Good day, and welcome to the InMode Limited Third Quarter 2020 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. 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 2020 Financial Results Conference Call. With us on the line today are Mr. Moshe Mizrahy, Chairman of the Board and CEO, Dr. Michael Kreindel, Co-Founder and CTO, Mr. Yair Malca, CFO, Dr. Spero Theodorou, CMO, and Mr. Shakil Lakhani, President of InMode North America. Before we begin, I would like to remind our listeners that certain information provided on this call may contain forward-looking statements, and the safe harbor statement outlined in today's 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 and pass it over to Shakil Lakhani, InMode's President of North America, to discuss our North American operations, followed by Yair Malca, InMode's CFO, with an overview of the financials. We will then 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. Thanks to all of you for joining our Third Quarter 2020 Financial Results Conference Call. In this earnings call, we will discuss our third quarter financial results in the context of COVID-19 pandemic, our strategy during the crisis, and our outlook going forward. We are an international company. With me on the line today, Yair Malca, our CFO for California, Shakil Lakhani, our President of InMode North America in Houston, Dr. Michael Kreindel, our CTO and Co-founder in Toronto, and Dr. Spero Theodorou, our Chief Medical Officer from New York. In the third quarter of 2020, InMode generated record revenue of $59.7 million, a 49% increase from third quarter of 2019. A record of $23.9 million of net income on a GAAP basis and $26.6 million of net income on non-GAAP basis.
In Q3 2020, we derived approximately 58% of our worldwide revenue from our surgical platforms engaged in minimally invasive and subdermal ablative treatment, 35% from our recently introduced proprietary hands-free platforms, and 7% from our traditional laser and non-invasive RF platforms. The record revenue in the third quarter was driven by demand for our minimally invasive and hands-free proprietary electrosurgical bipolar RF platforms, which are becoming the standard of care for a variety of surgical procedures. We have proven our organization adaptability and innovative leadership during the quarter as we successfully accelerate demand for our differentiated product in the U.S. once COVID-19 restriction eased. Internationally, we grew our sales rapidly, more than doubling the revenue on year-over-year basis. This growth was driven by our marketing and sales activity in China, Brazil, Mexico, Korea, and through our subsidiaries in Europe and Asia.
The COVID-19 pandemic has shifted our society into a new normal, where social distancing and health and safety concern are here to stay. We believe that InMode clinic-based technology provides superior alternative to invasive hospital procedures and will continue to attract consumer and physician in this environment. This quarter, while we continue to succeed in capturing market share and creating awareness to our technologies and platforms, we also continue to invest in our organization by advancing our research and development capability, diversifying our product pipeline, expanding our sales and marketing team, and progressing our regulatory processes. Additionally, we introduced the groundbreaking Morpheus8 Body technology and Morpheus8 Platforms, which use our innovative RF fractional technology to treat the entire body at many depths. In addition, we were recently granted a patent covering our fractional RF technology. We intend to protect our IP vis-a-vis anyone who infringes our patent.
Currently, our R&D pipeline is designed to bring the most innovative products to the aesthetic surgical industry and broaden the market we serve with our technology to address gynecology, ENT, and ophthalmology markets. Going forward, we plan to introduce two platforms into those markets in 2021 and beyond. As we roll out this new innovative technology, we will continue to build our brand and sales force to build interest and demand. Looking back, we are extremely pleased with our decision not to downsize our sales network due to the pandemic crisis, but instead continue supporting and growing our organization for the future. Although the market uncertainties due to COVID-19 are not yet behind us, we will remain committed to investing in InMode's future success and are confident that we can continue to build our organization through even the most difficult times.
As a mark for that commitment and a strong belief in our value, we announced a share repurchase program of up to one million InMode shares in Q3. Considering our successful performance in the third quarter of 2020 and the visibility we have into the rest of 2020, we are increasing our full -year 2020 revenue guidance range to $192 million-$195 million. We intend to maintain a non-GAAP gross margin of 84%-86%. Lastly, we continue to protect our employees worldwide and have followed local and regional guidelines to prioritize the health and welfare of our employees and customers. Now, I would like to turn the call over to Mr. Shakil Lakhani, who will go into more detail on our activities in North America market. Shakil?
