improvement on the margin.

Right. And just to again, kind of set the right cadence, you might first see an improvement in consumables. You might first -- we all might be hearing about improving volumes to our colleagues that cover spec pharma and aesthetic consumables, we might start hearing about more volumes, but it's really a period of time of seeing that, that would then lead to systems and console purchase, which then really is where the inflection and leverage comes for InMode. Is that fair?

Yes. Accurate.

So you've also launched a number of new products during this period of time. So as things were difficult in the end markets, you were next-genning some of your products, launching some new products in addition to the laser and the consoles in ophthalmology and Empower. What sorts of things can you tell us? I know you don't want to get too far ahead of your new products, but what sorts of cadence of new products that we think about this year?

So this year, we started with the Pico. In Q1, last month, we launched the Pico. We start selling that as we speak. In the last week or 2, we start selling those in the U.S. and start delivering -- start taking orders and we start delivering in the next week or 2. So we started with that. That's -- again, it's not a new technology. Pico laser has been around. It's used mainly for tattoo removals and skin treatment. I actually did the pico laser myself on my face. I had a skin treatment. I was really impressed. So we're starting with that. And later on in the year, we will bring probably a new version of the Morpheus8 together with Erbium laser that I mentioned on the same -- both of them on the same console. But that will be towards the end of the year. So I don't count on too much contribution from that product.

Okay. And no other -- you're kind of where you need -- and then the other is '27 is a reasonable timeframe for potential approval of on-label dry eye and then no other real console additions. I mean, besides -- I'm talking about on the RF side.

No, those two. The Morpheus8 is RF, it will come at the end of the year. Morpheus8 together with -- so we'll have a console that can do radio frequency, Morpheus8, together with laser on the same console.

Got you. Okay. That's helpful.

So usually, we try to stay within two platforms every year, and this is where we are.

Awesome. All right. Well, I don't know if it's the Pico laser or the Southern California climate, but you look great. And it's nice to have you here again this year. So thanks.

Thank you. Great being here.