Good afternoon, and thank you for joining us at this year's Canaccord Genuity Growth Conference. My name is Caitlin Cronin, and I'm one of the Medical Device Analysts here at Canaccord Genuity. Joining us this afternoon is InMode, a leading player in the global energy-based aesthetic treatments market. With me today is Yair Malca, CFO. Before we begin, I want to remind everyone of any relevant disclosures, which can be found on our conference and our firm website. With that, we'll get started with the fireside chat. Yair, I think the best place to start here is the Q2, given you just released results a couple of weeks ago. Maybe just provide some thoughts on where you guys are the first half of the year and what you're really trying to make sure investors understand coming out of the Q2 results.
First of all, thank you very much for having me and having InMode. Q2 was an okay year, an okay quarter, let's put it this way. It wasn't as strong as we hoped it would be, but it wasn't a terribly slow quarter. I think what we have seen is that we still see a decline in the U.S. business. Luckily, it was offset to some extent by a good performance, actually a record quarter in Europe, and then nice growth in the Asia-Pacific region. Overall, we still continue to see the same headwinds we've been seeing since the end of 2023. Things are, unfortunately, in Q2 did not improve. On the other side, I don't think they got worse. We still continue to experience the same challenges, low demand on the side of the patients.
Our doctors see lower demand than what they used to see a couple of years ago. That reflects on their willingness to invest in capital equipment into their practices. In addition to the fact that interest rates are higher, this makes their monthly payment on those devices higher as well. Together with some challenging financing markets, I think it's kind of a perfect storm that has been with us for a couple of quarters, and we still felt it in Q2.
Just relating to the guidance, last year, you lowered guidance multiple times. The Q1 this year had kept guidance consistent. In Q2, you pre-announced you lowered guidance. What was the rationale to lower guidance, the amount that you did, and when you did? How does that lowering play out into the future quarterly cadence for this year?
That's a great question. As you have noticed, we did change our guidance philosophy this year. Last year, we were more or even overly communicative, and with every quarter where we came a little bit below our expectations, we lowered the guidance. I think what we have realized and we're going to do moving forward starting this year is to try to minimize the revisions to the guidance. Q1 2025, we came below our expectations by a few million dollars because it was the first quarter of the year, which is usually seasonally also the slowest quarter of the year. We decided not to make any changes and to see how Q2 would look like. As I've mentioned, Q2, things did not improve, didn't get worse, but did not improve. We also came below our expectations for Q2 by around $5 million, $5 million, sorry.
Not too much, but still, together with the miss in Q1, when we have six months behind us, I think we kind of were in a better shape to look at the remainder of the year and have a better estimate of where we expect us to be. We provide the revised guidance, and we really hope that that's the only, and believe that that's the only revision that we will need to do from now until the end of the year. As I said, it's not a great year, but hopefully, as soon as the economy starts recovering, which we believe would happen, and the consumer confidence and consumer spending would start increasing again, I think in future years, we should see some improvement.
I think another interesting dynamic in the Q2 was the increase in non-invasive platform mix. Just maybe explain to the audience why this might have been the case, and then if this is a trend that you guys expect to continue.
That's another good question. I think what we've seen in recent years is some trends of combination treatments became very popular. For example, we have seen that many of our customers, the doctors, offer to their patients the Morpheus8 procedures together with a CO2 laser procedure. The Morpheus8 procedure is used for a more deeper treatment of the skin, and then immediately after, followed by a CO2 procedure for resurfacing and smoothing the skin. You are getting a complete treatment of the skin in one appointment. We have noticed this trend. We've noticed many laser companies reaching out to our Morpheus8 owners and trying to sell them their CO2 laser. We decided to take advantage of this trend and offer our own CO2 laser. This is one of the new systems that you see in this category, and that's one of the reasons for the increase.
It was somewhat surprising, at least to me. The CO2 laser is not a new or novel technology. This technology has been around for almost two decades. There are several, more than a handful of companies in our space offering the CO2 laser platforms. However, now that it's been packaged in a combination with our Morpheus8, it looks like there is a surprising and nice demand for it. This is something that we've been doing, and based on the results, we might look into expanding on that and maybe add additional laser procedures that would go hand in hand with our existing offering also in the future.
As one of the largest and biggest players, definitely in North America and probably in the world, in the energy-based aesthetic medical device, I think we would like to become a one-stop shop for all our customer needs, especially when it comes to an energy-based device. In the future, maybe we can expand even more than that.
