Good afternoon, everyone. Thanks for joining us. I'm Danielle Antonski, the U.S. MedTech analyst here at UBS, and very lucky to have with us the CFO of InMode, Yair Malca. Thank you, Yair, so much for joining us.
Thanks for having me.
Maybe let's start at a high level. Can you tell us about what's happening in the broader aesthetic market right now and how it has evolved over the last year? There's been some softness. Maybe talk about what's going on out there.
Sure. We definitely see and feel the softness in the aesthetic space, not only with energy-based devices, but I would say all across the board, including fillers, some toxins. I think overall our customers, our doctors, see more patients and have less patients, sorry, and have less procedures, and overall, over the last year, it started with some headwinds in terms of the financing environment. Since we deal with capital equipment sales, I would say 80%-90% of our systems are being financed by third-party leasing companies, so what we've seen in the financing space in the past year, year and a half, is that the underwriting process has been more difficult, I would say.
If in the past all you needed is a credit app and you would get an approval for listing for your customer, for the doctor, within a couple of hours, now it takes longer. And if you add to that also the high interest rate, that makes actually the monthly payment a little bit higher for the doctors. So that's another reason for them to delay their purchasing decision, maybe waiting for the interest rate to come down. Even though with the higher interest rate, the ROI is still different. Still, some of them are what we call rate-sensitive doctors, and they prefer to wait. And the main thing, I believe, that some of them prefer to delay their equipment purchasing is what I talked about, the slower demand for procedures overall.
I think that's the main thing that impacts the industry. When doctors see that he's not as busy as he used to be during COVID or a year or two ago, he or she would hesitate before committing for $140,000-$150,000 capital equipment investment, and unfortunately, our business tends to be cyclical. Now we are in what's called a down cycle. No one really knows how long it's going to last. One thing I know for sure is that InMode is a very strong company financially and in terms of R&D and innovative pipeline. So whatever this slowdown is going to look like, we are going to come out of that cycle much stronger on the other side, and this is not something I can say about some of our competition.
Yes. That's a very fair point. And I want to get to that in a second. Before we go there, as we are trying to look at what's happening in the macroeconomic environment, what are the sort of leading indicators that you as CFO are tracking? Because you have to put guidance out there, and I know that's probably very difficult. So what are you looking at to sort of try to call what's going to happen?
That's always very difficult, and as you noticed, even for us this year, we had to lower the guidance a couple of times throughout the year. Unfortunately, the aesthetic space is known for a fairly short sales cycle, so the visibility is not too far out, unfortunately. Usually a quarter, sometimes even less than that, but that's what we need to work with when we put out some guidance. We look at having some discussion with doctors, look at the demand, consumer confidence trends, unemployment, obviously interest rate and talking to our sales team, see what the funnel is downstream, and we take all of that into consideration, but at the end of the day, unfortunately, this is more art than science, and sometimes we do better and sometimes we don't.
Yes, and can you talk a little bit about what can you see, I guess, where we just had Q3, still some softness? Are you seeing any of those metrics that you're tracking start to turn in the right direction, or is it still pretty?
I don't see an improvement, but things are not getting worse.
Got it.
So hopefully, yeah, it's pretty stable, and I think once we see the consumer confidence, out of the main things, my main headwinds, consumer confidence, high interest rate, and underwriting financing processes, I think the consumer confidence is the most important thing. Once they start coming back to the doctor's office to get more procedures, in return, hopefully within a short period of time after, the doctors will start being more comfortable placing orders for capital equipment, so I think that's the main thing. Hopefully, sometime during 2025, we start seeing that turning around, but again, it's too early to say. We are monitoring the situation.
Even during the quarter, majority of revenue is coming at the last couple of weeks of the quarter, so we will know only at the very end of December how this quarter would look like. And Q4 is supposed to be the strongest quarter of the year. So we'll have a better feeling of how we end up this quarter and the year. And based on that level of activity and excitement around the quarter end, we might be in a better position to know, okay, how 2025 is going to look like. But learning from this year's mistakes, I'm not talking about guidance for next year yet. It's way too early because what I just said. But I think we are going to be conservative with what happens next year because we don't know, and no one really knows.
