Good morning and welcome to the InMode Limited Fourth Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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 fourth quarter and full year 2019 financial results conference call. With us on the line today are Mr. Moshe Mizrahy, Chairman of the Board and CEO; Mr. Yair Malca, CFO. Before we begin, may I remind our listeners that certain information provided on this call may contain forward-looking statements, and the safe harbor statement outlined in today's earnings release also pertains to this call. If you have not received a copy of the release, please view it in the Investor Relations section of the Company's website. Changes in business, competitive, technological, regulatory, and other factors could cause actual results to differ materially from those expressed by the forward-looking statements made today. Our historical results are not necessarily indicative of future performance. As such, we can give no assurance as to the accuracy of our forward-looking statements and assume no obligation to update them, except as required by law. Moshe will begin the call with the business update, followed by Yair with an overview of the financials. We will 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, and thanks to all of you for joining our fourth quarter and full year 2019 financial results conference call. Here with me around the table in Israel are, Dr. Michael Kreindel, the Co-founder and CTO. Michael is also a Board member of the Company, Yair Malca, our CFO; Rafi Likerman, our VP, Finance. Before I update you on the major development and financial results for the fourth quarter and the full year 2019, I would like all of you to join us as we celebrate two major events. This year, we're celebrating 10 years of operation. We began operation in 2009 so last year was our 10 year anniversary. The second event, we're celebrating is that's 2019 was the first year that's we recorded full year result as a public company. As we celebrate these major events, we would like to highlight our achievement along the way. In 2016, the FDA cleared InMode new and proprietary Bipolar RF frequency technology, which enabled further development and marketing of minimally invasive Subdermal Adipose Remodeling Devices. I'm sure that all of you may know our BodyTite, FaceTite, AccuTite and Morpheus8. With this new technology InMode introduced a new category in the medical aesthetic market, which we call Minimally Invasive and Subdermal Ablative Aesthetic Surgery. This technology enables physicians to provide solution to patient, who do not want to suffer from the shortcoming or full plastic surgery yet we'd like to get comparable results. We call them Treatment Gap patients. Today five years after being production of this technology in U.S., InMode has become the leading provider of minimally invasive aesthetic surgery solution to the aesthetic surgeons. The success of InMode's Subdermal Adipose Remodeling Devices into minimally invasive and the subdermal ablative space inspired InMode to apply the same principle of…

Thanks, Moshe. Good day, everyone. Total revenue in the first quarter of 2019 grew 63% to a record $47 million with the gross margin of 87% on a GAAP basis. The revenue growth was driven primarily by the continued success of InMode's expanding direct sales organization in the United States. Additionally, InMode continued to gain traction in international markets with international revenue growing 71% year-over-year. GAAP operating expenses in the fourth quarter of 2019, totaled approximately $23 million, a 2.3% decrease from the first quarter of 2018. Sales and marketing expenses increased 60.7% in the first quarter of 2019 compared to the first quarter of 2018, but were offset by the anniversary of the one-time legal settlement and loss contingency expense related to sublicense agreement of $8 million in the fourth quarter of 2018. On a non-GAAP basis, operating expenses totaled $22.7 million in the fourth quarter of 2019 compared to operating expenses of $15.4 million in the fourth quarter of 2018, an increase of 47.6%. GAAP operating margin was 38.2% in the fourth quarter of 2019 compared to 12.6% in the fourth quarter of 2018. Non-GAAP operating margin in the fourth quarter of 2019 was at 39% compared to 33% in the fourth quarter of 2018. GAAP diluted earnings per share in the fourth quarter of 2019 were at $0.46 compared to a net loss of $0.01 per diluted share in the fourth quarter of 2018. Non-GAAP earnings per share in the fourth quarter of 2019 were at $0.46 compared to $0.22 per diluted share in the fourth quarter of 2018, an increase of 109%. We completed the fourth quarter with a strong balance sheet. As of December 31, 2019, the Company had cash and cash equivalence, marketable securities and deposits of $193.4 million, out of which $70 million…

Thank you, Yair. With that, I will be pleased to take your questions.