Thank you, Moshe, and hello, everyone. We reported a record quarter in North America with surging demand for our minimally invasive, hands-free devices. Confirming our previous thoughts, the fact that our minimally invasive, hands-free technologies could be done in-office and adhere to social distancing guidelines appealed greatly to physicians and consumers as restrictions eased. Due to the investment in our sales team, along with the dedication of our employees, we were able to keep physicians engaged and excited during the quarantine, and ultimately translate the growing interest for our technology into record sales in the third quarter. Building on this growth, we continue to expand our sales and marketing efforts. We believe that we have the right team in place to finish this year strong and strengthen our leading position as we turn to 2021.
During the quarter, we were excited to launch the Morpheus8 Platform and Morpheus8 Body, followed by Morpheus8 Burst Technology, announced last month. The Morpheus8 Platform is a state-of-the-art workstation, complete with dual handpieces and four fractional tips and different microneedle configurations. This provides physicians with a standalone solution for full-body fractional RF treatments. We're also able to go deeper than any other competing technology, which clearly shows InMode's commitment to true innovation. We're following the successful formula we have developed for our other minimally invasive solutions and applying that to Morpheus8. We expect Morpheus8 to be a significant sales contributor in 2021. Looking to 2021, we will be preparing our team for the launch of two new additional technologies and continue to be optimistic despite the uncertainties of COVID-19 that still exist. We're very proud of our team's ability to navigate the pandemic so far.
We remain focused on the future and further establishing ourselves as leaders and true innovators in the market. Let me hand over the call to Yair to review our financial results in detail. Yair?
Thanks, Shakil. Good day, everyone. Total revenue in the third quarter of 2020 increased 49% to $59.7 million, with a gross margin of 84% on a GAAP basis. The increase in revenue was driven primarily by the expansion of InMode's direct sales organization in the United States and the continued momentum of InMode's hands-free technology, as well as the recently introduced Morpheus8 Body fractional technology. InMode continued to gain traction in international markets, with international revenue growing 109% year-over-year. GAAP operating expenses in the third quarter of 2020 totaled approximately $27 million, a 42.4% increase from the third quarter of 2019. Sales and marketing expenses increased 42% in the third quarter of 2020 compared to the third quarter of 2019.
Although no new stock options were granted during the third quarter, stock-based compensation increased to $2.4 million in the third quarter of 2020 compared to $1.2 million in the second quarter of 2020. This increase is due to higher than previously estimated vesting of our performance-based options as a result of our record revenue in the third quarter, as well as our revised guidance for 2020. On a non-GAAP basis, operating expenses total approximately $24.8 million in the third quarter of 2020 compared to the operating expenses of $18.6 million in the third quarter of 2019, an increase of 33.1%. GAAP operating margin was 39% in the third quarter of 2020 compared to 40% in the third quarter of 2019. Non-GAAP operating margin in the third quarter of 2020 was 43%, compared to 41% in the third quarter of 2019.
This increase in non-GAAP operating margin was primarily attributable to decreased marketing activities in the United States, such as events and conference participation due to restrictions caused by COVID-19. GAAP diluted earnings per share in the third quarter of 2020 were $0.57, compared to $0.42 per diluted share in the third quarter of 2019. Non-GAAP diluted earnings per share in the third quarter of 2020 were $0.63, compared to $0.42 per diluted share in the third quarter of 2019. We completed the third quarter with a strong balance sheet. As of September 30th, 2020, the company had cash and cash equivalents, marketable securities, and deposits of $234.3 million. Accounts receivables increased to $16.2 million as of September 30th, driven by higher international sales volume, and particularly from Asia, where payment cycles for our distributors are longer compared to the United States.