Yeah. If things are just to follow on that track, though, if things are stable, and I appreciate you want to be conservative, but at the very least, it's the implication that you won't continue to see sales decline next year, or you're not even ready to say that because who knows what can happen?
I hope so. Again, I want to see how Q4 will look like. Assuming Q4 will be the strongest quarter of the year, which we expect to be seasonally, that's what we expect Q4 to be. Let's see how it ends up like, and then we'll come up with the guidance. Hopefully, it will be a strong quarter, and maybe 2025 will be conservative and go with the flat guidance. We don't know yet. We need to wait.
Yeah. Understood. Okay. And I want to follow up on something you talked about earlier. You guys have always been committed to continue investing in the business despite downturns. COVID was a time when you last did that. So maybe talk a little bit about once these macroeconomic headwinds do ease, whenever that happens, it will happen, how will InMode be better positioned to take advantage of that?
Great question. We actually are a long-term player in this space. As I mentioned, this space, we know that it tends to be cyclical, and we continue to invest even during the slowdowns because we know that at the end of the day, demand for aesthetic procedures in the U.S. and around the world is not going to go away. It will come back. And we want to continue to invest and make sure we are ready that as soon as the market starts turning around and the demand is coming back, we are ready to take over the market. And as you mentioned, we've done this before, exactly the same thing during COVID. We went to other companies and the competitors cut down costs, terminated employees, put them on furlough.
We are the only one that kept everybody on the payroll, continued to invest, continued business as usual as much as we can. And we even hired some of the talent that were released to the market at that time. And as soon as the market starts opening up, we were very ready to take over market shares from the competitors that they were struggling, rebuild their sales team. And that played off very well last time around. And luckily, we are in a very strong financial position, and we can afford doing that. Yes, we took a hit on the operating margins, for example. Last year, operating margin, non-GAAP operating margin was 45%.
This year, it probably will be around 35%. Again, it's a big hit, but I would argue that 35% goes to operating margin and it. Last year, many companies will take it. That's the problem that many of them don't have these kinds of margins, and they cannot afford doing that. If you listen to their earnings calls, you see that they are talking about cost cutting, and we are the only ones that don't.
To follow up on that, how do you keep the sales force, for example, engaged during downturns like this? And how do you approach R&D investment? Because you do have to keep new products coming to market on a fairly regular basis.
Absolutely. So with the R&D purchasing initiatives, we just tell them we continue business as usual. We don't cut any projects. We continue to launch the products that we plan to launch. Even this year, we launched two very important product spots, even though it wasn't a strong year. And some may say that you may want to wait with launching a product when the economy is doing better. But we continue business as usual. So with R&D, we continue all the projects. We don't cut on any project. And regarding the sales team, we keep them engaged by telling them about what's coming, exciting products we have in the R&D pipeline. And the fact that they see what's going on with the competitor, with the industry. The fact that it's really scary out there helps us keep them in-house.
And also the fact that we are able to. We don't cut also on the sales and marketing programs. We give them all the support they need when they see that their friends working with competitors don't have the tools that we provide to them to make their life easier when they sell. Another great example is the financing program that we put together earlier this year. It's a risk-sharing program where InMode is taking part of the risk, like a fraction of the risk from every deal.
And the leasing companies take still the majority of it. We are a strong company financially. We could afford doing that. Their friends at other companies could not. This is another big advantage and another way for us to retain them with InMode because we also give them the tools that they would not get in any other company.
Right. Okay. And you mentioned that we've been through this before during COVID. How much can you help quantify for us how much market share you guys did gain given your position? And is it fair to maybe expect the same this time around?
It's very hard to say exactly how much market share we took because many of the companies are private.
Yeah.
So you don't really know. But I can tell you a big part of our goals back in 2020, 2021 was related to the fact that we made this investment. And moving forward, as I said, I think some companies, the entire industry shrank. Some companies will not even survive. If this slowdown continues for more than a couple of quarters, some of them will not survive. So almost by definition, we'll gain more market share. And I think overall, customers also understand that. And when they make an investment in capital equipment, they want to make this investment in a company that they know and feel comfortable that they will stick around for many years. And they look at InMode as the strongest company in the business, which helps a lot as well.
Yeah. Okay. Got it. You have had some key executive departures recently. Can you talk about what drove those decisions and how you should think about those departures impacting the business or not impacting the business?