Thank you. We will now being the question-and-answer session. [Operator instructions] The first question will come from Jack Meehan of Barclays. Please go ahead.

So, I'm looking forward to the new disclosures you plan to provide around revenue across surgical hand-free traditional. Was hoping, could you just give us a little bit of color, if you look at that today, what percentage of revenue each of those buckets were in 2019? And within the guidance, what you expect each of those to grow at? I'm expecting the hand-free is probably the fastest level of growth given the new products, but just a little bit more color there would be helpful?

This is Moshe. In 2019, we started to -- we've introduced the Evolve preliminary in August. And therefore, we sold the hand free devices only the Evolve, the Evoke only in the first quarter of 2020, only on the -- a little bit on the third quarter and on the fourth quarter. Altogether, it was around $22 million. The main market for minimally invasive -- just a second, the main market for the minimally invasive was around -- minimally invasive $24 million. And then, the subdermal ablative and the traditional, was on the $1 million. So, previous quarter just a second, okay. The numbers that I'm giving you right now, I'm looking on the spreadsheet. The number that I'm giving you right now is on U.S. only. I will not give you numbers on the international sales. We did not sell any hands free devices on the international markets. So, on Q4 2019, $24 million were the minimally invasive and ablative hands free was around $9 million and then non-invasive laser was only $1 million total of $33 million. This is out of the $47 million. In addition to that, we had another $4.3 million of recurrent and the rest was international. On the full year 2019, $89 million was the minimally invasive and ablative, $10 million was the non-invasive, the hands fee was $12 million, since we sold the little bit on the third quarter as well. This is together for U.S. $111 million. Total sale in 2019 was 156, out of which was around $16.4 million of recurrence and the rest was international, but in the international we did not sell any hand free yet.

And, miraculously, I think, I kept up with all the numbers and I think they make sense.

Jack, as you can see, up until we will stop selling the hands-free devices, which is the unique platforms in 2020. The minimally invasive and ablative, all the surgical products are the main category for us.

Yes. So, it seems like you've got off to a really strong start with Evolve. Maybe just talk about in terms of revenue within your guidance of 192, 198, what are you assuming for those platforms and how the customer feedback has been?

Okay. Well, we don't have a lot of customer feedback because most of the deliveries were done at the end of the fourth quarter, but we get some doctors who did some preliminary study even before we launched the products to the market and the results are good. So, we're very encouraged. What will happen in the future with the hands-free devices? First, in general, we do believe that the potential of the technology that we developed for the hands-free segment is even higher than the potential of the minimally invasive. And the reason for that is that the minimally invasive and subdermal ablative is mainly for doctors who are surgeon and the hands-free devices can be used by any aesthetic doctor. And the ratio between plastic surgeons and anesthetic surgeons, doctors who are doing surgery to doctors who are engaged in just medical aesthetics, I would say at least one to six to one to seven. So the potential is high. How the market will accept that? We don't know yet. We have those few quarters with that as at least two to three quarters to understand the potential, to understand the message, to fine tune the message, to decide which community of doctors we're approaching. So, it's still early to say.

And then last question, the recurring revenue think I heard 4.3 million in total. It seems like continued to have a nice ramp on the consumable side. Maybe just what was the revenue contribution from consumables and how are you seeing?

We're currently around 10%. Overall, in 2019, our current revenue from disposable and others are around 10% of the total revenue worldwide.

And the breakdown in there is about the 70% of that is consumable and 30% of that is warning. Does that answer your question?

Yes. And how much of the growth is coming from the minimally invasive side? And how you expect that the ramp in 2020?

Jack, only the minimally invasive and ablative has disposable. The hands-free and the non-invasive platforms do not have any disposables. The disposable are for the BodyTite, NeckTite, AccuTite, Morpheus8, and now we are introducing other version of Morpheus8. These are the one-time use and these other disposables. So, as the installed base of the minimal invasive and ablative platforms will grow, the total number of disposable will go as well. We see this starting in 2019. For example, Morpheus8 becoming a big winner. And we don't even keep the manufacturing in order to supply all the demands, but it's growing.

