Neuronetics Inc

NASDAQ:STIM

Good day, and welcome to the InMode Fourth Quarter and Full Year 2024 Earnings Results Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Miri Segal, CEO of MS-IR, to review the safe harbor statement for today's call. Please go ahead.

Thank you, operator, and to everyone for joining us today. Welcome to InMode's Fourth Quarter and Full Year 2024 Earnings 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 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 website.

Changes in business, competitive, technological, regulatory and other factors could cause actual results to differ materially from those expressed in 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 turn the call over to Moshe Mizrahy, InMode's CEO. Moshe, please go ahead.

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, and Rafael Lickerman, our VP of Finance. Following our prepared remarks, we will all be available to answer your questions.

The fourth quarter of 2022 (sic) [ 2024 ] was indeed challenging for InMode as we navigate intense headwinds in the aesthetic industry, which were compounded by broader macroeconomics factor. Despite this obstacle, we stayed focused and productive in 2024, driving innovation and maintaining a strong emphasis on R&D. We launched 2 new platforms in 2024. The IgniteRF and OptimasMAX, which are both breakthrough technology, though it took longer to reach the market due to the extended training cycle and increased complexity of the tools and the manufacturing line. Now that the delivery challenges are behind us, we are optimistic that these platforms will see better adoption in 2024.

The IgniteRF platforms provide a comprehensive range of radio frequency solution to address a variety of aesthetic and surgical needs. At the heart of the platforms, is the QuantumRF 10 piece, a breakthrough technology that deliver RF energy to deeper tissue layers, achieving remarkable results while maintaining a minimally invasive approach. As we previously mentioned, the IgniteRF is an upgrade from our popular -- of our popular body type platforms. And its feature 9 advanced technology that facilitate soft tissue contraction at multiple tissue depth for optimal outcomes.

I would like to provide some color on the second platform, the OptimasMAX. It is a versatile multi-application platforms that deliver more energy and superior heat distribution, resulting in fast more efficient results. Since time is one of the doctors most valuable assets, our solution allow physicians to perform more treatment per day, which translates to seeing higher numbers of patients. Both platforms are still in the early stage of revenue, but early feedback from doctors worldwide has been positive. We hope that we can update about our progress in the coming quarters.

As you may know, InMode has a long history of leading the industry in innovation and pioneer across several technologies. We have maintained our leadership position in the aesthetic market with continuously introducing new and exciting technology and platforms. In fact, in 2025, we plan to launch 2 new platforms, the fractional laser CO2 and another platform for the medical market. We will be able to share more information as we approach the launch.

Our fractional laser CO2 platforms focused on the popular facial rejuvenation and resurfacing market. And when added to our Morpheus technology, the patients receive noticeable results and smoother and more useful skin results with a minimal downtime. Since physicians like to bundle the Morpheus treatment with the CO2 laser, we expect this FDA approved technology to gain more traction later this year. As a result of our extensive portfolio and innovative product, compound with our streamlined organization structure in line with expansion strategy, InMode is well positioned to continue our leading market position, generate superior margins and benefit once condition will recover.

We are confident in our operation and the ability to meet the demand. We have long relationship with 3 subcontractors located in Israel, none of which have had any significant delay and maintain relationships with multiple suppliers of major component.

In 2024, we returned more than $285 million to shareholders via repurchasing, representing approximately 19% of our share capital and more than double our fiscal year 2024 free cash flow. As we mentioned in today's press release, we are happy to report that our Board has approved a new tax-efficient shares repurchase program of up to 10% of our share capital to be executed over the next 3 to 6 months. Together with our 2024 repurchases, this represents approximately 27% of our shares capital to be bought within less than 15 months.

Given our strong free cash flow generation and our confidence in our business, we are also exploring in consultation with our financial, legal and tax advisers returning a significant amount of capital by the end of the year to create future value to our shareholders. We continue to evaluate our options to enhance shareholders' value as part of a balanced, disciplined approach to capital allocation. We believe this latest decision reflects our strong confidence in the company's future and commitment to delivering value for our shareholders.

