Inmode Ltd

NASDAQ:INMD

Earnings Call Analysis

Challenging Quarter for InMode Amid Macroeconomic Pressure

InMode faced a tough second quarter with total revenue at $86.4 million, excluding $16.2 million in preorder sales. GAAP operating margin dropped to 21%, significantly down from 42% last year, and non-GAAP earnings per share decreased to $0.34 from $0.65. International sales fell by 17%, representing 47% of total revenue. The company has reduced their 2024 revenue guidance to $430-$440 million from $485-$495 million, while maintaining gross margin guidance at 82%-84%. Despite the hurdles, they remain committed to completing deliveries of their new platforms, IgniteRF and Optimus Max, and sustaining high operating margins.

Challenging Market Environment

InMode faced a challenging period in Q2 2024, with total revenue reported at $86.4 million. However, when taking preorders into account, pro forma revenue reached $102.6 million, highlighting a discrepancy tied to new platform deliveries yet to be recognized in financial metrics. The ongoing macroeconomic conditions significantly impacted the demand for aesthetic treatments, leading to a notable 30% decline in disposable sales in the U.S., an indicator of reduced procedure numbers. Selling fewer disposables suggests a tightening of consumer spending in high-cost aesthetic procedures, which commonly range from $3,000 to $7,000 per treatment.

Product Launch and Future Prospects

InMode recently launched two advanced platforms—IgniteRF and Optimus Max—which are expected to strengthen the company's market position. There is strong expected demand for these products, and while they were introduced only in the U.S. so far, plans to launch them in Europe and Asia could further enhance revenue streams. Management believes these innovations will be significant contributors to sales growth in 2025, provided the market stabilizes. This strategy is crucial as the upcoming quarters, particularly Q3, are generally softer in the aesthetic space.

Guidance Adjustments for 2024

InMode revised its full-year guidance downward, now expecting total revenue to be between $430 million to $440 million, down from previous estimates of $485 million to $495 million. Non-GAAP earnings per diluted share is projected to be between $1.92 to $1.96, compared to earlier forecasts of $2.01 to $2.05. These reductions reflect caution based on the uncertain market environment and revenue shortfalls experienced in the first half of the year.

Financial Performance Insights

The reported gross margins for the quarter were relatively stable at 80% (GAAP) and 81% (non-GAAP). However, pro forma gross margins showed a slight decline to 82% from 84% in the prior year, demonstrating the tightening financial performance amid decreasing sales. Operating expenses reduced by 11% year-over-year to $51 million, with sales and marketing expenses also dropping sharply to $45.1 million, reflecting the company's efforts to adapt to the subdued revenue environment.

Cash Reserve and Share Buyback Program

Inmode retained a robust balance sheet, ending the quarter with $729.2 million in cash, cash equivalents, and marketable securities. This liquidity provides a cushion amidst ongoing market uncertainty. The company also completed a share buyback of 8.37 million shares at an average price of $17.97, signifying a commitment to return capital to shareholders while managing tax implications related to share repurchases.

Looking Ahead: Cautious Optimism

CEO Moshe Mizrahy expressed cautious optimism for Q4 2024, anticipating a rebound following the U.S. election and potential improvements in the broader economic landscape. However, a clear recovery in demand hinges on several factors, including interest rates and consumer spending habits. In essence, While current conditions are tough, the management team seems to believe in the long-term potential of their new products and the aesthetic market as the external conditions improve.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to Inmode's Second Quarter 2024 Earnings Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Miri Segal, CEO of MS-IR. Please go ahead.

[Miri Segal-Scharia]

Thank you, operator, and everyone, for joining us today. Welcome to InMode's conference call. Before we begin, I would like to remind our listeners that certain information provided on this call may contain forward-looking statements and the safe harbor statement outlined in today's earnings release also pertains to this call. If you have not received a copy of the release, please visit the Investor Relations section of the company's IR website. Changes in business, competitive, technological, regulatory and other factors could cause actual results differ materially from those expressed by the forward-looking statements made today. Our historical results are not necessarily indicative of future performance. As such, we can give no assurance as to the accuracy of our forward-looking statements and assume no obligation to update them, except as required by law. With that, I'd like to pass the call over to Moshe Mizrahy, InMode's CEO. Moshe, please go ahead.

