...So let me get us kicked off here. I'm Matt Taylor, the US Medical Supplies and Devices Analyst here at Jefferies, and I'm pleased to be joined here by the management team from InMode. With my luck, we have the CFO, Yair Malka, and also the Chief Medical Officer, Spero Theodorou. So this is meant to be a fireside chat, so I'll do most of the question asking here for the initial part of the format. But if we have time at the end, we can have some audience questions as well. So Yair, let me turn to you to kick it off with kind of a high-level question.
So for some of those in the audience who don't know InMode as well, maybe you could give us just a really brief history of how InMode was formed and talk about some of the key products. And then bring us up to speed with some of your more current trends as you've been transitioning to the product refresh of some of the core products that really started the ball rolling a few years ago.
Sure, Matt, thanks for having us. It's always a pleasure. InMode started back in 2008, 2009, with a focus on a different energy from the laser energy that used to be around at the time. We focus on radiofrequency-based treatment, as well as minimally invasive treatment. So that was kind of a different shift to what used to be done. And I will let Dr. Spero Theodorou, who is with me, to talk about the technology, maybe.
Sure.
Then I'll come back to the business model. This is also something that's very unique about us.
I'm always a big proponent that if you can't explain things in one paragraph, then you don't know what you're talking about, or your thing doesn't actually work. So here's the bottom line: radiofrequency technology or energy has been around for a very long time. It's not new. Medtronic has a $5 billion division, et cetera, et cetera. So all we did is we took that RF technology, and we harnessed it for aesthetic medicine. We found that skin tightness, tightening, which is, you know, and collagen retraction, happens at a certain temperature. So our technology is bipolar radiofrequency. It targets those temperatures, and it causes contracture or tightening. That's their patent, that's what the whole company is based around, and that's our entry into the aesthetic world. So even though, we can get really, really technical or really high-end, that's basically it.
So the holy grail of plastic surgery or aesthetics is the ability to tighten skin without scars, and that's sort of where we are, and we're about 40% ahead of everyone. We'll continue to innovate in that respect. That's what, that's what we're chasing, and we've been able to accomplish it to a large extent.
Maybe just to expound on the differentiation in your business today, can you, Spero, first, talk about why bipolar is better than laser and how it compares to surgery, the kind of outcomes that you're getting?
Right
... the trade-offs that you make doing one of your procedures versus-
So-
-doing a surgery or-
That's a great question.
CoolSculpting or something.
That's a great question. So I think it's important to differentiate from what's out there and what we actually do. Ours is minimally invasive procedures. When you hear about CoolSculpting, that's non-invasive, so that's a whole different other segment, which we also have part of it, but a majority of what we're known for is minimally invasive operations. So I would say in some way, we are the Intuitive Surgical aesthetics. We took out the big operations out of the hospital, we brought them to the office, and we're able to execute on that. Now, how is it different than lasers? Well, laser RF is a blind energy. Laser recognizes pigment, and because of that, the RF is able to go as deep as you want. Controlling that depth and delivering that without damaging the surface structures is what bipolar can do.
Monopolar, which has been around for a long time, and companies that do that are basically good for cutting or coagulating during surgery, so that's been around a long time. But the companies that have adopted monopolar energy and tried to get out there and do the things they were doing have failed. I think you know what those companies are.
Right.
So, we're the last man standing, but we were the first man standing. So, you know, that's basically, basically it. No one can come into our segment. Everyone has tried. Our patents are still good for a very long time, so we have a large barrier of entry and about a hundred publications to prove it. So it's important that we're not just up here preaching, but we're important that we're doing peer review and having KOL adoption, and doing everything the right way for, have a staying power, which I think is InMode's biggest advantage. We're not here for today, we're not here for tomorrow, we're here for the long run. So what you're seeing, and all the criticism that you'll probably hear in the next hour, it's irrelevant.
We're here for the long run because our stuff is being used more than anything else. We're not just selling boxes. So that, that, that we're very proud of. Sorry, it's a little long-winded answer-
No, that's great.
... but part of the problem.
Because of this very strong IP protection, and because of the fact that we are focused on radio frequency energy, another thing that differentiates us from laser companies is the margins.
Yeah.