In recent quarters, revenue mix has been more evenly split U.S. or U.S. than in the past. Can you talk about this dynamic? Is this something that you would expect to skew further back to the U.S. when the market rebounds? What are your kind of expectations going forward for this mix?
Yes, as you pointed out, in the last couple of quarters, the mix has changed to around 50-50, 50% coming from the U.S., 50% outside of the U.S. It used to be 65% coming from the U.S., 35% from outside the U.S. As I mentioned, the headwinds that we are experiencing in the U.S. market are more significant than what we see outside the U.S., especially in Europe and in the Asia region. We do hope that when U.S. consumer confidence and consumer spending start coming back, we will see an increase in the mix towards the U.S. The U.S. is the more profitable region for us, by far, I would even say. I am looking forward for the U.S. market to recover. This is a weakness that we see all across the market, not only with the energy-based device. That's maybe something that it's worth mentioning.
It's not a specific problem that InMode is facing. This is something that the entire space is now facing, and we see that with our doctors and with some of the competitive dynamics, even not direct competitors. You see injectables are down. Fillers, HA fillers, toxins, are trending down in the last several quarters. Same I can say about the rest of the industry. I'm very much familiar with the energy-based device industry, and I can tell you that many of them, especially the big players, are hurting and reporting declines in sales. I think once the U.S. market starts turning around, I hope to see the mix change back, and the more revenue we get from the U.S., the more profitable we will be.
You know, I think in spite of these macro challenges, you've really continued to launch new products and upgrades to products. Maybe we'll just turn to that. You launched two new upgrades last year, Optimus Max and Ignite, as well as the CO2 laser you mentioned that was earlier this year. In the midst of these challenges, how has demand been for these new and upgraded platforms? How much of your install base do you think has upgraded to these next-gen platforms?
The demand for those new platforms, especially with the existing user, it definitely can be better. I think the fact that the economy, especially in the U.S., is not doing that great, and the space has been experiencing these headwinds that I mentioned. Existing owners of the old generation, which is the Optimus and the BodyTite. We launched last year the Optimus Max, which is the next generation of the Optimus, which has been a legacy product for us, one of our best sellers. Same with the Ignite RF that we launched last year, which is the next generation of the BodyTite platform, which is again one of our main drivers, especially when it comes to minimally invasive procedures. Doctors that used to have the old device might think twice before upgrading to the new one, especially when they see this weakness in the market.
They have a good working device. Their base product has been very successful for many, many years. Some of them, I would think, decided to keep them a little bit longer until they see some improvement, and maybe then they will feel more comfortable upgrading those to the next generation. That being said, we do see many of them upgrading, or some of them at least upgrading. It started last year, but because of the fact that last year we had some supply chain issues, we focused on selling the products that we were able to bring to the market to new accounts. This year, we no longer have those issues. We came up with some trading programs to incentivize existing owners of Optimus and BodyTite to upgrade to the next generation.
We tried to sweeten the deal for them, but as I mentioned, some of them are still sitting on the sidelines, waiting for the economy to improve before they feel confident enough to take this leap of faith and reinvest in their practice. Regarding the CO2, as I mentioned, it was a very surprising success because this was not a new technology, yet the demand there was very healthy and nice.
Another part of your R&D strategy has been commercializing your new wellness platforms. You talked on the Q2 call about your newest platform for erectile dysfunction with the soft launch occurring in Q2. Can you talk about the commercial strategy around this platform, when you expect FDA approval of an erectile dysfunction indication, and what are the treatments that these docs can do with the device in the meantime as you soft launch?
The actual launch will happen in a couple of weeks during our user meeting, and then we will be able to provide additional information. What I can say is that currently, we start with soft launch. The device is cleared for a more generic FDA clearance, which is improved blood circulation, which is exactly what you want to do in order to help people that suffer from erectile dysfunction. We currently lead with this clearance, and we can start selling until we get the FDA indication if and when it will happen, probably next year, definitely not this year. I think with the indication that we do have, we can start selling. We usually go after urologists, but in addition to that, we see some of our med spas that enter the HRT space, hormone replacement therapy, actually interested in adding these procedures to their practices.
We have been very active for several years with the women's health space, selling the Empowered OBGYN that helped many women across this country with SUI, but also with issues around sexual dysfunction for women. These practices decide to expand the offering to help also their partners with their sexual dysfunction. The women potentially will bring the husband too. This is another call point for us.