[Moshe Mizrahy, executive]

Thank you, Miri, and to everyone for joining us. With me today are Dr. Michael Kreindel, our Co-Founder and Chief Technology Officer; Yair Malca, our CFO; Shakil Lakhani, our President in North America, our Medical Director and VP of Medical Affairs, [Dr. Eran Krieger ]; and [ Rafael Lickerman ], our VP of Finance. Following our prepared remarks, we will all be available for question and answer.

I would like to highlight the development of the second quarter. As we previously mentioned in Q1, we launched our 2 new advanced platforms, IgniteRF and Optimus Max. We are happy to report that we have begun deliveries of both platforms. And we believe we are on track to complete deliveries of preorders before the end of the year. We are happy to see strong demand, and we believe that these innovative platforms that offer several technologies and hand pieces will be a solid contributor in the coming year. Once again, IgniteRF is the next generation of our legacy RFL technology, a minimally invasive platforms with a new Morpheus8 burst handpiece and the all new QuantumRF, a new version minimal invasive static surgical procedure in a box. The QuantumRF hand piece has been recently cleared by the FDA.

With Ignite, physician may adjust the depth of the power, allowing for more effective treatment in less time. These features are highly valued by physicians that aspire to shorten treatment time while achieving good results. The Optimus Max is a multi-application platform with Morpheus8 noninvasive RF hand pieces, IPL and laser-based treatment. It is most complicated device we have ever manufactured, and it has many features that doctors and patients desire. Such as ability to deliver different energy levels at various depth, allowing for stronger results and less time and with less discomfort. The macroeconomic trend that we discussed on our last call impacted the market demand as well as our financial results. The second quarter was a challenging one for us and for the aesthetic doctors. We have seen a major decrease in demand of treatment -- demand for treatment, mainly in the U.S.

Our Israeli team working longer shift to ensure we maintain our commitment to timely deliveries. Their dedication and hard work are crucial to our success while maintaining our leadership position in the market. Earlier this month, we have had -- we were happy to update that our FDA -- that the FDA cleared Morpheus8 for contraction soft tissue, the first and only of its kind. Our Morpheus8 treatment has become the gold standard in aesthetic treatment and our most popular technology. Additionally, the new indication enable petitioner to expand their patient base. We continue to invest in R&D to provide medical professional with the advancement they need to deliver the highest quality of care to achieve best results.

On the corporate level, I am pleased to introduce Dr. Eran Krieger as our Medical Director and VP of Medical Affair. Dr. Krieger joined the company, joined InMode, 4 years ago. He has 30 years of experience in medical aesthetics and has worked for several Italian and Israeli companies in the field. I would like to thank Dr. Spero Theodorou for his time with InMode and wish him best of luck in his future. Now I would like to turn the call over to Michael --to Yair Malca, our CFO. Yair?

[Yair Malca, executive]

Thank you, Moshe, and hello, everyone. Thank you for joining us. As Moshe mentioned, we launched two new platforms back in Q1 and started selling them on a preorder basis. Once again, this says that it's not yet been delivered, could not be recognized as revenue. Therefore, we continue to provide pro forma results, which adds to the non-GAAP results, the preorder sales and related expenses. We believe that the pro forma results better reflect our business activity during the quarter.

Starting with total revenue. Inmode generated $86.4 million in the second quarter of 2024. However, pro forma revenue was $102.6 million, which includes preorder of new platforms, not yet delivered. GAAP gross margin in Q2 was 80% and non-GAAP gross margin was 81%, while pro forma gross margin was 82% compared to 84% in Q2 of 2023. In Q2, our minimally invasive technology platforms accounted for 87% of total revenues.

Moving to our international operations. Second quarter sales outside the U.S. accounted for $40.9 million, representing 47% of total sales, a 17% decrease compared to Q2 last year. In Q2, Europe was the largest revenue contributor from outside the U.S. To support our operations and to ensure our future growth, we currently have a system of more than 250 direct reps and 83 distributors worldwide. GAAP operating expenses in the second quarter were $51 million, an 11% decrease year-over-year. Sales and marketing expenses decreased to $45.1 million in the second quarter compared to $51.1 million in the same period last year. This decrease is due to the revenue shortfall in Q2 of 2024.

