Welcome to the InMode third quarter 2019 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Miri Segal of MS-IR. Please go ahead.
Thank you, operator, and good day to everybody. I would like to welcome all of you to InMode's third quarter 2019 financial results conference call. With us on the line today are Mr. Moshe Mizrahy, Chairman of the Board and CEO, Mr. Yair Malca, CFO, and Michael Kreindel, CTO. Before we begin, may I 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 view it in 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 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. Moshe will begin the call with the business update, followed by Yair with an overview of the financials. We will open the call for the question and answer session. I'll now hand over the call to Mr. Moshe Mizrahy, InMode's CEO. Moshe, please go ahead.
Thank you, Miri, and thanks to all of you for joining our third quarter financial results conference call. I would like to welcome everyone to our first quarterly earning call as a public company since our IPO, which took place on August eighth of this year. I'm sure that many of you are already familiar with the InMode story from our virtual presentation and from meetings with some of you. For those of you who will hear the story for the first time today, I hope that we will communicate the message clearly. Before I start, I want to present the team here around the table in our office in Israel. With me, of course, Dr. Michael Kreindel, co-founder, our CTO, and also a member of the board. Yair Malca, our CFO. Rafi Likerman, our VP, Finance.
I will start by updating you with the major developments that have positively affect our company since the IPO. The first one, as presented in the roadshow, we launched the Evolve platform to the U.S. market. Evolve is the first hands-free platform with three treatment modalities: skin tightening, fat destruction, and muscle stimulation, what we call EMS. The launch was only in the United States, but it was very successful in the fourth quarter. Second, as part of our global expansion strategy, we have established two fully owned sales and marketing subsidiaries, one in India and one in Australia. We have already hired salespeople and management team in each of those two subsidiaries. This initiative will help us to sell our product portfolio directly to the doctor and not through distributors.
Third, we established business plan and contacts in 2 other countries in Europe and Asia for establishing 2 additionally fully owned subsidiaries for marketing and sales in 2020. By the end of 2020, we would like to have full direct operation in 8 territories: the United States, Canada, Spain, the U.K., India, Australia, and 2 more countries, as I said, one in Europe and one in Asia. Third, we are continuing to receive regulatory approval for our unique product line. We recently received approval in Canada, we reported that, for the Morpheus8, our second-generation fractional RF device, and for our RFAL radiofrequency-assisted lipolysis technology, which cover all the BodyTite, FaceTite, AccuTite application. We also received CE mark approval in Europe for Morpheus8 and also for the FormaV for women health application. In addition to that, we're currently managing 5 regulatory processes around the world.
In Taiwan, TFDA, in Korea, KFDA, in Brazil, ANVISA, in China, CFDA, In Singapore, All this is in addition to two filings that we made recently with the FDA as additional two filings with the CE in Europe. Altogether, we have right now pending something close to at least 10 to 12 new approval, which we expect to get from all regulatory body around the world. Hopefully, all of them will be in effect in 2020. Okay. We have continued to grow worldwide. As of September 30th, our total employee was 232 people, excluding manufacturing, out of which 107 direct sales people. Before we continue to update you with the financial results for Q3, I would like to reemphasize InMode's core business and competitive advantages. These competitive advantages help us to maintain our leadership position and momentum for years to go.
InMode is the leading global provider of innovative, minimally invasive surgical aesthetic and medical treatment solution. Our proprietary products are designed to address, first, face and body contouring, medical aesthetic, and women health, using minimally invasive bipolar radiofrequency energy. Minimally invasive bipolar RF energy represents a paradigm shift in the aesthetic surgery market, offering an alternative to conventional surgery while significantly minimizing risk of scarring, downtime, anesthesia, pain, and other complications that are typical in surgical procedure. In addition, we design differentiated non-invasive medical aesthetic product as well that include fat killing and skin tightening simultaneously, permanent hair reduction using our innovative dual wavelength technology, and other treatment targeting skin appearance and texture to our high power Intense Pulsed Light technology. Our competitive advantage is based on six competitive elements, which we will maintain as long as we are keeping the momentum. The first one is our IP.