Because of the efficiency of radio frequency and the strong IP position. So the fact that we are able to deliver over 80%, 83%-85% gross margin constantly as part of our business model allow us to spend what we need to do to spend on sales and marketing in order to grow the market. And this is a very sales-driven space. So the fact that we have the financial profile to continue to spend 35%, sometimes even more% of our revenue on sales and marketing, it gives us this competitive advantage that laser companies cannot have. They usually typically have 55% gross margin... so it's very hard for them to compete.
Yeah, certainly a great financial profile, which I wanna get into. I guess first I wanted to continue talking about the products a little bit. We've talked about the applications. Maybe we could touch on a couple of the platforms, 'cause I also wanna talk about how you're updating them. So the first couple platforms that you launched were really BodyTite, FaceTite for minimally invasive surgery to do fat reduction and skin tightening. Maybe talk about how those fit into the portfolio today, and then some of the other kind of marquee applications. Since we're in the Marriott Marquis,
Thank you for that.
like, like Morpheus and
Right
... the other solutions.
Thank you, Matt. Those are excellent questions. So I think it's important to say that this year is one of the years where our first technology, which is BodyTite and FaceTite, that we're revamping that, right? So the second generation is coming out, and it has a lot of new elements on it. Yair can talk about the leases that are coming up as well. So our replacement cycle is this year. And we're not just replacing, we're actually improving and changing things, and based on that technology, we're introducing Morpheus, different upgrades on Morpheus, which is really important because that's our lead technology at this point across all, almost all our platforms.
Within Morpheus, we have the capability of always doing skin of color, but now the new modifications increase that and make it even better. As a result, why is that important? Because that's the largest and fastest-growing segment in aesthetics. Allergan knows it, so we're doing it as well. So that allows a practice to capture those patients, where before they couldn't. Technically, that means you could do darker color skin patients without having problems. So we're proud about that. Our IPL, which is what Dr. Michael Kreindel invented, intense pulsed light, we have a stronger version of that coming out. Finally, we have something that's... I think it might eventually replace BodyTite, which is called Quantum.
That is internal Bipolar RF, which is used for superficial skin tightening and will allow pretty much any doctor in the office to be able to tighten skin in small areas. A lot more powerful than anything else. Like, think about it as the new version of BodyTite in a box, in your office, without liposuction for small area tightening. So we're very excited about that. We're waiting for FDA approval on that, but we've already you know, introduced it, a soft launch, and everyone's very, very excited about that. So we think all those things will kick in in Q3, Q4, and we're gonna see a lot of value from that. But we think it's. So the doctors are excited because it's groundbreaking technology, as far as that's concerned.
And the fact-
Yeah
... that it's more powerful actually allowed the doctor to do the treatment in a shorter time. And as you know, the most expensive resource for a doctor is his time. So if we are able to help him shorten his treatment time, he can have more time to do other procedures and make more money. So this is a very strong value proposition that we offer. And to elaborate on the leasing side, what Spero said, as you know, a big portion of our transaction are being financed by leasing companies, third-party leasing companies. And usually, it's a five-year lease term. That's the usual terms that we see in the space. So the BodyTite was introduced in 2017, 2016, so does the Optimas.
Many of those products has been paid off by the doctors. The leasing are out, and this will be a good opportunity to go and sell them the new technology.
Yeah. Maybe let's turn this a little bit to how that this will play into the financials. So, you mentioned before you have a, you know, a capital sales model, so maybe we could touch on that. And then now that you're doing this first big refresh with the new products and the leases, you know, being up may provide that opportunity for people to upgrade or refresh. Can you talk about how you think the refresh cycle will play into your sales as you move through this year, as you're transitioning some of those lines, and then what it could ultimately become over the next 2-3 years?
Because it's our, our first, true, refresh, people tend to forget that we're still fairly a young, company. This is our, first, product, refresh. So it's very hard for me to, to say how quickly it's gonna pick up, especially as we now focus mainly on selling to new customers, but that, there's definitely big opportunities, opportunities there. I can tell you from my experience with laser companies, the refresh, cycles can get to almost 50% of, of the sales of products, sometimes even more. But again, for us, it probably will start slow, and we'll start building it up, as we go. Main focus, at least this year, would be less on, on, upgrades, more on, new product sales.