Next, we looked at share-based compensation, which decreased to $5.2 million in the second quarter of 2024. GAAP operating margin for Q2 was 21% compared to an operating margin of 42% in the second quarter of 2023. The -- non-GAAP operating margin for the second quarter was 27%, and pro forma operating margin was 34% compared to a non-GAAP operating margin of 47% in the second quarter of 2023. GAAP diluted earnings per share for the second quarter were $0.28 compared to $0.65 per diluted share in Q2 of 2023. Non-GAAP diluted earnings per share for this quarter were $0.34, and pro forma diluted earnings per share for this quarter were $0.46 compared to $0.72 per diluted share in the second quarter of 2023 on a non-GAAP basis.

Once again, we ended the quarter with a strong balance sheet. As of June 30, 2024, the company had cash and cash equivalents, marketable securities and deposits of $729.2 million. This quarter, Inmode generated $42.1 million from operating activities. Regarding our latest share repurchase program, as of today, we successfully completed acquiring all 8.37 million shares at an average price of $17.97 per share. As for future capital allocation plans, we continue to carefully evaluate all options, and we will provide updates as soon as we have used to report.

Before I turn the call back to Moshe, I'd like to share with you our guidance for 2024. Full year 2024 revenue to be $430 million to $440 million compared to previous guidance of $485 million to $495 million; non-GAAP gross margin between 82% and 84%, which is the same as previous guidance; non-GAAP income from operations between $150 million to $155 million compared to previous guidance of $169 million to $174 million. Non-GAAP earnings per diluted share of between $1.92 to $1.96 compared to previous guidance of $2.01 to $2.05. I will now turn over the call back to Moshe.

[Moshe Mizrahy, executive]

Thank you, Yair. Operator, I believe we are ready for the Q&A session.

[Operator]

We will now begin the question and answer session. [Operator Instructions] The first question comes from Danielle Antalffy with UBS.

[Danielle Antalffy, analyst]

Congrats on the product launches. I guess my question is I appreciate the guidance you're giving for 2024, but looking ahead to 2025 and -- how we should be thinking about the evolution of the market here? I mean, it will be off easier comps. Obviously, you have these new product launches, which will start getting delivered in the back half of this year. So the double-digit growth, to earn to double-digit growth, in your mind is a feasible thing in 2025, even if the market doesn't turn around? Or do we really need to see that market turn around in order to get back there?

[Moshe Mizrahy, executive]

This is Moshe. I believe it will be very -- now it's very early to judge what will happen next year. We have 2 quarters ahead of us. The third quarter, as you know, in medical aesthetics is usually the softest one. And we believe that the fourth quarter probably will be a strong one following the election in the United States. We're still waiting to see the interest rate go down on lease packages on -- that will enable doctor openly to buy more systems and not wait. Right now, it's not happening yet. In addition to that, we need to see how the 2 platforms that we just launched will succeed in the market. We launched them only in the United States. We still have to launch them also in Europe and other territories. Usually, that's what we do. We started in the U.S., we continue. We all hope that all the changes that we do on the organization and the territories, the 2 companies that we have established in Japan and Germany will pick up in the second half of 2024 and we'll be ready in 2025. The plan, I can tell you, everything -- if everything will go well and the war in Israel will not escalate and this is a major issue right now for us, as everybody knows. We track that on a daily basis, especially now, all of a sudden yesterday, most of the airline discontinued fly to Israel. So hopefully, we will not be short of supplies of all kind of components in the near future or in the near few weeks. So there are several elements that we cannot foresee, and we need to wait and see what will happen in the third quarter before we can say something strongly about 2025.

[Danielle Antalffy, analyst]

Okay. That's helpful. I appreciate that. And then just on the margin side of things, I mean, you guys have been pretty transparent about your willingness to continue to invest even in a tough environment. I guess just how do we think about the potential drivers of margins here going forward -- margin improvement going forward into 2025. Are these new platforms accretive to margin, dilutive to margin in line? Any color there?

