Welcome to the InMode Third Quarter 2019 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Miri Sigal of MSIR. Please go ahead.
Thank you, operator, and good day to everybody. I would like to welcome all of you to InMode's Q3 2019 financial results conference call. With us on the line today are Mr. Moshe Myswahi, Chairman of the Board and CEO Mr. Yair Malka, 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 a business update, followed by Yair with an overview of the financials. We will then open the call for the question and answer session. Now hand over the call to Mr. Moshe Mizrahi, InMode's CEO. Moshe, please go ahead.
Thank you, Mimi, and thanks to all of you for joining our Q3 financial results conference call. I would like to welcome everyone to our Q1 re earning call as a public company since our IPO on which took place on August 8 this year. I'm sure that many of you are already familiar with the InMode story from our roadshow presentation and from meetings with some of you. And 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, Doctor. Michael Kreindel, Co Founder, our CTO and also a member of the Board, Yair Malka, our CFO, Raffia Likerman, our VP, Finance. I will start by updating you with the major developments that have positively affected 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 1st hands free platform with 3 treatment modalities: skin tightening, fat destruction and muscle simulation, what we call EMS. Although the launch was only in the United States, but it was very successful in the Q4. 2nd, as part of our global expansion strategy, we have established 2 fully owned sales and marketing subsidiary, 1 in India and 1 in Australia. We have already hired salespeople and management team in each of those 2 subsidiaries.
This initiative will help us to sell our product portfolio directly to the doctor and not through distributors. 3rd, we established business plan and contact in 2 other countries in Europe and Asia for establishing 2 additionally fully owned subsidiary 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. Spain, the U. K, India, Australia and 2 more countries, as I said, 1 in Europe and 1 in Asia.
3rd, we are continuing to receive regulatory approval for our unique product line. We recently received approval in Canada and we reported that for the Morpheus 8, our 2nd generation RF device and for our RFAL, radiofrequency assisted glycolysis technology, which cover all the BodyTite, FaceTite, AccuTite application. We also received CE Mark approval in Europe for Morpheus8 and also for the former V for women health application. In addition to that, we are currently managing 5 regulatory processes around the world: in Taiwan, TFDA in Korea, KSDA in Brazil, ANVISA in China, CFDA and in Singapore. And all this is in addition to 2 filings that we made recently with the FDA and additional 2 filings with the C in Europe.
So altogether, we have right now pending something that's close to at least 10 to 12 new approval, which we expect to get for 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 30, our total employee was 232 people, excluding manufacturing, out of which 107 direct salespeople. 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 innovating minimally invasive surgical aesthetic and medical treatment solution. Our proprietary products are designed to address, 1st, face and body contouring, medical aesthetic and women health using minimally invasive bipolar radiofrequency energy. Minimally invasive bipolar hours 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 designed, differentiate non invasive medical aesthetic product as well that include fat killing and skin tightening simultaneously, permanent air reduction using our innovative dual wavelength technology and other treatment targeting skin appearance and texture to our high power Intensepar slide technology.
Our competitive advantage is based on 6 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 the 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 devices for static surgery and other surgical procedure. This knowledge cover hardware, software and mechanical engineering. The 3rd 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 this technology and on our technology and indications.
We are the leaders of the research of minimally invasive bipolar RF clinical science. The 4th element the 4th competitive element is our luminary base. We have developed a group of luminary and opinion leading doctors who are also surgeon that conduct our study, and they are a great supporter of our technology. It will be very difficult for anyone in our of of our competitors to develop such unique group of luminary and opinion leading doctors. The 5th 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 6th element is our branding. We own the brands BodyTite, FaceTite, NeckTite, AccuTite, Morpheus8 and others, which are becoming increasingly well known brand names.
We have already sold 4,400 system worldwide. We're definitely considered pioneer in the industry with a strong marketing and brand position. In the Q3 of 2019, InMode generate record revenue of $40,000,000 a 57% increase from the same period in 2018, reflecting our continued growth and the increased adoption of our minimally invasive bipolar RS technology around the world. Net income increased by 87% to over year over year to $16,200,000 in the 3rd quarter, up from $8,600,000 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 minimal 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, Optimize and VUTIVA. So we are not dependent on any individual product.
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 and A.