Consumer doubled year-over-year in 2019 versus 2018, consumable exactly doubled in themselves.

The next question comes from Matt Taylor with UBS. Please go ahead.

I just have a follow-up on Jack's question. Could you articulate, when you look at the three main categories that you're now breaking out? How much of the growth in 2020 do you expect to come from each of them? If you can quantify that or just kind of speak to the trends?

I believe that just roughly. I mean, it's too early to say, but just roughly, I would say that at least a 65% to 70% of our revenue will continue to come with established business of the minimal invasive and ablative, 25% worldwide will come up with the hands-free. Since the production will take time, the regulation in certain countries will take time, although it's already cleared by the FDA, but in other countries in Europe, Asia, we need to go through the process and we haven't started yet. So, this would be around 20% to 25% and then that traditional laser will continue to be around, I would say, between 5% to 10%.

Moshe, it sounds like the hands-free launches are going really well. You're predicting a lot of growth from that this year. Could you just talk a little bit about the initial receptivity to them? How you feel they're differentiated and just any other color on market size and growth?

You mean on the hands-free platforms?

Yes.

Okay. We have basically two platforms. The Evoke, which is for the space. We don't have any competition because there is not even one platform similar to that in the market today, okay. On the Evolve side, there are some companies who are offering hands-free devices like ZELTIQ, with fat freezing, and like BTL with the EMS and some others with EMS. But these are single function platforms. The beauty of Evolve is that the Evolve has three modalities. It can compete with BTL and all the other EMS because we have one of the modalities EMS. It can compete with ZELTIQ and all the laser sculpture from Cynosure and other on the fat treatment. And -- but also we have additional modality which is the type for skin tightening. Also the three modality in the Evolve is doing fat treatment but also skin tightening. And therefore, when we see the competition, there was not even one platform who can offer such comprehensive platforms to the doctors, and this is something that unique about the Evolve. What is the potential? I said before, I believe if we will position it right to the aesthetic surgeons and also to the aesthetic physicians, doctors who are not doing surgical and who are not involved in minimally invasive to potentially high all over the walls. But you know, time will say, we need to compete against the competitors. We need to position it. We need to develop some training programs for every country. We need to finalize the regulation in many other countries. But during 2020, that's the main objective of us to bring the hands-free platforms category into the awareness of all the doctors who are engaged in aesthetic.

So one other follow-up question I had. I guess, when you talk about the contributions from these hands-free products, you mentioned a couple of times that you're looking to roll these out across the globe throughout 2020. Can you just offer some early thoughts on '21 and '22? Can we see this launch build basically over multiple years? Or do you see, I guess, what year would you see peak sales from these products?

Okay. Good question. The plan for 2020 is to take these two platforms and get regulation clearances in Asia, in South America, in the Eastern Block, which is separate from the regular CE, in Italy, which is again separate from the regular CE, and make sure that we got clearances all over the world, including Canada, U.S., and other countries. Once we have that -- and also in Brazil, of course. Once we have that in 2021, I believe the numbers that the total revenue from the hands-free category, which will be at least double from 2020, at least, doubled. And also for 2021, we might be able to double it again because honestly the technology that we're presenting on, which is based on the Bipolar RF is the only the technology that actually treat the fat and tight the skin, even when you take the Cynosure, a culture or the ZELTIQ, CoolSculp. Okay, they know how to kill fat cells, but then you have loose skin. And the beauty of our technology, especially with the hand-free is that we can do both simultaneously, and we can combine between the three modalities, depends on the patients and customize the treatment according to the BMI, according to what the patient want to achieve. We have many types of scenarios of treatments and protocols of treatment that we can employ here. So, we see a great potential for that. And this is something that we will concentrate on 2020, not just in the United States, but as I said, to get us clear by the relation authorities in many countries and in 2021 to grow big.