[Moshe Mizrahy, executive]

Every product that we develop and every platform that we develop and every handpiece that we develop, we designed it from the beginning, and we calculate what will be the margin. We will never develop a product that on the drawing base, it will show 60% or 65% gross margin. So everything that we do relate to margin, we designed the product, so the margin will be high. And as you can see, even when the sales go down because of many reasons, microeconomics, less demand for treatment, which we now see in the United States, as I said, the war in Israel, everything relate -- everything in the design phase, and we continue to invest in R&D, everything is planned to be on the high margin, and that's the philosophy of the company.

[Operator]

The next question comes from Caitlin Cronin with Canaccord Genuity.

[Caitlin Cronin, analyst]

I guess just maybe if you can provide some more color on why the environment was so much worse versus the prior quarters. Was it really just this deterioration in patient demand. And then on that point, if -- you noted earlier, if interest rates go down, but the patient demand remains lower, it would make sense that the providers would still not -- would still be hesitant in buying systems. Do you think both of those really have to recover for demand to come back?

[Moshe Mizrahy, executive]

Eventually, it will come back. But I know that the regular interest rate, yes, you're right, went down. But the interest rate on lease packages, especially for 5 years, the doctors are using lease companies in order to finance the purchase, did not come down enough to enable us -- to enable sell more system. And eventually, it will come. I don't know when. I believe that it will take some time. The second half of this year is crucial to see what will happen on the demand. Regarding procedures, the way we know that the procedures -- the numbers are coming down is because we sell less disposable. In the United States, we sold 30% less disposable compared to Q2 2023. That's crucial. And we're investigating the main reason for that. I believe people are saving money and doing less treatment in a time like that. Hopefully, it will go back because aesthetic people wants to continue to look nice and esthetic eventually will go up again and the technology, the special technology, that we are selling will be on demand. If you want to judge by comparing us to some of our competitors, like Cutera, which is a public company, or [indiscernible], we're still selling, we're still making money. We still have a positive cash flow. Although it's a tough time, we keep all the employees, we don't lay down or fire people right now because this is the assets of the company. Hopefully, that everything will get better, and we will continue the momentum.

[Caitlin Cronin, analyst]

Got it. That makes sense. And then just pushing a little further, you lowered the guidance further than the Q2 miss. Is that really just to reflect conservatism into the back half of the year?

[Moshe Mizrahy, executive]

Conservatism on what? I didn't understand the question.

[Caitlin Cronin, analyst]

You lowered the guidance which appeared further than the Q2 miss. So just wondering if you just expect -- you're just being more conservative with your guidance into the back half of year?

[Moshe Mizrahy, executive]

I understand the question. Thank you for repeating it. We're always conservative on the guidance. Always. I mean, we changed the guidance because the revenue in Q2, which is usually a strong quarter -- which usually was a strong quarter over the last few years, not just for Inmode for the entire industry, was not good enough. And we are not satisfied from the numbers that we show. And in the 2 quarters on the pro forma base, we did something like $196 million. In order to meet the $230 million or $240 million, we still have to make $140 million -- $240 million in the next 2 quarters. As I said before, the third quarter is usually a slow one because it's summer and people do less treatment during the summer. We all hope that we will do well in the third quarter compared to the regular numbers of the third quarter. And if that will be the case, we are -- I don't want to say absolutely sure, but we are -- we would be encouraged to see that the fourth quarter will be strong. And then we will do this $240 million to meet the $440 million guidance.

[Operator]

The next question is from Jeff Johnson with Baird.

[Jeffrey Johnson, analyst]

A couple of questions here. I guess, Moshe, you've got about 11,000 -- almost 11,000 systems now placed in the U.S., almost 25,000 globally. Remind me of any of those systems been upgraded over the years? And I think the answer is no on that. Are the new systems -- Optimus Max and IgniteRF and those kind of systems, are those systems that should have upgrade demand in addition to new system demand? Or are the feature sets different enough than the older technology in the field? Will you be offering kind of trade-in programs in that? Is that a focus? Or is it really just focused on new system sales at this point?

[Moshe Mizrahy, executive]

At this point, we are focusing on new system sales. But as we stated, more than once the Ignite is our second technology for minimally invasive RF. It's a little bit -- it's different than the body type, face type, the neck type. It is not exactly replacing them that because it's working with a different technology. So I believe the doctors who has the body type, face type, neck type platforms, which we're happy with the system, will buy the Ignite as well in order to have a comprehensive opportunity for different indications.