Sure. Absolutely. I think overall, what high-level what we need to understand is that the same team and the same structure that we had back in 2017, when we were a $50 million revenue company, cannot be the same structure. Last year, we were a $500 million revenue company and a much bigger company in terms of headcounts. We are no longer a startup. I think it makes sense to start looking at changing the structure a little bit, creating some focus areas into different medical communities, some bifurcating the sales team, having more professional physicians cover their respective areas.
So we have plastic surgeons that will cover that, have urogynecologists to cover women's health, for example, and ophthalmologists to cover the ophthalmology space, etc., and ENT experts when we get to the ENT space. So I think that's kind of creating these specializations and focus in the organization. I think that's the right way forward if we now want to take the company from a $500 million revenue last year to all the billions.
Yeah. Okay. Got it. Okay. Let's maybe talk about the business model because I think that is the key differentiating factor. And we were talking a little bit about it before we got up here on stage. So you guys are capital-intensive. And maybe talk about why that is the right approach versus what is typically an aesthetic, the razor-razorblade model.
Right. Again, we looked at the razor-razorblade model for a couple of times. And our conclusion is that it is very hard to make it work in the aesthetic space. In order to have a successful razor-razorblade model, you need to sell the capital equipment for a very low price and then increase, significantly increase the price per procedure. And in order to make this work, you need to do a massive spend on sales and marketing, which sometimes cannot even make this work right because when patients come into the physician and they want to get a treatment, even if they come in asking for a specific treatment, the physician has a set of procedures that he or she can offer to them.
And if in one procedure, the physician is supposed to pay the manufacturer a third of what he is collecting from the patient. For InMode, for example, he's supposed to pay only 10%. So 30% or 10%. Guess what you will feel more comfortable offering to the patient. In most cases, the patient has this relationship with the physicians that even if they got exposed to the marketing activities that the company did and they came and asked for that specific product, they would listen and follow whatever their physician will recommend. In our space, unfortunately, many companies try to implement this model. Most of them are unsuccessful. I think we decided to take a different approach.
That kind of is one of the key reasons for why we were so successful. We charge full price on the device, six figures, and we charge a very reasonable price on the disposable. It's very inexpensive. We want the physician to make a lot of money on the InMode procedures. By making sure that that's the case, we make it very easy for the physician to offer the InMode procedures to their patients almost as much as they can.
Yeah. Yeah. And what is the sales pitch to a physician? When you're talking to a rep that's talking to a physician about buying a system, a Morpheus8, for example, and what do you tell them as far as average number of procedures before you basically pay for the system? What's that conversation like?
The Morpheus8 luckily has such a strong brand name.
It does.
We don't need to tell them at all. Sometimes they're calling us asking about the Morpheus8 because they have patients coming in and asking for the Morpheus8. So luckily, we have that going on for us. So again, it's not an easy sell, but the fact that we have a strong brand name with Morpheus8 makes it easier. And if you look at Morpheus8, we usually try to sell it in a package of three to four. We recommend that they sell it to their patients in a package of three to four procedures, treatments, roughly around $3,000 per package. I think we, as I said, charge probably 10% of it, around $300-$350. So this is a very profitable business for the doctor. They keep 90% of the profits in their pocket.
Yeah.
So it's very profitable. And again, it's up to them. As much as they sell it to their customers, the sooner they will return the investment.
Right. Right. So yeah. So basically, even if they're paying six figures for the capital procedure equipment, when you're making $2,500 plus per procedure.
Yes. So usually, we're talking about well less than one year.
One year. Yeah.
Right.
Okay. Maybe let's talk about from an installed base perspective, how much runway is left for InMode-based systems in the market? And I guess we tend to think about this as like, "Oh, you're X% of plastic surgeons already have a system." And then how do you get them to buy multiple systems? And so maybe talk a little bit about where we are from a penetration perspective.
Right. So right now, I think our installed base overall worldwide is about 24,000; 11,000-12,000 out of them are in the U.S. And keep in mind, at least in the U.S., around 30% of our customers have more than one device. So if you're looking at 11,000-12,000 units installed in the U.S., you're talking about roughly 7,500 physicians. And then you can start looking into what kind of category.