The next question comes from Kyle Rose with Canaccord Genuity. Please go ahead.

This is Ian on for Kyle. Thanks for taking the question and congrats on another impressive quarter. Just wanted to ask about gross margins, is that lag came in a bit above what we were expecting? And 2020 guidance is 85% to 87%, it seems to imply a bit of a step down from the current levels. Just anything in particular this quarter that led to the strong performance in that line? Anything you're seeing in 2020 that would weigh it down a bit? I know you mentioned the manufacturing concerns from coronavirus. Was there anything else? Thank you.

Well, the gross margin in the fourth quarter and the full year of 2019 was 87%. The main reason is first economies of scale. I mean, we manufactured much more than 2018 and we sold more than $50 million more. Now when you deal with this kind of manufacturing, you have bargaining power again versus suppliers, you can get better prices, and of cause you don't increase your overhead accordingly. And therefore 1% increase from 218 to 219 was reasonable increase based on that. What will happen in 2020? We believe that somehow we would need to find solution for the component that we will not be purchased from China, and we might pay a little more. And this is the reason why we say that the range is between 85% to 87%, if the coronavirus will spread and we will need and China's factories will not open in the second quarter, then we estimate 1% decrease in the gross margin in 2020 to something in the neighborhood of 86%, this is based on some calculations that we did here. But I want to tell you one thing, which is very important and we dealt with this issue this week and we have teams of -- we established a team of people that's right now exploring all the other alternatives around the world for similar components, and we will pay more on the components as long as we can keep the production line up and running. This is more important for us to deliver on time. And then, on the first quarter, we don't see a major because we have some inventory. But if this virus, the coronavirus will continue to create an issue -- to be an issue in the second quarter, the gross margin will grow 1% down, and this is why we estimate 85% to 87%.

[Operator Instruction] The next question is from Jeff Johnson with Baird. Please go ahead.

Moshe, I just want to follow up on the subcomponent supplier point there you just made on a 100 basis point impact. Is there any risk that you won't be able to find alternative suppliers? I guess, you've quantified the size, but is there risk of actually going out and finding those suppliers?

No, there was no such risk. And even if we have to make for example, metal component in Israel and it will cost, I don't know, full time so as much we will do it. We're not taking any chance of not delivering product on time, and we're not taking any chance, even if it will cost much more to stop the production line. Because once you stopped the production line, it would be very difficult to start it again. You lose the knowledge, you lose people and you don't want to be in this situation. And I can assure you that all the components will be purchased from second and third sources and we will continue the manufacturing. The good news and I'm saying it again. The good news is, well, not yet cleared in China for selling our product. Therefore the effect on revenue would be very minimal. And unlike other companies like Lumenis and Cynosure and of course Condella, who are having subsidiaries in China and a major part of their business in Asia, originated in China, they are going to be helped much more than us as far as revenue. But as far as manufacturing and components, there's no risk that we will stop the lines.

All right, that's helpful. Thank you. And then maybe two follow-up on Evolve and Morpheus8, Evolve, are you seeing most plastic surgeons and other purchasers of that platform buying all three hand pieces? Are they buying two hand pieces and maybe thinking about adding EMS later? Just would love to hear kind of an update on how that is being purchased? In Morpheus8, you mentioned some updates to that. Any additional color you could provide there would be helpful? Thanks.

Most system of Evolve that we sold in the preliminary launch was with all three modalities, because the message to the doctor is simple. Those modalities and the treatment of tight, trim and tone are complimenting each other. And therefore in order to customize the treatment per patients, what you need to do is to develop a customized protocol for him and you need all three modalities, but we do also the system with one, two or three modalities.

Great. And Morpheus8 the updates there?

What do you want to know about the Morpheus?

You said something in passing in answering a previous question about some updates there, and I didn't know if something is changing with that product, if you're launching a second gen or maybe a third gen product in Morpheus8. Just was trying to follow up from a comment you made in passing?

No, no. What I said is that we continued to develop some other vision of the Morpheus because the Morpheus is the winner product and we will announce it once it's ready and get the clearance from the FDA.