During the quarter, we announced a share repurchase program of up to one million of InMode's ordinary shares. Our share repurchase program illustrates the confidence we have in InMode's future following the continued success of our new product introductions and growing cash position, even in the face of global uncertainty. On the cash flow front, the company generated $30.2 million from operating activities for the third quarter of 2020, driven by the record sales volume. With that, I will turn the call back to Moshe.
Thank you, Yair. I believe now we need to go to the Q&A.
We will now begin the question and answer session. To ask a question you may press star then one on your touchtone phone. If you are using a speaker phone plese pick up your handset before pressing the key. To withdraw your question please press star then two. At this time we will pause momentarily for to assemble our roster. The first question today comes from Matt Taylor of UBS. Please go ahead.
Hi. Excuse me. Good morning. Thanks for taking the question, and congrats on a good quarter. I wanted to ask you about a couple of things. The first one is, you mentioned this decision that you made to continue investing, and it seems like it's paid off for you. I was wondering if you could talk about the commercial organization, how you've added to that, how you plan to add to that over time, given you continue to have this really strong growth.
Well, Matt, hi. This is Moshe. How are you? I believe we'll continue to invest in all the disciplines. We continue to invest in R&D, and we have something like five main projects in the R&D pipeline right now. We continue to invest in sales force. As you know, we started a subsidiary in France, back in April. They stayed idle for three months, and now we're adding more salespeople there, to increase our momentum in France and other countries in Europe. We are investing more in China, and we see nice progress since we got the first CFDA approval. We're investing in marketing activity all over, although we're doing it on Zoom. For example, we had two conferences in South America, in Brazil. We did two in China. We also invest in a distributor meeting, also we'll do it virtual, in Asia on the 3rd of December.
For us, Matt, business as usual. Although we have the restriction what we can do and what we cannot do, compared to a normal time, but from R&D point of view, we increased manufacturing capacity by at least 25%. We have produced more than 1,000 platforms in the last quarter, in the third quarter. We see no signs of slowing down in any of our business activity. It's also started in the fourth quarter. We see the same trend. We don't see, although the COVID is still there, and as you know, in Europe, they are experiencing now the second wave in countries like Italy, U.K. now is in a lockdown for four weeks remain the same, but we do as much as we can in order to maintain activity, of course, within the restriction and the local regulation.
Thanks, Moshe. The other thing I wanted to ask about was the buyback that you announced. You now have over $200 million in cash and securities, and I was wondering how you plan to use that. Do you see yourself as buying shares steadily? Is it something that you'd be more opportunistic about? What are your thoughts on capital allocation in general?
We have announced a program which we have approved on the board of directors to repurchase one million shares. As of today, we did very limited. We have not yet used all the money to do that. We are not going to repurchase shares for all the $234 million. Maybe we'll do first the one million, and later on, maybe we will add more, within the limitation that we have from a tax point of view and being an Israeli company. These are not the same rules applied to us as apply for American company. To tell you today, if we have plan to allocate or invest the $230 million, the answer is no.
Okay. Maybe last one for me, I'll just ask about, you had a few recent studies that were published, peer-reviewed studies, looking at the safety and efficacy of some of your MIAS treatments, and then there was this plume study that came out recently looking at the difference between laser and RF and the importance of that in COVID. I guess I was wondering if you could just speak to the importance of those studies and how they could help you with marketing, how they could help shift behavior.
Spero, could you please answer that?
Okay. Sure, Moshe. Thank you, Matt. Appreciate the question. The philosophy behind our organization as to most of our marketing, quote-unquote marketing, is spent, is actually in backing up our sales force with proper studies, peer-reviewed studies in good journals, that the doctors can read and adopt the technology. This has been probably the biggest differentiator between us and all our competitors. We make a very, very large effort, with Moshe's support, to get this body of work published and out there, and especially for the leader in radiofrequency, it's almost something that we have to do as leaders in this space. As far as COVID and the plume study we did, it's very simple. It's out there now. It's basically comparing our radiofrequency technology to our lasers. We know with lasers, it's a very well-established fact, there's plume, and there's virus in that plume.