Because of the minimally invasive nature of our procedures, and we started with the RFAL technology, which is focused on plastic surgeons. So we started with plastic surgeons. Our Chief Medical Officer was a plastic surgeon. Everything was geared towards the plastic surgeon community. I would say that this is the community we are mostly penetrated with, around probably 25%, if not more, of plastic surgeons have our devices.
Okay. But that's still low.
Yeah. We still have a long way to or some way to go there in two ways. One, for example, the new Ignite platform that we launched. The new Ignite platform is the next generation of the BodyTite. It has the BodyTite Turbo and the FaceTite Turbo, which are similar handpieces to the BodyTite and FaceTite, but with much stronger energy, 50% more in energy. In addition to that, we have the Quantum, which is a unique cannula that has two electrodes and the internal cooler. And for example, this is a rigid cannula, unlike BodyTite and FaceTite that was a flexible cannula. So there were plastic surgeons that didn't like the fact that it's flexible because they're used to work with a rigid cannula. That's what they're used to for liposuction procedures. Most of the liposuction procedures are rigid.
So now, the ones that didn't want it because it was flexible, they can consider the Ignite now because we have something with a rigid cannula, for example. And going back to all the ones that already purchased the old BodyTite, they are candidates for an upgrade to the Ignite, right, the next generation. And that's a big thing. I can tell you, coming from the laser industry, laser companies usually, after so many years, they sell most of the new products to the existing installed base as an upgrade to the next generation. If you look at the typical laser companies, 70% of their sales are coming from existing products. For InMode, it's still the other way around. We forget we are still a fairly young company.
\This is our first true replacement cycle this year with the Ignite and the OptimasMAX. Still, 70% of our revenue, 65%-70% of our sales in the U.S. are coming from new customers. So we are still in the phase of bringing new customers to the InMode family. Yes, we are probably the highly penetrated or the highest with the plastic surgeons, but with dermatologists, for example, which is the largest community than plastic surgeons, we are not because we didn't focus on them at the beginning. We started focusing on them only in the last couple of years. So with them, we are probably 5-6% penetrated. We still have a long way to go there. In addition to med spas, in addition to the new categories that we are after, the women's health, ophthalmologists, ENTs, etc.
Yeah, and just on the point of, I think you said 70% of your sales are to new customers in the U.S.
In the U.S.
Yeah, and so in this sort of downturn, that hasn't changed at all. It's held steady.
Correct.
Okay. That's interesting. And what about the international markets? What are the big markets for you internationally, and what's the incremental runway for growth there?
Obviously, looking at some of the veteran companies in the space, they make most of the revenue actually from the international market. We are still not there. We started with focusing, as I said, in the plastic surgery community in the U.S. So in the last couple of years, we started expanding in the international markets. This is definitely a growth engine for us all over the international markets, Europe, Asia, even Latin America. We still have a long way to go there. We started putting some resources towards those markets. During COVID, we didn't see too much because the international markets got severely impacted by COVID. But now we start seeing some of the results.
We are still, I can tell you, there's no single country outside of North America that we're responsible for more than 3% of the revenue. But I think overall, this is definitely one of the growth engines of the company. We made some changes in Europe, went direct in some more countries, same in Asia. We went direct in Japan. It takes some time from the point when you start going direct in certain countries until you start seeing meaningful contribution. But overall, long-term, international markets are going to be a growth factor for us. Even though right now, same in the U.S., some countries are suffering similar headwinds as we experience here in the U.S., short term.
Yeah. Okay. Maybe also, you alluded to this earlier, but I appreciate you guys are very committed to being an aesthetics company, but you have made a foray into women's health. You will in ophthalmology. Maybe talk a little bit about how to think about those markets and how they're additive to your TAM and your go-to-market strategy and anything you can say about Empower and how successful that's been in women's health.
Yeah. Overall, maybe I'll start by saying that both the Empower and the Envision products are also suffering from the same headwinds that the entire portfolio and the entire industry is suffering. They are maybe doing slightly better than the rest, but still, they're suffering from the same headwinds. Overall, I think this is part of our growth strategy as well, going into those categories with specific indications, and we continue to work with some additional indications, especially in the women's health. We're working with some exciting indications in the future. We are definitely going to continue to develop this space. We don't forget, for one second, that we are an aesthetic company.
