Good day, and welcome to the InMode Limited Third Quarter 2020 Earnings Conference Call. All participants will be in listen only mode. 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 Mary Siegel 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 2020 financial results conference call. With us on the line today are Mr. Moshe Mizrahi, Chairman of the Board and CEO Doctor. Michael Kreindel, Co Founder and COO Mr.
Yair Malka, CFO Doctor. Spero Theodoro, CMO and Mr. Shaquille Akani, 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 Shakila Khani, Imode's President of North America to discuss our North American operations followed by Yair Malka, Imode'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 Mizrahi, InMode's CEO. Moshe, please go ahead.
Thank you, Miri, and thanks to all of you for joining our Q3 2020 financial results conference call. In this earnings call, we will discuss our Q3 financial results in the context of COVID-nineteen pandemic, our strategy during the crisis and our outlook going forward. We are an international company. With me on the line today, Yair Malka, our CFO for California Shakila Khany, our President of North America in Houston Doctor. Michael Kweindel, our CTO and Co Founder in Toronto and Doctor.
Spiro Tarduru, our Chief Medical Officer from New York. In the Q3 of 2020, InMode generated record revenue of $59,700,000 a 49% increase from Q3 of 2019, a record of 23,900,000 of net income on a GAAP basis and $26,600,000 of net income on non GAAP basis. In Q3 2020, we derived approximately 58% of our worldwide revenue from our surgical platforms engage in minimally invasive and subdermal ablative treatment, 35% from our recently introduced proprietary hand free platforms and 7% from our traditional laser and non invasive RF platforms. The record revenue in the 3rd quarter was driven by demand for our minimally invasive and hands free proprietary electrosurgical bipolar RF platform, which are becoming the standard of care for variety of surgical procedure. 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-nineteen 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-nineteen pandemic has shifted our society into a new normal, where social distancing than 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 depth. In addition, we were recently granted a patent covering our fractional RF technology. We intend to protect our IP visavis anyone who infringe our patent.
Currently, our R and D pipeline is designed to bring the most innovative product to the aesthetic surgical industry and broaden the market we serve with our technology to address gynecology, ENT and ophthalmology market. Going forward, we plan to introduce 2 platforms into those markets in 2021 and behind. As we roll out this new innovative technology, 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-nineteen are not yet behind us, we will remain continue to build our organization through even the most difficult times.
As a mark that for that commitment and a strong belief in our value, we announced a share repurchase program of up to 1,000,000 INMO shares in Q3. Considering our successful performance in the Q3 of 2020 and the visibility we have into the rest of 2020, we are increasing our full year 2020 revenue guidance range to $192,000,000 to $195,000,000 and we intend to maintain a non GAAP gross margin of 84% to 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 Akhani, who will go into more detail on our activities in North America market.
Shaquille?
Thank you, Moshe, and hello, everyone. We reported a record quarter in North America with surging demand for our minimally invasive and hands free devices. Confirming our previous thoughts, the fact that our minimally invasive and hands free technologies could be done in office and adhere to social distancing guidelines to physicians and consumers as restrictions eased. Due to the investment in our sales team along with the dedication of our employees, 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 Q3. 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, 4 fractional tips and different microneedle configurations. This provides physicians with a standalone solution for full body fractional RF treatments. We are 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 other minimally invasive solutions and applying 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 2 new additional technologies and continue to be optimistic despite the uncertainties of COVID-nineteen 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.
Now let me hand over the call to Yair to review our financial results in detail. Yair?
Thanks, Akhil. Good day, everyone. Total revenue in the Q3 of 2020 increased 49% to $59,700,000 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 continue to gain traction in international markets with international revenue growing 109% year over year.
GAAP operating expenses in the Q3 of 2020 totaled approximately $27,000,000 a 42.4% increase from the Q3 of 2019. Sales and marketing expenses increased 42% in the Q3 of 2020 compared to the Q3 of 2019. Although no new stock options were granted during the Q3, stock based compensation increased to $2,400,000 in the Q3 of 2020 compared to $1,200,000 in the Q2 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 Q3 as well as our revised guidance for 2020. On a non GAAP basis, operating expenses totaled approximately $24,800,000 in the Q3 of 2020 compared to the operating expenses of $18,600,000 in the Q3 of 2019, an increase of 33.1 percent.
GAAP operating margin was 39% in the Q3 of 2020 compared to 40% in the Q3 of 2019. Non GAAP operating margin in the Q3 of 2020 was 43% compared to 41% in the Q3 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-nineteen. GAAP diluted earnings per share in the Q1 of 2020 were $0.57 compared to $0.42 per diluted share in the Q3 of 2019. Non GAAP diluted earnings per share in the Q3 of 2020 were $0.63 compared to $0.42 per diluted share in the Q3 of 2019.