Please, Yair. Thanks, Moshe. Good day, everyone. Total revenue in the Q3 of 2019 grew 57% to $40,000,000 with gross margin of 87%. Operating expenses in the quarter totaled approximately $19,000,000 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 3rd quarter with a strong balance sheet. As of September 30, 2019, company had cash and cash equivalents, marketable securities and deposits of $166,300,000 out of which $70,000,000 are net proceeds raised at the recent IPO.
On the cash flow front, across the 1st 9 months of 2019, the company generated $34,800,000 from operating activities. With that, I will turn the call back to Moshe.
Okay. Thank you, Eyal. Now we are pleased to open to question. Mire, do you want to handle this session?
Excuse me. The first question comes from Jack Meehan of Barclays. Please go ahead.
Thank you. Good morning, good afternoon and congrats on the Q1 Allagate. 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? And 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?
Yes. Thank you, Jeff. Thank you. Yes, I will answer your question. Currently, in North America, we have 96 direct sales, sales rep.
Our plan for 2020 is to grow to 115 between 110, 100 and 15. Direct salespeople in the rest of the world right now is about 11 people, and we would like to grow in 20 20 by at least another 12 by opening more studios. As we guided to 2019, our target revenue was between $146,000,000 to $148,000,000 We are now yes, raising the target to $150,000,000 $152,000,000 As we go to 2020, we will give the target in the next conference call.
Great. That's helpful. And then maybe could you just give us some color on where you're seeing traction with the BodyTape 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? And then 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 handpieces to the BodyTite and Brace platforms, we sell upgrade to existing customers, and we sell the new platforms with the new handpieces. 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 3 segments of our business, which is minimally invasive, which include the body type, face type, neck type, accutite, embrace and Morpheus 8, all the ablative product. And the second segment is the aesthetic, which is the noninvasive RF IPL laser for more, I would say, conventional aesthetic treatment.
And the 3rd part of our or the 3rd segment is women health, which we introduced to the market a few new indication using the AccuTipe for LABIA plus 3 and others. Other than that, I don't think we want to reveal the numbers of individual platforms. But 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 outsized 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 in mode, 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 2 new platforms every year, on the the systems that we the system that we're designing will have 85% gross margin. Otherwise, we do not start. Unless we have 85% to 87 percent gross margin, we will never be able to invest 45% in marketing, in R and 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% to 87%. It's depend on the mix of the product that we manufacture.
If the mix is more RF based, then it's stored 87. If the mix is more laser and IPL, it's stored 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%. But on average, we will keep the at least 85% gross margin on any combination product or any portfolio that we will have in the future. Does that answer your question?
It did. So but also and I really appreciate that feedback. Just in the quarter itself, was there any 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 Q4? What are you thinking?
You mean on the 4th quarter?
Yes. So just
looking forward, is this
a good run rate? Or should we just assume 85% of
the year? Yes. It's not a very good run rate. Yes. The answer is yes.
It will be probably the same as the 3rd, plusminus 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 the question and congrats on a good quarter. So 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, 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. Okay. I will. Thank you, Matt. How are you?
I'm doing great. How are you?
We're fine. Working out of work fine. Yes, the Evoque, first of all, the Evolv, we launched the Evoque in the U. S. In the last month in the last quarter, and we continue in the Q4.
We will launch it in the rest of the world in the Q1 of 20 2020. We're still waiting for the final approval by the CE for Europe of the EVOLVE, which is the body hand free device. But it will come in, it's come. We're almost at the end. Right now, regulatory become a bottleneck.
You need to spend more money and attention to get it. But we know how to do it. We have a good regulatory department here that actually file worldwide with some assistance from consultants. So this is the Evoque. The Evoque, 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 1st of next quarter. I'm sure you understand that the FDA is more 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 study and to show them the safety, and hopefully, it will come soon. The same with Cellotite. The Cellotite right now is already FDA approved, but we are waiting to see the results from the study that we're making from the United States to finalize the protocol. So these two platforms, as we promised in the roadshow, will either end of the market towards the end of this quarter, but I believe it would be better to do it right and to launch those 2 products sometime in the Q1 of 2019 2020, excuse me. Other we have other products in the pipeline like the EMS and the EMS device and some new Morpheus tips.
But 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. So 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? Yes, it was what I can say, it was a successful launch. We saw quite a few in Q3, and we have some backlog, which we're basically supplying in Q4. We increased manufacturing capacity of the Evolv recently, and now we're producing about 25 every week. So it's coming, and it's going to be successful worldwide.