And then the last question for me. Just India and Australia, I think your two newest subs, just where are you at in building out your market presence in those two markets? Are you now fully staffed up and going after those markets? And how should we think about maybe your presence in those markets in 2020 versus 2019?

Well, we started the Indian subsidiary in 2019. And on the fourth quarter, we did close to $400,000 already, which is good for start. That was the first full quarter. In Australia, we set up the Company in the fourth quarter of 2019. We hired the managing director. We hired a logistic guy. We hired the three sales people. They're getting ready with the training and they sold two systems in the fourth quarter and also in the fourth quarter, in the beginnings of this quarter of the first quarter. So I believe that in Australia and India by establishing subsidiaries, we went to be one of the market leaders.

So the next question is a follow-up question from Jack Meehan with Barclays. Please go ahead.

I was wondering if you could update us where you ended the year in terms of the number of sales people in the U.S.? And given some of the distractions that some of your competitors, do you think that's helped you at all on the commercial front?

Yes, as of December 31, 2019, we had 110 direct sales people in the U.S. and in Canada, but since then we continue to hire and prepare ourselves for 2020. I believe there is some opportunity and I would like to extend that in market today. The fact that Cynosure was acquired by an equity fund and the team is not doing very well under Allergen. And I believe that the companies like Alma and Condella just because the crisis in China will lose some of the revenue in 2020. I'm sure that some people will leave those companies and we might find some good people to hire in 2020. And we would continuing to hire because if we want to be in the neighborhood of $200 million in the worldwide and at least 70% of that would be North America. We need more people. And on average, direct sales person in North America is selling something between $1.3 million to $1.4 million a year. So, we can calculate and do the math simply in order to determine how many direct sales rep we need, but we continue to hire in 2020.

That's great. And then within your guidance for 2020, is there a range you feel comfortable with for the first quarter? Is there anything seasonally you would call out?

Jack, we decided that we do not want to give guidance for the first quarter. I'm sure all of you know the seasonality of the market, but we decided we don't want to give guidance per quarter, but rather give guidance for the full year, which we will update every quarter with the actual. And therefore at the end of Q1, we will update the numbers based on the actual revenue that we achieve in Q1, and Q2 and Q3 the same. So, right now, the guidance that we gave, we believe, as far as competitive situation with our competitors it's the maximum we can do, also the categorization that we decided to reveal in the three categories also because we cannot give information about individual platform. This is a very strict competitive information, which we do not want to share with our competitors. All of them are on the line now.

No, that's all fair. Last follow-up, you're building a bit of a work chest on the balance sheet now, over $190 million of cash and equivalents. How are you feeling in terms of what you want to do on the deal front potentially? And do you think any of this disruption could open up some targets for you?

Well, maybe, we're not engaged in any M&A. We had a board meeting yesterday, and basically, in the board meeting, we decided to give all the $200 million that we have as bonus to the employees, but we'll do it almost four quarters, not immediately. I'm kidding. No, we're not -- we don't have any M&A targets right now. We have enough organic growth on the table from our development, which we need to bring to the market with a high potential. And with the management attention that we have in this company currently, I just want to remind everybody that we're not very big company, altogether 250 people. We do not see any reason why to start doing an M&A and engage in all kind of issues and others. It will take time. We might do it in the following years. But right now the answer is, we will continue to generate cash and it will accumulate on the balance sheet. If the opportunity will present itself to buy technology or something which will complement our product line, yes, we will consider it, but this is not $200 million.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Moshe Mizrahy for any closing remarks.

Okay. Again, thank you everybody for joining us. It was a very good quarter for us. We are very excited with the new categories that were developing. We're very excited with the R&D pipeline that we established for the 2021 and 22. And we have a full engineering team here in Israel, who are working on new platform. As we promised during the road show of the IPO, we will bring to the market at least two new platforms every year in order to keep the momentum and keep the growth, and continue to be the innovation or the innovative leaders on the medical aesthetic. Thank you all.

Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.