Now I would like to turn the call over to Yair, our Chief Financial Officer. Yair, please.

Thanks, Moshe, and hello, everyone. Thank you for joining us. Starting with total revenue, InMode generated $97.9 million in the fourth quarter of 2024, with a gross margin of 79% on a GAAP basis. For full year 2024, revenue totaled $394.8 million, a decrease of 20% compared to 2023. Non-GAAP gross margin remained the highest in the industry, and within our target range at 80% for the fourth quarter and 81% for the full year of 2024. In Q4 and in the full year of 2024, our minimally invasive technology platforms accounted for 86% and 87%, respectively, of our total revenues. For the full year of 2024, consumables and service accounted for 20% of revenue, an increase from 16% in 2023.

Moving to our international operations. Fourth quarter sales outside the U.S. accounted for $35.2 million, or 36% of sales, a 23% decrease compared to Q4 last year. This decrease was across all regions. For the full year of 2024, sales outside the U.S. accounted for $150 million or 38% of sales, a 19% decrease compared to 2023. To support our operations and growth, we currently have sales team of more than 260 direct reps and 87 distributors worldwide.

GAAP operating expenses in the fourth quarter was $49.8 million and $204.5 million for the full year, a 10% and 5% decrease year-over-year, respectively. Sales and marketing expenses increased slightly to $44.7 million in the fourth quarter compared to $49.5 million in the same period last year. For the full year of 2024, sales and marketing expenses totaled $181.4 million, down from $193 million in 2023. The year-over-year decrease was primarily due to lower sales commissions resulting from a decline in sales and a reduction in share-based compensation. These decreases were partially offset by increases in salaries, trade shows expenses and other marketing costs.

Next, we look at share-based compensation, which decreased to $3.4 million in the fourth quarter of 2024 and $16.6 million in the full year of 2024. On a non-GAAP basis, operating expenses were $46.8 million in the fourth quarter compared to a total of $49.5 million in the same quarter of 2023, representing a 6% decrease. For 2024, non-GAAP operating expenses were $189.8 million compared to $194.1 million in 2023.

GAAP operating margin for Q4 and for 2024 was 28%. Non-GAAP operating margin for the fourth quarter and for full year 2024 was 32% and 33% compared to 45% for the fourth quarter of 2023 and for full year 2023. GAAP diluted earnings per share for the first quarter were $1.14 compared to $0.64 per diluted share in Q4 of 2023, and $2.25 in 2024 compared to $2.30 in 2023. Non-GAAP diluted earnings per share for this quarter were $0.42 compared to $0.71 per diluted share in the fourth quarter of 2023 and $1.76 for 2024 compared to $2.57 for 2023.

Once again, we ended the quarter with a strong balance sheet. As of December 31, 2024 the company had cash and cash equivalents, marketable securities and deposits of $596.5 million. This quarter, InMode generated $32.4 million from operating activities. Because of our strong balance sheet and free cash flow, we completed our fourth share repurchase program approved last September in the fourth quarter, buying back $135 million or 7.7 million ordinary shares, out of which $120 million were purchased during Q4. This is in addition to the share repurchase program approved back in May for 8.4 million ordinary shares. In total, we repurchased 16 million ordinary shares or $285 million under these programs in 2024, returning capital to our shareholders in a tax-efficient manner.

As part of our financial update, I'd like to highlight a significant onetime tax adjustment. Over the years, our U.S. subsidiary has accumulated a federal tax loss carryforward of approximately $203 million and a state tax loss carryforward of about $165.5 million. These primarily stem from employee stock option exercises that generated tax deductions exceeding recognized compensation expenses. After reviewing our cumulative income in recent years and evaluating the realizability of deferred tax assets, we released a valuation allowance related to our U.S. net deferred tax assets. This led to the recognition of deferred tax assets of $55.1 million. It's important to note that this amount has been adjusted for non-GAAP purposes.