And then just one follow-up on that. So I guess with Evoque coming a quarter or 2 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, but is there 1 or 2 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 Evolv, the hands free device was actually sold only in the U. S. And it was 9% from our business in the 4th quarter, close to $3,700,000 if I to be precise. So that was the 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. So a lot has been asked, but I guess I just wanted to talk you put out a press release, I think back in late August, early September, just 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.
And then when you think about 2020 opening up 2 markets, it sounds like 1 in Europe, 1 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 big, biggest countries. I'm not talking about Belgium. We're not opening fully owned or joint venture controlled by us in a country that will contribute few $1,000,000 a year.
We would like or a few $100,000 a year. We would like to open it in a country where the investments 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're 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. Territories, 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 far as your first question regarding the user meeting. The user meeting was the first time we did was the first time we would that the IMOD actually did such meeting. And it was just good for the doctors to share information.
We had something like, I don't know, 6 to 8 lectures every day. It was for 2 days. Attendance was about 600 people, which is very unique for the 1st user meeting. We intend to continue to do it. Some doctor share some of the experience.
Some doctor ask question about adverse effect. They tried to share protocols and to understand which protocol works better. I think it's good, especially for doctors. It's a community. It's a community like a family of remote, and we will continue to do it.
We're learning from the first time, and the next time, we'll be organized, I believe, even better with some experience that we have from the first time. But it was quite success.
Great. And then just one follow-up for me. Just you've got a nice war chest of cash piling up both from the recent financing in the IPO, but then also from just cash flow from operations. I guess how should we think about your deployment of capital on a go forward basis? I mean your expectations for product development and gross margins are very clear.
But 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 $170,000,000 and I will not tell you today that we have we know how to deploy $170,000,000 No. But we have 3 area where we will invest heavily. 1st, when you establish a subsidiary, you need 1,000,000 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. 2nd, 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, etcetera. So 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 cost $170,000,000 but it cost money, and we are now establishing few more lines. Probably, we will increase our production capacity by onethree 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 component. This is also another. But at the end of the day, we're generating you can see that we're generating about $16,000,000 to $18,000,000 every quarter, which is a lot of money.
Basically is our net profit. And so I assume that the money will continue to accumulate until we have some good reason to invest tens of 1,000,000 of dollars. Right now, we do not have.
Is there a follow-up, Mr. Rose?
No. Thank you for taking the questions.
Thank you. The next question comes from Jeff Johnson of Baird. Please go ahead.
Thank you. Good morning. Good afternoon, guys. Just a couple of 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.
And then on EVOQ, 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, EM face. Just wondering what that product is. We thought that might be Evoque, but it sounds like it must not have been.
Yes. The Em face, it's a preliminary on the Evolq. We got the approval on one indication. We're waiting for the second one. So we will launch them together.
You're right. This is the product. As we go 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, but the EMS will be also be launched on the Votiva and other platform as
well. All right. That's helpful. And then on the women's health care 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. So 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?
Yes. The Women's 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 Luminess and Cynosure and others. Those company have used laser to do ablation in the vaginal wall. Since we're using RF, which is non ablative and noninvasive technology.
The FDA received our answer to the letter, and we are cleared by the FDA to continue to sell it. So 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% above 20% and above.
Great. That's helpful. And last question for me. Just on the new relationships in India and Australia, was there any contribution from inventory load into those dealers in the Q3? Or can we use this kind of $9,000,000 international revenue number for the Q3 as a good jumping off point to think about how we grow that number over the next several quarters?
Thank you.
Yes. In Australia, there is none. We just hire the general manager and 2 more people. So their contribution and they give us their contribution to the 3rd quarter was not would not exist. The Indian was the Q1 that we're actually selling, and the revenue in India was around $280,000 to $300,000
And we have a follow-up from Matt Taylor of UBS. Please go ahead.
Hi, thanks for taking my 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 are in some kind of a balance. I think to go above 85% to 87% would be very difficult, and we don't want to jeopardize the quality of the system. Course, we can buy cheaper components and try to do cheaper, but I don't think it's necessary having 85% to 87%. I do believe that we will continue to maintain this gross margin level between 85% to 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 3 months in our end of the year earning call. And 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.