We believe that we have a very strong IP on all of our base technologies, which have been registered in several countries. So far, no one has tried to copy these technologies since we believe that everyone knows that our IP cover the technology very well. To summarize, we believe that our minimally invasive RF bipolar IP will provide us with the protection and advantage over years to come. The second competitive advantage is our know-how. During the last 10 years, we have developed knowledge and know-how with regard to how to design minimally invasive bipolar RF devices for aesthetic surgery and other surgical procedure. This knowledge covers hardware, software, and mechanical engineering. The third element is our clinical base. Since our initial introduction to the market, we have published over 40 peer-reviewed articles in the best magazines on our technology and indications.
We are the leaders of the research of minimally invasive bipolar RF clinical science. The fourth competitive element is our luminary base. We have developed a group of luminary and opinion leading doctors who are also surgeons that conduct our study, and they are great supporter of our technology. It will be very difficult for any one of our competitors to develop such unique group of luminary and opinion leading doctors. The fifth competitive advantage element is the regulatory approval. We passed all the regulatory approval processes in many countries. This process take years since the regulatory bodies around the world ask for long follow-up. We believe that this is a significant barrier entry to other competitors. The sixth element is our branding. We own the brand BodyTite, FaceTite, NeckTite, AccuTite, Morpheus8, and others, which are becoming increasingly well-known brand names. We have already sold 4,400 systems worldwide.
We're definitely considered pioneer in the industry with a strong marketing and brand position. In the third quarter of 2019, InMode generate record revenue of $40 million, a 57% increase from the same period in 2018, reflecting our continued growth and the increased adoption of our minimally invasive bipolar RF technology around the world. Net income increased by 87% year-over-year to $16.2 million in the third quarter, up from $8.6 million in the same period in 2018. We are focusing on profitable growth and are successfully pursuing our goal of international expansion, driven largely by Europe and Asia Pacific. We're increasing this expansion effort with our subsidiary established in India and Australia, and more to come, which both offer a large target market seeking minimally invasive technology that address the need of plastic surgery, cosmetic surgery, and women health.
Having boots on the ground provide us with direct contact with our customers, ensuring understanding of their need and how to effectively address them, and I mean the doctors. We have diversified product portfolio. Most of our revenue in the quarter was generated from our BodyTite, Embrace, Optimas, and Votiva. We are not dependent on any individual product.
Okay.
Now let me hand over the call to Yair. He will review and give you more detail on our financial results, and after that, we will open it to Q&A. Please, Yair.
Thanks, Moshe. Good day, everyone. Total revenue in the third quarter of 2019 grew 57% to $40 million, with gross margin of 87%. Operating expenses in the quarter totaled approximately $19 million, a 42% increase from the previous year. The increase is due largely to our expanded sales and marketing efforts. Operating margin in the quarter was 40%, compared to 33% for the same period in 2018. Earnings per share in the quarter were $0.42 per diluted share, compared to $0.26 in the previous year, an increase of 62%. We completed the third quarter with a strong balance sheet. As of September 30th, 2019, the company had cash and cash equivalents, marketable securities, and deposits of $166.3 million, out of which $70 million are net proceeds raised at a recent IPO.
On the cash flow front, across the first 9 months of 2019, the company generated $34.8 million from operating activities. With that, I will turn the call back to Moshe.
Okay. Thank you, Yair. We are pleased to open to question. Miri, do you want to handle this session?
Excuse me. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Jack Meehan of Barclays. Please go ahead.
Thank you. Good morning, good afternoon, and congrats on the first quarter out of gate. Just as my first question, the revenue came in better than we were expecting. I heard the update is where you stood at August in terms of the commercial hiring, but I was wondering, as you look forward in the U.S., what are your expectations for additional sales hires in terms of the numbers? Where do you expect to end 2019, and what's a good run rate into 2020? Then internationally, could you just give us some color on what some of the efforts you put in in Europe and Asia to drive growth?
Thank you, Jack. Thank you. I will answer your question. Currently in North America, we have 96 direct sales reps. Our plan, for 2020, is to grow to 115, between 110 and 115. Our direct sales people in the rest of the world right now is about 11 people. We would like to grow in 2020 by at least another 12, by opening more subsidiaries. As regarded to 2019, our target revenue was between $146 million-$148 million. We're now raising the target to $160, $152. As regard to 2020, we will give the target in the next conference call.
Great. That's helpful. Maybe could you just give us some color on where you're seeing traction with the BodyTite family? Just in the quarter, could you give us a sense for how many systems you placed, and where you were seeing demand from a customer perspective? Finally, just how is the AccuTite launch contributing to that? Has that been a driver of the BodyTite placements?