Before I turn the call back to Moshe, I'd like to reiterate our guidance for 2025. Revenue between $395 million and $405 million; non-GAAP gross margin between 80% and 82%; non-GAAP income from operations between $130 million and $135 million, non-GAAP earnings per diluted share between $1.95 and $1.99.

I will now turn the call back to Moshe.

Thank you, Yair. Operator, we are ready for questions.

[Operator Instructions] Our first question comes from Danielle Antalffy with UBS.

I just wanted to, Moshe, get your further thoughts on capital deployment. I appreciate the new share repurchase. But you guys have been transparent in the past specifically also being opportunistic on the M&A front. Just curious if that's still the case? And then just one follow-up after that.

Well, as you know, we are always exploring M&A opportunities. Once it's come, we will report that we did. So far, we are not able to find something that we can buy or very synergetic to us. And therefore, we have decided to start expanding the buyback. In 2024, we bought $285 million of shares back from the market. And now we announced another 10%, which I believe will accumulate to another $120 million, maybe a little bit more million dollars depending on the share price. Again, if opportunity will present itself which will be either complementary to our product line or synergetic to our product line or something that had to do with the aesthetic that we do not make, I mean in the energy-based devices, which are similar to what we are doing, we will explore it and report. But right now, we have nothing in the pipeline.

Okay. Got it. And then my follow-up question -- I mean I assume you guys are seeing the sort of leading economic indicators that we see. But is there anything that you are seeing under the surface there? We now have a new administration in place here in the United States, the news flow is pretty volatile there, though, too. Are you seeing anything that gives you any comfort in a potential economic sort of turnaround here at some point in 2025? Appreciating I don't think that's what's reflected in your guidance. But just curious qualitatively what you might be seeing if there's anything that gives you some optimism or reason for optimism here?

Well, so far, the answer is no. We don't see the light at the end of the tunnel, unfortunately. And we don't see it in the beginning of 2025. Not in our business. Maybe in other businesses, they can see something. But we try to estimate when the economic market or the macroeconomics will improve something, and we said that it might happen in the second quarter of 2024. I'm sure you remember that. But it was -- we were wrong. It didn't happen. Unfortunately, the second half of 2024 was also not a good one for InMode. We don't want to do any estimation at that point, we would like to work and if something will come, maybe when interest rates will go down and we see some kind of improvement, we will report.

Our next question comes from Matt Miksic with Barclays.

So one on the sort of management structure. I know you made some changes in the fall and sort of talking about, I think, realigning the senior management team and sales and marketing and maybe CMO kind of structure against your -- the markets that you're going after. So wondering if you could give us an update as to how that's proceeding? What we should expect to hear or see about it? And then I have one follow-up.

Well, all the managerial changes that we have done were implemented in 2024. I believe we discussed that a quarter ago, we changed management in 3 countries in Europe, Spain, U.K. and France just because we felt that the existing management was not eager enough, was not within the market right and we refreshed all of this. In addition to that, we have nominated a guy to be a Vice President that manage actually the all 5 subsidiaries in Europe. It's a new position that we added because we believe that distribution and subsidiaries are working differently. And we would like to emphasize the direct sales and get it as much as we can because it will allow us to be close to the doctor and also to recognize the full value of our sales.

In the United States, as you know, and we report that, we changed management. Basically, we released the President and 2 Vice President of Sales. And we refreshed again within the organization. We did not bring people from the outside. We have 2 new Vice President of Sales, one for the East, one for the West. And also, we made a little bit different allocation as far as territory between the East and the West to maximize the ability of the reps and the directors. We do not have yet President for the U.S. or to North America because Canada stay the same. And we're still looking for -- to find somebody.

Currently, I'm also the President of North America, and I spent a few days a month in the U.S. and working with them on a daily basis. So as far as management, I'm carrying out the position of the President of North America.