Regarding the Optimus Max. As you remember, we had the Optimus before the Optimus MAX, but the Optimus Max has some different hand pieces with a little bit different energy levels and more user friendly. So yes, in the future, we will do some trade in, but not -- we will not do a program to do trade in for everybody. But the plan is eventually to sell the Optimus Max to all the doctors who previously has the Optimus and they paid off -- and already paid in full original lease, which, as you know, between 3 to 5 years. So, partially, it will be trading, Mostly, it will be new system.

[Jeffrey Johnson, analyst]

Okay. That's helpful. And then two other follow-up questions. I guess, one, just on the procedural consumable sales down 30%. It sounds like you said year-over-year in the U.S. Obviously, we saw the global number in the press release. Is -- do you believe that's all just macro driven? Any indications from the field, the doctors you're talking to, about any kind of conversion to other technologies, share loss, anything there? So that's one question. And then two, your placements this quarter did go up sequentially. And obviously, I know 2Q tends to be a seasonally stronger quarter than 1Q, but that sequential increase from 1Q to 2Q was almost a fairly normal increase like we've seen in some of the past years. Is there anything to read there that on the margin, you're through the worst of it? Or I being too optimistic there? Which I might be.

[Moshe Mizrahy, executive]

Okay. Let's start with the disposables. I said that we see a drop in the disposable in the U.S. but we have some increase in other countries. So we have some offsetting numbers on the total, which were totally less than the second quarter of 2023, but the main decline or the main drop came from the U.S. market. Now the reason for that can be -- we believe it's macroeconomics, people are saving money because our treatment are not $500 or $300 like regular cosmetic treatment, hair removal, vascular lesion, et cetera, doctors are charging on minimal invasive treatment. They charge in between, I would say, $3,000 to $6,000/$7,000 per treatment. And therefore, it seems relatively expensive to some people. And therefore, I believe that's drive the downtrend.

In addition to that, just because, for example, the Morpheus was very, very popular and become a gold standard. We start seeing some Chinese copies on the market with the same name with the same logo with the same label on the back. They claim that this is made by Inmode, or sometimes even with the same part number. We don't know how they got into the market, especially Europe and some in Asia. And now we see some in Latin America. And I'm sure that there are some in the United States as well and doctor gets confused and they make mistakes to buy a $10,000 system instead of buying $120,000 system from InMode believing that is doing the same. But finally, they realize that this is the fake. We try to fight it and we do a lot of legal activity against those companies, try to stop them for bringing them into the several territories. But it's just because of the success. Therefore, the Chinese said, okay, this is a good product. Let's fake it. Let's try to develop something similar. Sometimes it looks the same. It's just a pure Chinese copy. Did I answer your question, or you had another one?

[Jeffrey Johnson, analyst]

Yes. I mean that raises about five other questions, which maybe we'll handle offline in the call back. But on the sequential increase in placements, that was the question I asked, and again, I know 2Q tends to be seasonally stronger than 1Q. I get that. But the pattern, the increase. . .

[Moshe Mizrahy, executive]

[indiscernible] What? Jeff, I didn't -- [indiscernible]

[Jeffrey Johnson, analyst]

The sequential increase in the number of units you placed in the second quarter was higher than the first quarter. I don't want to overread that and say, oh, that means the market is getting better, but that sequential increase of units placed in 2Q did go up. It did follow a somewhat normal pattern. My question is just, does that tell us that we're at kind of a little bit better place than we were maybe a quarter ago? Or is that too optimistic of a read?

[Moshe Mizrahy, executive]

I understand that. I mean, the answer relates to the difference between the regular recognition and the pro forma the system sometime -- sometime when a doctor order Optimus MAX and the deal is closed and financed and we don't have the Optimus Max. And we send them an Optimus, regular. It's not the same system, but you can start working with an Optimus. And once Optimus Max is available, we replace that. And therefore, it creates some confusion on the total system delivered. I will suggest to look on the numbers of U.S. dollars and not on the total. By the end of the year, everything will be balanced.