Great. Are there any other system upgrades or launches on the horizon? Any sort of changes to the R&D strategy as these macroeconomic challenges continue, such as developing products that maybe target cheaper non-invasive procedures?
Our strategy overall on the R&D is to continue to bring new products to the market, both in aesthetic and in those wellness areas. We plan to continue with doing that. On the aesthetic side, we continue to bring products to these two avenues: one, the minimally invasive surgically physicians, and also to the non-invasive. There is a huge demand also for non-invasive procedures, just like the CO2 laser that we introduced earlier this year, and we plan to introduce more. Hopefully, this answers your question.
Yeah. Maybe let's move on to the commercial and management structure and the recent changes there. I think you made a number of changes to the commercial org and the management org over the past year, including the structure of the U.S. and North America. Can you describe those changes and then, you know, why you implemented them and any further changes that you expect to occur?
Yes, maybe I'll start on a very high level. InMode experienced very accelerated growth from 2017 all the way up to 2023. Sometimes it's pretty acceptable to assume that the team that brought you almost from zero to almost $500 million in revenue will not necessarily be the same team that will take you from that level to the next level. Sometimes you need a different skill set. Not to say that they did something wrong, but they were the perfect fit for what we needed then, and what we needed moving forward might be something different. Moshe, our CEO, took the time to review region by region, and we started making changes. In Europe, we changed some of the country managers, and we started seeing the results. We made some promotions there.
We went direct in some countries, which helped a lot. In the Asia-Pacific region, we changed the Head of Sales, the VP of Sales for Asia-Pacific earlier this year, and we started seeing some results there. In North America, as you suggested, we made some management changes with the removal of the President and two VPs. This actually freed up some space for new VPs to get promoted. Moshe, as the CEO, is working closely with the new VPs to mentor them and grow them and make sure they would have the tools and mindset they need in order to take this company to the next step of where we want to be.
I think with all the products that we added in the last few years, both on the aesthetic side and the wellness side, it might make sense to start looking at reorganizing the sales team, creating some specialties. When we were smaller, it was okay. It made sense to have one sales rep carry the entire bag of products. Now, when you have so many products that address different call points, I think we are at the moment that we start thinking seriously of creating specialties. That's what we've been doing. We started with the Envision. We have a Director, a Senior Director, that oversees this space and starts building its own team of sales reps that can sell only this product. By doing that, we almost force them to focus on one product.
Based on the success of this pilot, we'll call it, we might do the same thing in other areas, like women's health, ENT in the future. We plan to introduce platforms for the ENT, etc. Even in aesthetics, we have the surgical devices, which are focusing on minimally invasive and the non-invasive. Sometimes these are two different call points. These are only for plastic surgeons or surgically trained physicians, and the non-invasive can go almost to any med spas. Sometimes you may want a different type of sales reps to go after those different call points.
Maybe just turning to capital allocation, you have a large, you know, cash balance, and you've gotten pressure from investors to put some of that capital to work, which you have done. Just maybe provide an overview of your recent capital allocation and further plans for this year and beyond.
I think in the past, starting last year, last year, and within less than a year, or a little bit over a year, I'd say, we purchased 27% of the company for about $400 million in cash. Overall, in the last few years, we bought $500 million in cash. We spent on share buyback, basically. There are investors that think that this is not enough and we should do more. We appreciate the feedback. We are basically looking at all the options. Yes, we can do more, and we are considering that, but we're also considering other cash allocation strategies, such as dividend allocation, as well as M&A.
At the end of the day, M&A can help us buy some interesting assets that can contribute to the future goals of the company, whether it's additional assets on aesthetics or additional assets on the wellness space, the ones that we are going after, whether it's women's health, male health, ophthalmology, ENT, etc . I would say that all the options are on the table. We have nothing against buyback. We've done quite a significant buyback program so far, and we are open to do more if the board determines that that's the right thing to do. Having said that, we're also looking at other alternatives that might be the right thing to do as well.
Maybe just in the last minute here, touching on tariffs, what's the strategy and what's the expected impact for this year, and how do you expect to implement mitigation efforts?
Currently, our estimate is that we are going to pay on average 10% tariffs. It's probably, hopefully, will be less. We are trying to implement some programs that would help us reduce that. For now, let's go with the 10%. This would have an impact of 2%- 3% on the gross margin on an annual basis. Once we are successful in implementing different alternatives, we will report back the expected income. For now, let's go with what we provided so far.
Great. I think we'll end it there. Thanks, Yair.
Thank you very much. Thank you, guys.