So in addition to the new products that we bring to the aesthetic space, when we launch a product to a certain community of doctors, let's say, women's health, so ophthalmology, in addition to the applications that are specific to their field of use, we also have the aesthetic application. And by doing that, we are attracting more physicians into the aesthetic world. And in this current environment where reimbursements are going down, those doctors are looking for ways to increase their revenue, to grow their practice.
And we try to teach them, educate them that one of the best ways for them would be to produce cash-based procedures for the practice. And I would argue that there's no better cash-based procedure for them to offer to their patients other than aesthetics. This is definitely something that they discover at some point, and then we can upsell them additional devices that are pure aesthetic. That's the plan to attract them into the aesthetic space.
Yeah. And so I'm going to focus on Empower because that is one, I think you guys launched that in 2023. Was it last year?
Yeah.
Or 2022?
2022 or 2023, yeah.
And you had a lot of success right out of the gate. I mean, I think you guys exceeded your initial guidance, but now you haven't talked to you don't break it out anymore. I mean, how has Empower? I don't think it's because it's not important. I think.
No, it is important. We did ramp up pretty quickly. We always said it can be a $40-$50 million product a year.
You got there.
We got it within one year. Instead of over two-to-three years, we got it in year one already. We're pretty much at that level. As I said, it's still suffering from the headwinds. I think once we are able to see the economy recover and when we bring additional handpieces and additional applications with hopefully additional indication to this product, that actually will give it another boost.
Yeah. Well, and my question was less about, I guess, Empower too, but how it's grown your physician base? Is there a way to quantify? I don't know if you have what percentage of your treating physicians are buying? And then also, how much beyond Empower those physicians are doing? Because I think that's the point, right?
Yeah. We have 700 of them.
How does that look? $7,500, and it's a few hundred or?
Yeah. Yeah. Probably around 500, maybe more. Physicians, OB-GYN, I would say, many of them we see when we track their disposable orders. We see that they order also purely aesthetic tips as well. So we did some analysis. At some point, it was almost one to two on every vaginal tip that they order for vaginal procedure. They order two purely aesthetic tips. So on every vaginal treatment, they upsell two traditional aesthetic treatments. So we see that this is working, the fact that we are able to attract them into the aesthetic space.
So the Envision product, is there any reason to think that would be different, faster, slower?
No. Again, we need to learn the market a little bit more to see if ophthalmologists are a little bit more conservative. But overall, same thing. We have on the Envision also pure aesthetic procedures to think of. There are your orbital wrinkles, brown spots on the face. So definitely, we are going to give them this opportunity to upsell also aesthetic procedures to their patients. And it makes sense because they have this relationship with the patient. They're already there, coming to treat their dry eye problems. And the doctors can tell them, "Hey, I have this new procedure that can help you with the wrinkles around here. If you are treating your eye, let's do a complete rehaul of your eye.
On your face.
Yes. You start with the eye, yeah. But technically, yes. Technically, they can do a Morpheus, an IPL on the entire face. They have the capabilities, and they can definitely do that.
Okay. And in the minute we have left, I do want to ask you about capital deployment priorities. I appreciate this has been a tough year. And prior to this year, you were pretty transparent about searching for potential acquisitions. Where do you stand with that now?
So we were pretty transparent that our priority is M&A. However, we couldn't find anything, so we moved to the second thing on our priority, which is buyback. We completed already one program earlier this year. We are in the middle of completing the second program. Again, we did not give up on M&A. Just in the current environment, we couldn't find anything that would make sense for our shareholders that would not be dilutive for the EPS. But we are keeping things. But in the meantime, we keep accumulating cash. And we understand this cash belongs to the shareholders, and we try to return it in a way of a buyback.
Yeah. And just thinking about as you search for M&A, how we should be thinking about sort of what the criteria are that you're looking for?
I think we are looking into not only aesthetic, also into the new spaces we are after, women's health, ophthalmology, the ENTs. We want it to be accretive at least to our EPS. Obviously, we have a very high margin. It's almost impossible to find something that will not be dilutive to our margin. But we want it to be accretive to our EPS within let's say at least one year.
Okay. Okay. Great. Well, we went a little bit over. Thank you so much, Yair. Thanks, everyone.
Thank you very much.