As far as Asia, recently, we changed the VP who are responsible for the countries in Asia with another guy from the industry, not within the organization, but from the industry. And we hope to do some changes there. I'm flying tomorrow to visit 7 countries in Asia with him to go over country by country and determine the budget for 2025 and the strategy for 2025. And I hope that this region will deliver more than it used to. Did I answer your question?

Yes. Yes. Very helpful. Kind of overview of everything you've done. So thanks for that. And then just, Yair, for you or for you, Moshe, if you could help us understand, looking at 2025 and this uptick in interest and traction and volume both in procedures and then hopefully in equipment that we're all kind of looking for and waiting for and asking about. Maybe help us understand the cadence that you expect, not predicting when volumes will pick up, but is it patient flow and then a month or 2 later, its system demand? Or is it quarter or 2 later, it's system demand? Maybe help us understand how your business inflects if we get to the other side of this cycle here?

Okay. Good question. Well, what happened in 2024 is that, first, we saw at least 20% to 25% decrease in the demand for minimally invasive procedures. Now we know that because we sell the disposable and we can see how many disposable we sold. And don't forget, as we install additional equipment in the market, we anticipate -- we believe that the total numbers of disposable should grow, but it did not. It went down, mainly in the United States.

Second, the interest rate for leasing, which is the method by which doctors are buying equipment during the inflation time in 2024 went up to a range of 12% to 14% on an annual basis, which is very high. That, combined with the fact that doctors see less patient basically brought up the decrease in total revenue of 20% that we experienced in 2024.

Now for the future. For the future, I believe two things need to happen. If the interest rate will go down, the interest rate on leasing will go down. Once that happens and people and patient will start going back to the doctor to get minimally invasive. One thing I want to say here. A treatment of Morpheus or treatment of Quantum or treatment of FaceTite are not similar to a treatment of hair removal with laser. I mean these are $1,000 treatment and not $100 treatment. And people tend to delay that once they don't feel comfortable with the macroeconomics.

So once customers will start going back to the doctor office, and we will see that based on the numbers of disposable that we will sell to the doctors, and the interest rate will go down, at that point, we will see a turnaround. Currently, we don't see it yet.

The next question comes from Michael Sarcone with Jefferies.

This is Mike on for Matt this morning. I guess just first one to start more of a modeling type question, but we didn't see typical seasonality through the quarters in 2024. Was wondering if you can give us just some color on how you're thinking about seasonality in 2025?

Yes, that's you're spot on with why we were kind of surprised in 2024. We expected Q4 -- we expected to see typical seasonality in 2024, especially in what we used to call the pro forma numbers. And Q4 was not the strongest quarter of the year. I do want to believe that in 2025, the overall numbers would look the same as 2024, but we probably should go back to more traditional seasonality this year, where Q1 is usually the slowest quarter of the year. Q2 is a strong quarter. Q3, because of the fact that this is summertime, it's somewhat soft quarter. And then Q4 should return to be the strongest quarter of the year.

Got it. And then just the last one for me. And Moshe, I think you might have mentioned this kind of reading in between the lines. You said you have multiple suppliers for the strategic components of your systems. I guess just in light of all the volatility we're seeing around potential tariffs and when they may be implemented. Could you just maybe give us some comments around supply chain risk and how InMode thinking about what could happen if there are potential tariffs put in place either Canada, Mexico or China?

Well, I mean, right now, we don't suffer with any change in the tariff and duty and import taxes to Israel. Some of the components are made in Israel, so we don't have any problem. Some of the assemblies are made in Israel. Some we buy from the U.S., the good stuff, like diode laser, et cetera. And I hope that we will not see a 25% tariff like Canada and Mexico. I believe that the relationship between Israel and the United States are, in a sense, a good relationship, and it will not happen to us. .

The fact that we have multiple suppliers in different part of the world give us some protection as well. Because if something will happen in one country, then we can buy it from another country. The component that we're using, except maybe 3 or 4 are not exclusive to one supplier. We have many -- not many. We have at least 2, 3 suppliers that we work with in order to negotiate prices and lead time, et cetera, but -- and we maintain all of them, and they know that they are in competition with others. So if something will happen in the tariff structure vis-a-vis Israel, we are ready for that. It will probably will not affect us.