We completed the Q3 with a strong balance sheet. As of September 30, 2020, the company had cash and cash equivalents, marketable securities and deposits of $234,300,000 Accounts receivable increased to $16,200,000 as of September 30, 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 1,000,000 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 $30,200,000 from operating activities for the Q3 of 2020, driven by the record sales volume.
With that, I will turn the call back to Moshe.
Thank you. Thank you, Eyal. I believe now we need to go to the Q and A.
The first question today comes from Matt Taylor of UBS. Please go ahead.
Hi. Good morning. Thanks for taking the question.
Congrats on a good quarter. I wanted to ask you about a couple of things. So 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? We continue I believe we'll continue to invest in all the discipline. We continue to invest in R and D and we have something like 5 main project in the R and D pipeline right now. We continue to invest in Salesforce.
As you know, we started a subsidiary in France back in April. They stayed idle for 3 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 progress, nice progress since we got the first CFDA approval. We're investing in marketing activity all over, although we're doing it on Zoom. But for example, we had 2 conferences in South America, in Brazil.
We did 2 in China. We also invest in distributor meeting. Also we'll do it virtual in Asia on the 3rd December. So for us, Matt, business as usual. Although we have the restriction what we can do and what we cannot do do compared to a normal time, but from R and 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 Q3. So we see no signs of slowing down in any of our business activity. So and it's also started in the Q4. We see the same trend. So we don't see although the COVID is still there, and as you know, in Europe, they are experiencing now the 2nd wave in countries like Italy, UK now is in a lockdown for 4 weeks, Spain 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 $200,000,000 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?
Well, we have announced a program which we have approved on the Board of Director to repurchase 1,000,000 share. As of today, we did very limited. We have not yet used all the money to do that. We are not going to buy to repurchase for all the $234,000,000 but maybe we'll do first the €1,000,000 and later on maybe we'll 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 apply to us as apply for American company.
But to tell you today, if we have plan to allocate or invest the $230,000,000 the answer is no.
Okay. And then 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 MIS 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?
Spiro, could you please answer that?
Okay. Sure, Moshe. Thank you, Matt. Appreciate the question. The way the philosophy behind our organization as to most of our marketing, quote unquote marketing is spend 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.
So this has been probably the biggest differentiator between us and all our competitors. So, we make a very, very large effort with Mocha's support to get this body of work published and out there and especially if we are the leader in radio frequency, it's almost something that we have to do as leaders of 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 radio frequency technology to our lasers.
And we know with lasers it's a very well established fact there's plume and there's virus in that plume. Now we don't know if COVID is in the skin. However, using Morpheus microneedling, this thing does not exist. The particles are not in the plume or very, very little. So, from a safety purpose, always have to consider large number of the study 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. And 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?
Yes. Thanks, Fero. Appreciate that. Thanks, guys.
Next question comes from Kyle Rose of Canaccord Genuity. Please go ahead. Great.
Thank you for taking the questions. So 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 tailwind or headwinds. But 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?
Shaquille, why don't you start and then I will add.
Yes, sure. Hey, Kyle, thanks for the question. So 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. So 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. So I do think that people do have some excess disposable income they're starting to reinvest in themselves.
We thought maybe it might just be something short term that we possibly would have 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. So 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. And I think in turn, it allows them to try and offer some of these new types of procedures. So our hands free technology, our minimally invasive have been really, really strong and been very popular with some of the new kind of regulations in place that people are following.
Spiro, did you want to talk a little bit about what you're seeing in the clinics?
Yes. Can you hear? Yes. Thank you, Shaq. Absolutely, we're seeing a lot of demand.
We thought can you hear me? Yes. So, we are actually seeing a lot of demand. We thought the demand initially was compressed demand for back in the spring and we kind of expected it to sort of taper off in the months of September, October. But these are unusual times and demand has continued and exactly like Jacques said, it's not necessarily everywhere the same, but the continued demand is an aberration because traditionally in the aesthetic world, usually in 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 Shacks said definitely have more income than sitting around and not spending on other things, But we've continued to see this demand through this period of time, which is definitely unprecedented.
And we welcome it, 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, minimal invasive, ablative, everything that penetrates the skin, there is one time disposable per treatment. The last quarter, we had a record sales of disposables and that's continue in the 4th quarter.
This is a record. We have 6,400 system already stored worldwide and we see increase every month. We see increased demand for disposables. So basically that tell us that the doctor is using the system. And the doctors make money on the system.