The answer, yes, absolutely. As we add more hand pieces to the BodyTite EmbraceRF platforms, we sell upgrade to existing customers, and we sell the new platforms with the new hand pieces. As you know, we do not want to release and reveal the numbers of platforms that we're selling every quarter, by names or by category. The only thing I can tell is that we continue to sell across three segments of our business, which is minimally invasive, which includes the BodyTite, FaceTite, NeckTite, AccuTite, EmbraceRF, and Morpheus8, all the ablative products. The second segment is the aesthetic, which is the non-invasive RF, IPL laser for more, I would say, conventional aesthetic treatment. The third part or the third segment is women health, which we introduced to the market a few new indication using the AccuTite for labiaplasty and others.
Other than that, I don't think we want to reveal the numbers of individual platforms. Again, as I said in my presentation, we do not depend on one product. We're selling across the line.
Great. Last question. The gross margins at 87.4% came in above what we were looking for in the quarter. What do you attribute the leverage on that line to, and what's a good run rate moving forward? Was there anything outside which contributed to the upside in the quarter?
Okay. First, before I answer your question, I want to say something so everybody will understand. Gross margin of above 85% for InMode, it's a must. It's not nice to have. What does it mean? It means that every time that we go back to the drawing board to design the next platform, and we're designing at least two new platforms every year, on the drawing board, we have all kind of formulation to calculate that the system that we're designing will have 85% gross margin. Otherwise, we do not start. Unless we have 85%-87% gross margin, we will never be able to invest 45% in marketing, in R&D, and other, and have a nice profit, which is the most important objective of the firm, I would say. Therefore, we will continue to maintain this level. Either it will be 85, 86 or 87.
It depends on the mix of the product that we manufacture. If the mix is more RF-based, then it's still 87. If the mix is more laser and IPL, it's still 85. If we sell more on the international market, where we recognize only the transfer price and not the full value of the system, then gross margin go a little bit below 85. On average, we will keep at least 85% gross margin on any combination product or any portfolio that we will have in the future. Did that answer your question?
It did, and I really appreciate that feedback. Just in the quarter itself, because it obviously did a lot better in the quarter, was there anything that contributed? Should we expect it kind of drops closer to 85% in the fourth quarter? What are you thinking?
You mean on the fourth quarter?
Yes. When you're looking forward, is this a good run rate? Should we just assume 85%?
Yeah. It is going to be a good run rate. Yes. The answer is yes. It will be probably the same as the third, plus minus 1%. You never calculate it by fraction of a percentage.
Sure. Appreciate it, Moshe.
Thank you.
The next question comes from Matt Taylor of UBS. Please go ahead.
Hi, thank you for taking my question, and congrats on a good quarter. I just wanted to ask a little bit more about the pipeline. Can you talk about the platforms that you were planning to launch here in the second half of the year? First, the non-invasive hands-free devices for body and face, and also the CelluTite application. How are those rolling out? What's the reception been like? Any other color that you can provide would be great.
Okay. I will. Thank you, Matt. How are you?
I'm doing great. How are you?
We're fine. Working hard, but we're fine. Yes, the Evoke. First of all, the Evolve, we launched the Evolve in the U.S. in the last month, in the last quarter, and we continue, in the fourth quarter. We will launch it in the rest of the world in the first quarter of 2020. We're still waiting for the final approval by the CE for Europe of the Evolve, which is the body hand-free device. It will coming. It come. We're almost at the end. Right now, regulatory become a bottleneck. You need to spend more money and attention to get it. We know how to do it. We have a good regulatory department here that actually file worldwide, with some assistance from consultants. This is the Evolve. The Evoke, the hand-free face treatment platform, is pending FDA approval. Hopefully, it will come soon.
The system is almost ready. We're waiting for the approval, and we're even starting to manufacture some pieces in order to launch it once we have the approval. I believe it will come either at the end of this quarter or the first of next quarter. I'm sure you understand that the FDA is most sensitive with the face, and they ask many questions to make sure that it's safe and the efficacy is according to what we said. We have done all kind of in vivo and animal testing to show them the safety, and hopefully it will come soon. The same with CelluTite. The CelluTite right now, is already FDA-approved, but we are waiting to see the results from the study that we're making from the U.S. to finalize the protocol.