The next question comes from Caitlin Cronin with Canaccord Genuity.

Just one on consumables. So I think global consumable services down about single digits year-over-year. What about the U.S. consumables and services for the quarter?

Well, the 20% that we lost in 2024 were equal in all the territories, 20% in North America and 20% in ROW. Certain countries in Europe did well, but the overall, if you count all Europe or all Latin America or the U.S. and Canada, it's about 19% to 20% in each territory.

Great. And just some more color on the capital return that you were talking about for this year and what that would entail and if it would also be tax efficient?

The first 10% that we announced, this is pretty much the same 10% that we try to do every year. We believe it's going to be tax efficient. As for future capital allocation program, we will need to wait and see, and we will report that. We, of course, in discussions with experts and advisers, both on the tax world and the financial world. And we would like to try to do it as tax efficient as possible. But we will know only once we finalize it and report back to investors.

I believe -- just to add to what Yair said. In Israel, a buyback is considered by the Israeli IRS as paying dividend. And therefore, you need to pay 20% tax. We tried to do it in the most efficient way with some prewilling from the IRS, et cetera. So we do the best we can to buy back shares without paying dividend tax.

The next question comes from Mike Matson with Needham & Company.

I guess, first, the EPS guidance that you guys are providing, does that account for the share repurchases that you're guiding to as well?

No. We usually don't account for future share repurchase program when we put guidance out.

All right. Got it. And then it sounds like in 2024, you called out there were some supply chain challenges in addition to lower demand. So I mean I don't know if it's possible to separate those two issues, but -- was there a situation where you could have sold more systems if your supply chain have been functioning better? Or was it really just purely an issue of demand not being there?

Okay. This is Moshe. Well, just due to the war in Israel, on the first quarter, on the second quarter, because our major facilities are in what we call the war zone in the north, we had some delays in manufacturing. But as you remember, we worked 2 or 3 shifts a day on the third quarter, and we have supplied a $30 million of preorders that we received on the first and the second quarter. Q4, everything was back to normal and we delivered everything within a week or 10 days. So the decrease in revenue did not come because of logistics or supply chain or the war in Israel or disability to manufacture.

We have 2 production lines, each one of -- two production facilities, each one came capable to produce all of our platforms and disposable. So we didn't see any issue even during the months of the war to deliver. Sometimes it was back order and we supply them no later than one quarter. So most of the decrease in the revenue came because of a slowdown in the U.S. and in Europe and high interest rate. And basically macroeconomics and the fact that people, not enough people went to the doctor to get treatment.

Okay. So it sounds like it may be affected the quarterly sequencing, but kind of on an annual basis, you sort of caught up to where you would have otherwise been, I guess. Is that a fair way to summarize it?

That's correct.

Okay. All right. And then finally, just on the existing installed base, do you have any sense for how old those machines are on average? And what I'm getting at is could we start to see some sort of replacement cycle here at some point, particularly now that you're launching some new platforms or I guess, upgraded or enhanced platforms with Ignite...

Well, we have something like 27,000 systems installed worldwide, out of which 12,000 in the United States. And I would say that all this, the oldest system on the market is from probably in the U.S. from 2017. So they are not very old. Don't forget, this is an RF system. And if you maintain it right and you buy a service contract from us, you can keep it, I don't know, more than 15 years. We do see doctors are buying second machine because of the new generation that we brought to the market. For example, OptimasMAX versus Optimas, Ignite versus BodyTite. And doctor wants to go to the newest version and keep the old one so they can work parallel in 2 rooms on 2 patients. But I don't think there is any -- there's any installed base or any system that's on the market that are not being used. We see from all of the systems, we believe they're still working.

And I'll add to that for 2025, we do plan to introduce some promotions for upgrades, upgrading some of the old systems, the one that out there in the field for more than 5 years. So the doctors did pay it off, and we are going to come up with some attractive promotions for them to upgrade to, especially the new OptimasMAX and the new Ignite.