And they don't need much. If they do even 2 treatment per week, they are paying back the system in less than 7, 8 months. I believe I did the calculation once. I will do it again if necessary. But 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. And then the other question, 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. So a 2 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? And then 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. Okay. Well, as we said, the international market, what we call outside U. S, doubled its sales year over year in Q3. And this is because all the regulation processes that we have completed during the last two quarters.
As you probably know, in the Q2 beginning, we started to sell in China after getting the approval for 2 out of the 9 platforms that we have. Not everything is yet approved in China. And we start to sell. We have an office in Guangzhou, a subsidiary. We have distributor in Beijing.
We're doing a good job in introduction of the product and the technology into the Chinese market. And in the third quarter, we grew in China compared to the 2nd quarter. And I believe on the 4th quarter, we continued the momentum. Other countries that we see some growth is Brazil. Although Brazil is under a difficult situation today because of the COVID-nineteen, all of South America are in a terrible shape today as everybody know, because the leaders in Brazil do not accept that there was a pandemic.
But we managed to do a big introduction and virtual conference to many plastic surgeons, especially for the surgical procedure and the surgical 2nd quarter and we see momentum growth in the 3rd quarter as well in Mexico, as well in Korea and in Asia. India, although we have a subsidiary there, but the situation is just now getting some improvement from COVID. Europe, you are right, we're experiencing a second wave in Europe. But Q3 was better than the Q2. And I believe the Q4, 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. But 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. So 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. And the Q4, 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 the 6,400 installed base a few minutes ago. Could you give us the split U. S.
Versus OUS on that? And then maybe I'd be interested in hearing from you or maybe Shaq, now that you've got the Morpheus 8 platform, you've obviously got the Evolv and Evolvq 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? So 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 2 as well?
Shakil, would you answer that?
Yes, sure. So yes, you're bang on and we're actually in the process of right now to further enable that. But we are seeing more 2, 3 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. And so 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.
So when you combine the 2 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, very happy with. We've heard some great success on Morpheus Ate Bodies so far, obviously Morpheus Ate for quite some time. But 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 Omotiva for women's health and wellness, but then 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. So the Evoqua or the Evolv kind of come into play. So 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. And 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. And I know you might not want to share numbers, but can you split that 6,400 installed base U. S. To OUS, if you could anyway or Shack, any kind of systems per office, any number?
I'll let Moshe handle that.
Yes, we can. 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. And then Moshe, my last question is, if I look now over the last 3 years, each of the last 3 years, assuming guidance here is fairly accurate for 2020, you've increased revenue about $40,000,000 to $50,000,000 per year on an absolute basis. I know you're not providing 2021 guidance, but is that how we should think about kind of what the market can absorb each year and then kind of how absolute revenue trends should maintain into 2021, just the typical $40,000,000 to $50,000,000 increase each year?
Well, we have not yet gave the guidance for 2021. We will give the guidance for 2021 in the next earning call, which will take place in February, which will be in February next year. But yes, you can follow the same growth that we had in the last 3 years or even 4 years for 50 to 100 to 150 to close to 300 this year and probably will be the same in the next years. Yes, we are introducing the same amount of new product every year or new platform. And I believe your estimate is right.
Thank you, guys. I appreciate it.
The next question comes from Asaf Baral Chindale of Oppenheimer. Please go ahead.
Hey, guys. So 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 exact timing of the new product launch because of regulatory issue, not because it's we cannot say, it's because we're as you know, we are not launching any product before we completed a full study to prove safety and efficacy, before we filed submission with 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. Sometime it takes a little bit longer than what we estimate in the beginning because the FDA might have more question or they ask us to do a little bit more clinical work in order to ensure that this is safe and efficacy high efficacy for what we want to claim. But just as a guideline, usually we bring one product sometime in the Q1 if everything goes well.
And the last and the second one a second platform before the end of the third quarter toward Christmas and the Q4.
Okay, great. That's helpful. And 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%? So if there are any updates on that front, that would be helpful.
And then 2nd, 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 kind of the higher growth levels. Should we be thinking about accounts receivables being closer to the current levels, which are up pretty maybe it's still an absolutely low number, but on a relative basis, it's a little bit higher.
Eilif, can you answer that? Yes, I'll take this question. So 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 exemption expires only at the end of 2021. So only starting 2022, we will go up to the maybe 11% that you mentioned. Regarding the accounts receivable, yes, it's probably now that international markets start doing much better, it will probably go up.
And yes, 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 for 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 Mizrahi, CEO for any closing remarks.
Okay. Thank you, operator. Thank you everybody for joining us to the Q3 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.