These two platforms, as we promised in the roadshow, will either enter the market toward the end of this quarter, but I believe it would be better to do it right and to launch those two products sometime in the first quarter of 2020, excuse me. We have other products in the pipeline, like the EMS device and some new Morpheus tips. These are in the engineering phase, and it will come sometime in 2020. Did I answer your question?
Yes, you did. I just had one follow-up based on that. Firstly, I just was wondering, given you had, sorry, Evolve launched early last quarter, can you talk about the early uptake of that? How are customers responding to it? Was there actually material sales in Q3?
Material sale?
Sale.
Yeah. What I can say, it was a successful launch. We sold quite a few in Q3, and we have some backlog, which we are basically supplying in Q4. We increased manufacturing capacity of the Evolve recently, and now we're producing about 25 every week. It's coming, and it's going to be successful worldwide.
Thank you. Then just one follow-up on that. I guess with Evolve coming a quarter or two later, I mean, obviously, the results in Q3 were very strong despite not having any sales of that. I know you don't want to talk about the specific numbers of boxes, is there one or two areas this quarter that were very strong, that you saw an acceleration in demand? Is there any high-level color that you can provide to help us understand how different areas of the business are performing?
Well, the Evolve, the hands-free device, was actually sold only in the U.S., and it was 9% from our business, in the third quarter, close to $3.7 million, to be precise. That was a nice contribution to Q3, and it will continue to contribute in Q4 and in 2020 as well.
Okay, great. Thank you. I'll step back in the queue.
Thank you very much.
The next question comes from Kyle Rose of Canaccord Genuity. Please go ahead.
Great. Good morning and good afternoon, everybody. Thank you for taking the questions and congrats on a strong quarter. A lot's been asked, but I guess I just wanted to talk, you put out a press release I think back in late August, early September-ish, about a user meeting. Maybe you can help us understand kind of the feedback from the user meeting, and kind of how that helps inform your view of the product development and kind of the market opportunity for some of these new products. When you think about 2020, opening up two markets, sounds like one in Europe, one in Asia Pacific. Maybe just help us understand the potential for the size and the investments that need to happen to open up those opportunities. Is that something that happens in the first half? Do we see the revenue growth in the second half?
Just kind of flesh that out for us.
Okay. First, I will start with your second question. Okay? The country in Europe that we're talking about, and you can guess, is one of the biggest countries. I'm not talking about Belgium. We're not opening fully own or joint venture controlled by us in a country that will contribute a few million USD a year, or a few hundred thousand USD a year. We would like to open it in a country where the investment will pay off, and of course, it will be one of the biggest countries. In Asia, I can tell you, we're talking about China. We are trying to open something in China. We have a small company in Guangzhou, and once we get the CFDA approval, we will start operating commercially in China, direct and through some distributor. In China, you cannot go just direct. You have to combine because China is big territory.
Sometimes there's a different mentality. We are learning it right now, doing some homework in order to be prepared for the time that the CFDA will allow us to start. We are in the process of getting CFDA for the InMode RF, for the minimal invasive, and also for the InMode. As for your first question regarding the user meeting, the user meeting was the first time that the InMode actually did such meeting, and it was just good for the doctors to share information. We had something like, I don't know, six to eight lectures every day. It was for two days. Attendance was about 600 people, which is very unique for the first user meeting. We intend to continue to do it. Some doctor share some of their experience. Some doctor ask question about adverse effect. They try to share protocols, and to understand which protocol was better.
I think it's good, especially for doctors. It's a community. It's a community like a family of InMode, and we will continue to do it. We're learning from the first time, and the next time will be organized, I believe, even better, with some experience that we have from the first time. It was quite success.
Great. Just one follow-up for me. You've got a nice war chest of cash piling up, both from the recent financing and the IPO, but then also from just cash flow from operations. I guess, how should we think about deployment of capital on a go-forward basis? Your expectations for product development and gross margins are very clear. Should we expect you to be acquisitive on a go-forward basis? Just how do you view your cash utilization moving forward? Thank you.
Well, we have close to $170 million, and I will not tell you today that we know how to deploy $170 million. No. We have three areas where we will invest heavily. First, when you establish a subsidiary, you need millions of dollars. You hire people, you have real estate, you need training, you need to give them demos, you need to keep inventory, working capital. It's an investment, and this is coming from the same source. Second, if the opportunity will present itself, and we will be able to acquire complementing technology that will enable us to design something which will complement our product line, we will do it. Licensing or buying technology, and there are some technologies that we're considering right now. We're checking. We have some people coming to us with technologies that relate to wellness, aesthetic, et cetera.