We don't know if COVID's in the skin. Using Morpheus8, this thing does not exist. The particles are not in the plume, or very, very little. From a safety purpose, always have to consider large number of aesthetic procedures being done right now. We also have to instruct the doctors that not only are we a company that innovates, but we're also a company that takes safety very, very, very seriously. Putting a body of work behind that safety and how we do it and providing this literature to our doctors is probably the best and strongest marketing tool we have. Does that answer your question, Matt?
Yeah. Thanks, Spero. Appreciate that. Thanks, guys.
Next question comes from Kyle Rose of Canaccord Genuity. Please go ahead.
Great. Thank you for taking the questions. I wanted to ask just a little bit more about what you're seeing in the marketplace. Obviously, a very strong quarter here, so congrats on that, given all of the COVID-19 headwinds. Maybe help us understand what your customers are seeing in the actual market. Obviously, you're placing a lot of systems, but maybe what utilization for the systems looks like, and then maybe with just overall market trends you're seeing there. I mean, people are traveling less. They're spending less on vacations. Maybe they're going out to less dinners. Is there increased interest in pursuing aesthetic procedures? Are you seeing higher consumer demand? Just trying to understand what the recurring revenue trends look like in the business.
Shakil, why don't you start, and then I will add.
Yeah, sure. Hey, Kyle. Thanks for the question. One of the things that we've definitely seen, and we've kind of called this and suspected it, but we looked at some type of pent-up demand. Even if you look overall, if you look at retail sales for certain types of things that people wouldn't normally spend on, going back to what you said, people aren't traveling. I do think that people do have some excess disposable income, and they're starting to reinvest in themselves. We thought maybe it might just be something short-term that we possibly would've seen a spike in, but we've actually seen that carry on since things have kind of returned back to normalcy to a certain degree, or the new normal, as Moshe calls it. I do think that we've seen that.
A lot of our clinics have been busier than they've ever been right now. I'm not going to say all of them, but it is something that we're seeing across the board, at least in North America. I think in turn, it allows them to try and offer some of these new types of procedures. Our hands-free technology, our minimally invasive, have been really strong, and been very popular with some of the new kind of regulations in place that people are following. Spero, did you want to talk a little bit about what you're seeing in the clinics?
Yes. Can you hear? Yes. Thank you, Shakil. Absolutely. We're seeing a lot of demand. Can you hear me? Yeah. Let's see. Yes. We're actually seeing a lot of demand.
We thought the demand initially was compressed demand for back in the spring. We kind of expected it to sort of taper off in the months of September, October. These are unusual times. Demand has continued. Exactly like Shak said, it's not necessarily everywhere the same, but the continued demand is an aberration. Traditionally in the aesthetic world, usually September, things typically drop off from more plastic surgery procedures. The mothers usually take the kids back to school. It's a large element of the practices, but we haven't seen that. This is continuing demand. I think it's because of people having, what Shak said, definitely have more income than sitting around and not spending on other things. We've continued to see this demand through this period of time, which is definitely unprecedented, and welcome, of course.
I just want to add one thing. This is Moshe here, which give you some more color to your question. The only way for us to measure the demand for procedures is to check and measure how many disposable are we selling. As you know, in our surgical devices, minimally invasive, ablative, everything that penetrates the skin, there is one-time disposable per treatment. The last quarter, we had a record sales of disposable, that continue in the fourth quarter. This is a record. We have 6,400 system already installed worldwide, we see increase every month. We see increased demand for disposables. Basically, that tell us that the doctor is using the system, the doctors make money on the system, they don't need much. If they do even two treatment per week, they are paying back the system in less than seven, eight months.