[Operator]

[Operator Instructions] The next question comes from Joseph Conway with Needham & Company.

[Joseph Conway, analyst]

Maybe just one question on the Optimus. You had mentioned that this is the most complicated device you had manufactured at this stage. I was just kind of curious to your thoughts on the laser, the IPO market in general, if it's growing more than minimally invasive, if this is kind of an area you guys are going after more. And maybe just a little bit more color, if you could kind of describe what portion of your business, total business is that laser ITL technology?

[Moshe Mizrahy, executive]

I assume you're talking about the Optimus MAX and not the Optimus, is that -- am I. . .

[Joseph Conway, analyst]

Yes.

[Moshe Mizrahy, executive]

Okay. Okay. Okay. On the Optimus Max, for example, the IPL is much more powerful than the one on the Optimus because we learn how to get more from the same energy level. The Optimus Max has more power in the system itself, so it can deliver more energy. The Optimus Max has a different type of software to enable all kind of new procedures, which is not available or not possible on the Optimus. The Optimus Max can handle the two Morpheus8 burst, with the scale and the burst technologies, which again was not often on the regular Optimus. On the Optimus Max, eventually, we will be able to upgrade to other laser system, which cannot be done on the regular Optimus. So overall, although it seems like the same name, it's a fully upgraded technology with a better -- I would say, with a better way to set up energy, depth, et cetera. It is much more, as I said, powerful as new hand pieces of Morpheus. The regular hand pieces of noninvasive RF like the former are the same like in the Optimus, but the outside design is a little bit different.

The system is -- I said it's the most comprehensive system, but the most complicated system that we ever manufactured. Look on the Internet and you see the system itself and you realize for yourself. But we believe that there is nothing like that on the market for regular medical aesthetic treatment, not very, I would say, invasive and this system eventually will be a very successful one.

[Joseph Conway, analyst]

Okay. Yes. And then I guess two more, I'll just ask them together. Consumable and service revenue declined this quarter; it's kind of the first time it declined in our model. Obviously, a tough comp and you laid out some of the reasons for that. I was curious, though, if the handpieces are those supply constrained for InMode, or is that more focused to the capital equipment? And then just a separate question. In terms of the share repurchase program, the 8.7 million shares, is that kind of a target or -- for a potential follow-on or potential another share purchase program, would you target that similar level? Or are you guys thinking kind of a higher level, lower level?

[Moshe Mizrahy, executive]

I will start with your first question. Handpieces is part of the system and it's a capital equipment. Handpieces is not disposable. Disposable is what you put on the hand piece in order to do the treatment or connect to the system like the body type, face type, or the quantum so you can do the procedures. So handpieces refer to laser handpieces, Morpheus handpiece, IPL handpiece, Lumeca, forma, body effects, many effects, it's part of the capital equipment. It is not disposable.

On your second question, we did a buyback of 8.37 million shares, which is exactly 10% of the total outstanding shares that we had. Why it's 10% is because of some tax issues. If we do more than 10%, we'll have to pay according to the Israeli IRS, we'll have to pay dividend tax. They allow us to do -- and hopefully, they will allow us to continue, but we ask for a pre-ruling from the Israeli IRS and they allow us to do 8.37 million shares, which is about 10% of the total shares. And, I mean, if we will decide in the future to continue with buyback, all the options are on the table right now. We will ask again and hopefully, it will be approved, so we can do some more in addition to the 8.37 million shares.

[Operator]

At this time, there are no further questions in the question queue. So this concludes our question-and-answer session. I would like to turn the conference back over to Moshe Mizrahy, CEO of InMode for any closing remarks.

[Moshe Mizrahy, executive]

Thank you very much, operator. Thank you, Miri. Thanks to all the employees of InMode in Israel, Europe, North America, Latin America, Asia in all of our subsidiaries, thank to all the distributors in the 96 countries that we operate thanks to the shareholders of InMode that are working with us for so many years. Special thanks for the Israeli team, as I said before, that work with -- in spite of the war that is now escalating, especially in the north side of Israel where we are located, continue to come to work every day and if needed, even two shifts a day, in order to be able to supply everything, very dedication. I would like to thank them especially. And we'll see you all in the next quarter. Thank you very much.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.