This is also something that we might consider. All the rest is we're increasing our capacity of manufacturing, and that costs money. I will not say it costs $170 million, but it costs money, and we're now establishing few more lines. Probably, we would increase our production capacity by one-third next year, and we're doing it right now, and this is also, we're deploying money on all kind of manufacturing facilities, all kind of testing equipment, all kind of fixtures, and hiring, and buying inventory of components. This is also another. At the end of the day, you can see that we're generating about $16 million-$18 million every quarter, which is a lot of money. Basically, is our net profit. I assume that the money will continue to accumulate until we have some good reason to invest tens of millions of dollars.
Right now, we do not have.
Okay. Is there a follow-up, Mr. Rose?
No. Thank you for taking the question.
Thank you. Once again, if you have a question, please press star then one on a touch-tone phone. The next question comes from Jeff Johnson of Baird. Please go ahead.
Thank you. Good morning, good afternoon, guys. Just a couple follow-up questions for me. First, Moshe, did I hear you correctly, I joined the call a little late, that you do have EMS indications approved on Evolve? Then on Evoke, I know you're talking about an approval late this year, early next. We did just see an FDA approval on a product called EMFACE, E-M Face. Just wondering what that product is. We thought that might be Evoke, but it sounds like it must not have been.
Yeah. The EMFace, it's a preliminary on the Evoke. We got the approval on one indication. We're waiting for the second one. We will launch them together, you're right. This is the product. As regard to the EMS on the Evolve, it is not yet FDA-approved. Once it will be approved, we will be able to launch it to the market on the Evolve. The EMS will also be launched on the Votiva and other platform as well.
All right. That's helpful. On the women's healthcare platform, obviously, there's just been a lot of noise in the past year on there, and you seem to be sitting well compared to some of your competitors in that area. Any color you can provide on that part of the business this quarter, what it grew, how to think about the women's healthcare business over the next several quarters?
Yeah. The women health business, you know that all the industry had a problem in the middle of last year, in 2018, when everybody received the letter from the FDA. Several companies left the market, like Lumenis and Cynosure, and others. Those companies have used laser to do ablation in the vaginal wall. Since we're using RF, which is non-ablative and non-invasive technology, the FDA received our answer to the letter, and we're cleared by the FDA to continue to sell it. Actually, this market, after the FDA letter, went down significantly, and we're picking up again. Right now it's about 16% of our business, but by adding more indication to the same platform, we hope that that will grow again to the level of 20% and above.
Great. That's helpful. Last question for me, just on the new relationships in India and Australia, was there any contribution from inventory load-in to those dealers in the third quarter? Can we use this kind of $9 million international revenue number for the third quarter as a good jumping off point to think about how we grow that number over the next several quarters? Thank you.
Yeah. In Australia, there is none. We just hire the general manager and two more people. Their contribution to the third quarter would not exist. The Indian was the first quarter that we're actually selling, and the revenue in India was around $280,000-$300,000.
Thank you.
We have a follow-up from Matt Taylor of UBS. Please go ahead.
Hi. Thanks for taking the follow-up. I just wanted to ask about margins longer term. You had really strong margins this quarter, and you talked about your commitment to 85%-plus gross margin products. I guess, given the high margin number that we saw in Q3, does that give you more confidence in your gross margin trajectory over the next couple of years? Can we actually see gross margins expand? Can you talk a little bit about those dynamics? Thank you.
No, I think we're in some kind of a balance. I think to grow above 85%-87% would be very difficult, and we don't want to jeopardize the quality of the system. Of course, we can buy cheaper components and try to do cheaper, but I don't think it's necessary having 85%-87%. I do believe that we will continue to maintain this gross margin level between 85%-87%, depends on the platform, depends on the territory, depends on the end user price. I don't think it will go up to above that.
Okay. All right. Thank you very much.
This concludes our question and answer session. I would like to turn the conference back over to Moshe Mizrahi, Chairman and CEO, for any closing remarks.
Okay. Again, thanks to everybody for joining us. We will welcome you again within three months in our end-of-year earnings call. Have a good day. Thank you very much. Bye-bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.