I believe I did the calculation once. I will do it again if necessary. Every month, we see continuation in the growth of disposable, and this is the best measure to measure how the system are being used. Does that answer your question?
It absolutely does. I appreciate the color from everybody on that. That's very helpful. The last question I had, and then I'll hop back in the queue, is just around the international markets and kind of the entrance you've had to China. A two-part question. One is, how has the launch into China progressed? What are your expectations, I think, over maybe now through the end of 2021? Also, we've seen rising case volumes and some pretty severe shutdowns of procedures in markets again in Europe. Maybe just help us understand how we should think about the international markets as we move into the Q4.
Okay, as we said, the international market, what we call outside U.S., double itself year-over-year in Q3. This is because all the regulation processes that we have completed during the last two quarters. As you probably know, in the second quarter, beginning, we started to sell in China after getting the approval for two out of the nine platforms that we have. Not everything is yet approved in China. We start to sell. We have an office in Guangzhou, a subsidiary. We have distributor in Beijing who are doing a good job in introduction of the product and the technology into the Chinese market. In the third quarter, we grew in China compared to the second quarter. I believe on the fourth quarter, we continue the momentum. Other countries that we see some growth is Brazil.
Brazil is under a difficult situation today because of the COVID-19, all of South America are in a terrible shape today, as everybody know, because the leaders in Brazil do not accept that there is a pandemic. We managed to do a big introduction and virtual conference to many plastic surgeons, especially for the surgical procedure and the surgical platforms. We start to sell there in the second quarter, and we see momentum growth in the third quarter as well in Mexico, as well in Korea, in Asia. India, although we have a subsidiary there, but the situation is just now getting some improvement from the COVID. Europe, you are right. We're experiencing a second wave in Europe.
Third quarter was better than the second quarter, and I believe the fourth quarter, although right now the situation is a little bit more difficult, we have commitment from our subsidiary and distributors to do everything they can, taking into consideration, of course, the situation and the restriction. We're not stopping there. Although the second wave is tough in Europe right now, and we follow it on a daily basis, but this is not the same as the first wave of the COVID, because they managed to know how to control it a little bit better. What I'm saying is, we're not stopping the development and the activity in any country, not even in Israel where the situation is not the best. The fourth quarter, I believe, will not be a slowdown. On the contrary.
Great. Thank you very much for taking the questions.
The next question comes from Jeff Johnson of Baird. Please go ahead.
Thank you. Good morning, guys. Moshe, you mentioned a 6,400 installed base a few minutes ago. Could you give us the split U.S. versus OUS on that? Then maybe I'd be interested in hearing from you or maybe Shak, now that you've got the Morpheus8 Platform, you've obviously got the Evolve and Evoke is doing so well. You've got all the various tight platforms, things like that. Is there an increase happening in the number of platforms per office? Is the average platforms per office going from 1.2 to 1.3 to 1.4? How do you expect that to trend over the next year or two as well?
Shakil, would you answer that?
Yeah, sure. Yeah, you're bang on, and we're actually in the process of things right now, to further enable that. We are seeing more two, three-system, what we call bundle deals, that are going in. It's increased, but at the same time, what's nice about it is a lot of these technologies are technologies that they can delegate, that physicians can delegate. With that being said, it allows them to generate passive income versus, say, the minimally invasive, where they have to be the ones actually performing the procedure. When you combine the two of those together, it is a nice one-two punch. It's a nice return on investment for the physician. The patients get the results that they're very happy with. We've heard some great success on Morpheus8 Body so far, obviously Morpheus8 for quite some time.
We do see it overall that there are different areas, depending on what specialties that we go after. If it's, say, an OBGYN, well, they can start treating people with a Votiva for women's health and wellness. At the same time, they might have certain patients that are going to be in a position where they want to have something done with skin tightening. The Evoke or the Evolve kind of come into play. Our team has been very well-versed and prepared in terms of how to actually take it to a certain degree where we ensure that the actual physician themselves, it's a good fit for them, where they're going to be doing well. As Moshe said, utilization of consumables has been increasing, which is a very positive sign for us because they're using their devices and our default rates on leases have been minimal, which is extremely good.