You know, this year you talked about some headwinds in the first quarter as you've transitioned those lines with some supply chain challenges and booked some non-GAAP revenue in the first quarter. So can you talk about those challenges where we sit today, how you view the resolution path for them, and maybe touch on the non-GAAP revenue, what that means, how that was booked?
Sure. In terms of the overall headwinds that we start seeing actually at the end of 2023, end of last year, we start see the, the headwinds with the demand for aesthetic procedures, and the problems that we've seen in the financing, the space. In terms of underwriting, is more difficult right now to get a doctor approved, as well as interest rate keep going up.... and that results in higher monthly payments for the doctors. So taking all this into consideration, kind of posed significant headwinds for us. It continued in Q1, and unfortunately, we still feel the those headwinds also into Q2. We were hoping that things would ease a little bit.
We were hoping to see an interest rate cut at the middle of June. Obviously, that's not gonna happen, and now I hear that some analysts are even doubt if we are even gonna see any interest rate cut this year. So unfortunately, the headwinds continue. In terms of the supply chain, we were able to put together the production lines for the Ignite, which is the next generation of the BodyTite, and for the OptimasMax. Ignite, we already received last week the first shipment into the U.S. And again, we start selling it only in the U.S. for now. We'll expand internationally later, but we start with the U.S. as almost always. OptimasMax, probably in the next week or two, we'll get probably end of next week, we'll get to the U.S.
It's gonna take us some time to deliver all the pre-sales that we did in Q1 and at the beginning of Q2. So this kind of shift would continue into Q3, for sure, maybe a little bit Q4. What we did with the pre-sale is basically because the word was out, doctors did not want to buy an old technology and preferred to sit on the fence, waiting for the new technology to come. So what we did, we sold them the new technology, but in the meantime, we provide them with the current technology. For example, a doctor that was interested in the OptimasMax, we sold them the Optimas with the right to upgrade to the OptimasMax when available.
We provided them the Optimas last quarter in Q1, so he can start working with it, start making money, and in the next few weeks, and in the next few months, we will, once we get the OptimasMax, we will replace his Optimas with the OptimasMax. So this process takes time.
So when you say it could continue through part of Q4, is that the time it'll take you to basically catch up and, A, I guess, replace all of the-
Yeah. The plan is that by the end of Q3, but it might spill into Q4, but for sure, by the end of the year, we are not going to be catch up. And that's why when we provide guidance, we talk about the entire year, and we don't provide quarterly guidance. So for the entire year, there will not be any difference between the GAAP revenue to the pro forma revenue.
Mm-hmm.
It's just the shifting between quarters.
Okay. Okay. And just one kind of accounting rev rec question. So, let's say you catch up by end of Q3 or whatever-
Mm-hmm.
-The time frame is. How does that transition work in terms of the non-GAAP revenue that you booked when you catch up?
So in those quarters, we will continue to show pro forma revenue. So pro forma revenue is the real business that we closed.
Mm-hmm.
The accounting revenue is basically the revenue that we recognize based on shipments. Sales that we had in Q1, because they had the right to upgrade to the OptimasMax, we could not recognize them.
Mm-hmm.
We will recognize them only upon shipment. So for GAAP revenue, you will see a revenue only based on shipments. For pro forma revenue, you'll see the revenue based on the time that we close the transaction.
Understood. Okay. And then maybe let's transition. You mentioned some of the macro headwinds this year with financing that have been weighing on the business for the last 6-9 months. Can you just talk more broadly about the underlying trends? How are you seeing those develop around the world? Are there any kind of trouble spots, or are there any places where you think demand is picking up? And since we talked about rates and the impact that that has, maybe you can give us a sense for how much sensitivity you think your business has to rates. So if we were to see a half-point rate cut or whatever the number is, do you think that would cause any kind of immediate pickup, or is it a psychological thing for your customers?
Maybe I'll start with that. It's a big part of, it's a psychological thing. You know, we have what we call the rate-sensitive doctors, and they know that the interest rate is very high, and it's about to come down, so why would they lock themselves in a 5-year lease if they can wait a little bit and get lower interest? We see that happens often. If you think about it, the difference in the interest rate increased their monthly payment by a few hundred dollars. So instead of maybe $3,000 monthly payment, it's $3,300, $3,400. The ROI is still there for them, but there's still a psychological, a big psychological effect. Regardless, as I said, that was only one...