The next question comes from Jeff Johnson with Baird.

I guess just gross margin questions, last couple -- maybe some multi-part gross margin question. But in the fourth quarter, gross margin slipped below that 80% level. Is that just manufacturing inefficiencies from the lower volumes? Obviously, you've been dealing with the Israel-Hamas war. Is it that? Is it higher cost on the supply chain -- or sorry, higher discounting you might be doing in the quarter? Just what pushed that gross margin in the fourth quarter maybe below that 80% level?

Well, our gross margin in 2024 was above 80%. Now we need to remember that we're manufacturing hardware and not software. Prices of components, subassemblies and logistic and supply chain went up significantly in 2024. But we manage to be more efficient, although we lost 2% or 3% on the gross margin was still above 80%. The gross margin in 2024 was not because of the war or inefficient in the logistics. We're still very efficient in the logistics and in the manufacturing. .

We lost 2%, first, because revenue went down by 20%. And we did not cut personnel and we did not cut people. And there is always fixed cost in any product, which we maintain because that's the IP of the product -- of the company. And therefore, I believe that's one of the reason why we lost, I don't know, maybe 1% or 2%. The second reason is we did not waste prices and prices of component and subassembly went up in 2024. We believe that in 2025, once we see a new momentum, we will be able to recover 2%, 3% on the gross margin.

Okay. And then I guess two follow-ups on that, Moshe. One, so as we're hopefully moving beyond the Israeli-Hamas war, you don't believe that's going to help just from a workflow efficiency standpoint, anything like that, that alone not enough to pick up, number one, in gross margin?

And number two, as you introduce the CO2 laser, my understanding with the history of the company is that one of the things that's helped those gross margins in the 80s and solid gross margins for capital equipment is that the RF technology is relatively low cost to manufacture, especially relative to the ASP in the field to the system. So is CO2 laser manufacturing, is it a lower gross margin product? Are the input costs and of the system more expensive than RF?

Well, good question. You asked two questions. One, I mean, we all hope that the war and the ceasefire will continue, essentially on the North. So we will not go back to war situation. As you know, we're in the north, and that was war zone up to 3 months ago or even something like that. Your second question regarding the gross margin on RF versus laser, the RF, the gross margin is higher because to manufacture laser cost more. And therefore, the gross margin that we report is the average between all the RF, IPL, laser and all the other platforms that -- all the other indications that we cover in each platform.

The next question comes from Sam Eiber with BTIG.

Maybe just following up on the last question. Anything on timing you can say for the CO2 laser. It sounded like you already do have FDA approval. And then if I'm reading your commentary right, that's going to be a multi-application platform with Morpheus. I just love to hear how you're positioning that in the marketplace.

No, the CO2 laser is only CO2, cannot carry any RF. It's a laser device. Timing, hopefully, we will start seeing a traction in the U.S. market because currently, we have only FDA. We don't have other regulation on this platform. I mean for other countries. And therefore, some time to the end of the first quarter and the beginning of the second quarter.

Okay. That's helpful. And I think it's been a couple of quarters since we heard any updates on some of the adjacent products like Empower and Envision. Just wondering the latest on how some of those are doing over the last couple of quarters?

Well, like the full portfolio, 2024, Envision and Empower went down also around 20%. And therefore, I mean, once the market will pick up, we will see some increase on this medical or so-called medical products as well.

This concludes our question-and-answer session. I would like to turn the conference back over to Moshe Mizrahy, InMode's CEO, for closing remarks.

Thank you, operator. Thank you, Miri. I would like to thank everybody who is on the line for -- I would like to thank all InMode employees worldwide, the Israeli team and the U.S. team and other teams around the world, either a subsidiaries team or agent. I'm sure that many of them on the line. We do hope that 2025 will be a better year than 2024. We don't see it yet, but hopefully, it will come in the next following months. Thank you, everybody.

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