Thank you. I know you might not want to share numbers, but can you split that 6,400 installed base U.S., OUS, if you could anyway, or Shak, any kind of systems per office?
Yes.
Is there a number?
I'll let Moshe handle that one.
Yes, we can. In the presentation that we share with everybody on the IR section, we gave this information, 6,400 system installed worldwide, out of which 3,500 in the U.S.
Thank you. I guess I missed that. I apologize. Then Moshe, my last question is, if I look now over the last three years, each of the last three years, assuming guidance here is fairly accurate for 2020, you've increased revenue about $40 million-$50 million per year on an absolute basis. I know you're not providing 2021 guidance, is that how we should think about what the market can absorb each year? Then kind of how absolute revenue trends should maintain into 2021, just the typical $40 million-$50 million increase each year?
We have not yet gave the guidance for 2021. We will give the guidance for 2021 in the next earning call, which will be in February next year. Yes, you can follow the same growth that we had in the last three years or even four years. For $50 to $100 to $150 to close to $300 this year. Probably will be the same in the next years. Yes, we are introducing the same amount of new product every year or new platform. I believe your estimate is right.
Thank you, guys. I appreciate it.
As a reminder, if you have a question, please press star then one. The next question comes from Suraj Kalia of Oppenheimer. Please go ahead.
Hey, guys. First of all, again, congratulations on really an exceptional quarter and a strong full-year guidance. Just a couple of questions here, most of them have been asked. On the pipeline, is there any further color you can give us on either the timing, or maybe further color on the use cases for the 2021 launches, and then where we should be looking in terms of use cases for 2022 onwards?
Well, we cannot give the exact timing of the new product launch because of regulatory issue. Not because we cannot say, it's because, as you know, we are not launching any product before we completed a full study to prove safety and efficacy, before we file a Submission with the FDA and the CE in Europe in order to get clearance. This is a medical equipment. We cannot market them without approval for the specific medical indication that we request. Sometimes it takes a little bit longer than what we estimate in the beginning, because the FDA might have more questions, or they ask us to do a little bit more clinical work in order to ensure that this is safe and high efficacy for what we want to claim.
Just as a guideline, usually we bring one product sometime in the first quarter, if everything goes well, and the second platform, before the end of the third quarter, towards Christmas and the fourth quarter.
Okay, great. That's helpful. Then just a couple of maybe more technical questions. First, on the tax rate, should we continue to be thinking about the effective tax rate next year moving up somewhere towards 11%? If there are any updates on that front, that would be helpful. Then second, on the accounts receivable, maybe it's a bit of a minor issue, but given the fact that international revenues are now a bigger part of the business, and it's expected to be a bigger part of the business on a go-forward basis because of the higher growth levels, should we be thinking about accounts receivables being closer to the current levels. It's still an absolutely low number, but on a relative basis, it's a little bit higher.
Yair, can you answer that?
Yes, I'll take this question. As for the tax rate, in 2021, we believe the tax is going to stay pretty much similar to what we've seen in 2020, as our tax exemptions expire only at the end of 2021. Only starting 2022, we will go up to the maybe 11% that you've mentioned. Regarding the accounts receivable, yes, it's probably now that international markets start doing much better, it will probably go up, and yeah, it might be reasonable to assume that it will remain in pretty much the same level.
Okay. I'll head back into the queue. Thank you. If nobody else has any other questions, I'll ask another, but thank you.
This does conclude our question and answer session. I would like to turn the conference back over to Moshe Mizrahy, CEO, for any closing remarks.
Okay. Thank you, operator. Thank you everybody for joining us to the third quarter 2020 financial results. Hope to see you in the next conference call. Stay healthy and be safe. Thank you all.
The conference is now concluded. Thank you.