Interest rate was one of the problem. We had also the underwriting process that is being more significant nowadays. You know, a year and a half ago, all you needed to get a doctor approved is just a credit app. Credit app only, credit application only, and you could get a doctor approved. These times are over, and now we have leasing partners asking for a full set of financial statement, last two years of tax returns. They do a lot of due diligence before they provide us an approval. And you know what we say in our space, "Time kills deals." And the longer the process takes, the higher the chances a deal will go sideways.
We did put a program together earlier this year, what we call a risk-sharing program, with one of our leasing partners. We are taking a small fraction of the risk, up to 6%, and they take 94%, and in return, they are willing to provide a credit decision faster. So have a shorter underwriting process because we are taking part of the risk. And also, they are willing to buy deeper, as we call it. So, willing to take not only A credit, also B credit customers. This is also obviously helps, but as I said, there is a series of headwinds that we see. So we are able. On some of them, we do have control, and we are able to come up with solutions.
But, you know, the macro headwinds that we see, some kind of some problem with the consumer confidence that we see, not only with our products or across the entire industry and across also other industries as well. So this is something we cannot control. You can see in North America, we are the biggest aesthetic medical device capital equipment player in North America. When there are macro headwinds, it's very hard for us to bypass those headwinds. In the international markets where we are still kind of growing, in the growing phase, we are definitely not the biggest. We still have a long way to go. In some pockets, we are able to go despite those headwinds.
If you look at Q1, Q1 was a record quarter in Europe for us. So in markets where we are not too big, we are able to grow, in some of them, to grow, despite the headwinds. But since we are the biggest player in North America, that makes things a little bit different, difficult, until, you know, the economy start turning around.
You mentioned some of the assistance you're providing to help kind of grease the wheels with financing. Maybe I could just ask, A, is there more that you can do, that you should do there? Are you happy with how the program's going? Could you expand it?
Yeah. So the program is working very well, and we are looking to expand it to maybe do something with other partners. Some of it will be exactly the same, some of it will be similar in a way. But the concept is that you know it's the same risk-sharing concept. We are taking a small part of the risk to make the lenders feel comfortable lending to our business.
Mm-hmm.
It's a win-win situation. Investors are asking me why I don't use my entire balance sheet to start doing that. We are not there yet. Why would I take 100% of the deal on my balance sheet if I can take only 6%?
Mm-hmm.
I think, for us, that's the way to go at the moment, and there are, there seems to be other lenders that are interested in participating in similar programs.
Maybe speaking of the balance sheets, given there's been some of these challenges and pressure on the stock, you've talked about doing more buybacks now. So can you talk about capital allocation, how we should think about the buyback program, how you're executing that, and what are your calls on cash going forward? You talked about a lot of M&A in the past, but we haven't seen a lot of deals yet.
So, M&A has been, and it still is, our first priority. We believe that if we want to provide long-term value to our shareholders, diversifying our assets is the right way to go. However, we are very disciplined with our M&A strategy, and we just don't go to buy something to or to do M&A just for the sake of doing M&A. We want to make sure it's a good fit and it's accretive to the EPS. You know, one of our problems is that we are very profitable, so we don't want to buy some assets that will end up being dilutive for our financials. And specifically, we focus on EPS, so that's—this is still our focus.
Find an M&A target that would make sense, be a good fit, and would be accretive to the EPS. We say within at least a year. You know, when you pick up some assets, you sometimes need to integrate them, you need to turn them around to some extent. So we don't expect it to be accretive immediately, but at least within a year, I think it's a reasonable expectation. Again, these rules are not set in stone, but that's what we are looking for, and we have been very disciplined, and that's why so far we didn't find any. So therefore, we looked at the other alternatives. We have all the options, all the options are on the table, and our board evaluate them from time to time there.
And the main options are M&A, buyback, and dividend. So we saw that we couldn't find a good M&A target. We keep accumulating cash. We decide to move to try to do buyback as a form of a capital allocation. We announced a buyback program for up to 10% of our outstanding share. I think it's a very very nice program, at least to start with. So far, all the buyback programs that we've put in the past, we executed on them fairly fast, we don't sit on them for years, and I expect the same thing here. And once we complete this program, we'll see what to do next.
Hopefully, we'll find an M&A target, and if not, maybe we look at other alternatives, maybe dividend, maybe another buyback. We'll see. Maybe a combination.
... All right, very good. So we have just a little time left. Maybe for the last question I'll ask here, Spero, can you talk a little bit about some of the new products in the pipeline? I'd love to hear an update on how things are going with ophthalmology, and then maybe some of your efforts in women's health or whatever else you can talk about in the skunk works with you and Dr. Kreindel.
Right. So certainly, our women's health, we are still foot on the gas on that. It's gonna take time. We're going for indications for overactive bladder. You know, we do have... And I know there's been confusion on this, but it's important that I differentiate. On the actual Empower platform, we do have a handpiece that has an indication for stress urinary incontinence. What we're talking about is specifically for radiofrequency microneedling for overactive bladder, and we have found that our initial study that came back was very, very encouraging, and we're going deeper now, and we find the results have improved dramatically. So that pathway to the FDA takes time, but we're committed to go all the way. That's not gonna happen overnight. That's mainstream gynecology, that's mainstream... And 45,000 gynecologists are not going to adopt a machine overnight.
But we have to take that path, but because we do believe there's a large market there that we need to address. Our studies on HPV are also very important, and we're also committed to doing that as well. Our preliminary pilot studies are coming back very encouraging to say, and we're continuing down that path as well. So those are the two elements in that respect. Having said that, our Empower is a very strong platform. The aesthetic components that are on that Empower are selling very well, and we always had the theories: How do we increase TAM? How do we increase TAM? Because there's only so many pockets you can sell to in aesthetics, right?
So going into these practices and saying you have these overactive bladder patients, you have these women, what else can you do for them? Can you do Morpheus? Can you do skin tightening? And we found that our first 10 top practices, gynecology in the country, for every radiofrequency, vaginal microneedling tip, they order 10. So it's 10 to 1. Across the board, it's 1 to 2.5. So that means that we are making inroads. We're still an aesthetics company. We're not going into these tangents, not being focused. We're focused, but we know that our goal is to be able to help these practices actually make money as well, cash, because of the reimbursement issues. So that's basically the foundation of the Empower platform. We're bringing in some very strong KOLs.
We have some good things going on with the erectile dysfunction. Our first study is done. The data just came in last week, and I'm happy to share that with you, Matt. It's actually very encouraging. So, we can move quickly there. Mishka has already developed the platform, is already, you know, good to go, pretty probably. I'm not sure I'm gonna promise when that's gonna come out, but my part's done. So that's important, we're excited about that. Now, we got some good R&D here. That's some good pilots coming out of Israel. And I think that's another, again, a wellness quality of life thing.
It may not be aesthetic, but if you ask every wife out there, you know, whether it is aesthetic, what's more important is sleeping at night with her husband snoring or not? I think they'll have a lot of repercussions in that respect. But the truth, all kidding aside, we're not going after sleep apnea. We're going after snoring. So, our radiofrequency in the cartilage and the molding and what it can do has been tried before, but unsuccessfully, because of the use of monopolar and the damage done. In our hands, it's actually quick procedure, 15 minutes in the office, and it, it stops it. Now, whether you have to do it once a year or not, you know, maintenance, well, that's something we have to see, but we're very encouraged by that as well. So strong R&D pipeline.
These things take time, and that's what I keep on saying, and I think this is a theme of this year. Everyone expects us to keep on going bonkers like we always have, but we're not Superman, you know? We have a great team back in Israel doing what we can. We got our great sales team here, but at the end of the day, we're using all this bipolar RF mandate we have in different applications in the body, and the ones that are not necessarily purely aesthetic, you have to go down the medical pathway. You have to go and do it right. Otherwise, you'll be punished. So that's sort of the route we're taking, and that's a 3-5-year route, no question about it. But in the meanwhile, aesthetics is attached to it.
Does that kind of answer your question, Matt?
Yeah. Well, you guys done a lot to look forward to, and guys, thanks so much for your time. Thank you.
Thank you for having us.
You're welcome.
Thank you for having us, Matt.