Good day, and welcome to the InMode's Third Quarter 2024 Earnings Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to hand the call to Miri Segal, CEO of MS-IR. Please go ahead.

Thank you, operator and everyone for joining us today. Welcome to InMode's third quarter 2024 earnings call. 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 visit 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. With that, I'd like to pass the call over to Moshe Mizrahi, CEO. Moshe, please go ahead.

Thank you, Miri, and to everyone for joining us. With me today are Dr. Michael Kreindel, our Co-Founder and Chief Technology Officer; Yair Malca, our CFO; our Medical Director and VP of Medical Affairs, Dr. Eran Krieger; and Rafael Lickerman, our VP of Finance. Following our prepared remarks, we will all be available for Q&A. During the third quarter, macroeconomics headwind continued to impact our performance as reflected in our financial results. A decrease in minimally invasive treatment and a slowdown in platform sales led to less than expected sales in consumable and platforms in Q3, which in turn led us to revise our full year guidance. We are optimistic about the early endorsement of our two new platforms, IgniteRF and Optimus Max. We hope that as macroeconomics environment improves, particularly in easing interest rate and faster financial approval from leasing company, more physicians will recognize the benefit and efficacy of these new platforms. I would like to elaborate on our decision this quarter to reorganize some aspect of our corporate structure. As part of these management changes, we had to release some members of the management of the U.S. and replace certain management in the UK, Spain and in France. We believe these management changes are essential for aligning our target market with the right company structure. Additionally, we are segmenting the North American market into separate roles for U.S. and Canada, allowing us to focus on specific needs each geographic area. We are making additional changes in ROW [ph] that will better reflect our activities. Finally, regarding the situation in Israel, we want to assure everyone that our top priority remains the safety of our employees. We have overcome challenges relating to production and we take pride in our employees' dedication in working longer shifts to upload customers' commitment. Now I would like to turn the call to over Yair Malca, our CFO to review the financial results in more detail.

Yair thank you Moshe and hello everyone. Thank you for joining us. Starting with total revenue, InMode generated $130.2 million in the third quarter of 2024, out of which $31.9 million was generated from preorders received in the first half $31.9 million was generated from pre orders received in the first half of 2024. This leaves us with $98.3 million of net sales received in Q3. GAAP and non GAAP, cross margins in Q3 was 82%. Moving to our international operations, third quarter sales outside of the US accounted for $36.4 million representing 28% of total sales, a 19% decrease compared to Q3 last year. To support our operations and to ensure future growth, we currently have a sales team of more than 250 direct reps and 83 distributors worldwide. GAAP operating expenses in the third quarter were $57.9 A 2% increase year-over-year, sales and marketing expenses increased to $51.9 million in the third quarter compared to $50.8 million in the same period last year. This increase was primarily driven by our recent management change costs, higher commissions as well as additional spending on trade shows and workshops activities in Q3 of 20 next we look at share based compensation which decreased to $4 million in the third quarter of 2024. GAAP operating margin for Q3 was 37% compared to an operating margin of 38% in the third quarter of 2023. Non-GAAP operating margin for the third quarter was 40% compared to a non GAAP operating margin of 43% in the third quarter of 2033. GAAP diluted earnings per share for the third quarter was $0.65 compared to $0.54 per diluted share in Q3 of 2023. Non-GAAP diluted earnings per share for this quarter were $0.70 compared to $0.61 per diluted share in the third quarter of 2023. Once again,…

We will now begin the question-and-answer session. At this time, we will pause momentarily to assemble our roster and our first question will come from Matt Miksic of Barclays. Please go ahead.

Hi. Thanks so much. Can you hear me okay?

Yes, we do.

Great. And I just want a question on the full year EPS guidance and understanding the impact of the buyback. You've talked often in the past about investing through this cycle and yet, you know, obviously were able to kind of offset some of the reduction in sales with some element of cost control. So you can maybe talk a little bit about, where some of those cost controls are coming through and then I have one follow up.

Well, in Q3 we did not have a lot of, we didn't do any cost cutting or cost control. Actually we continue business as usual in R&D, marketing, et cetera and we did not lay out any employee. In addition, we spent a little bit more on the manufacturing due to the war in Israel. So we need to work overtime and that cost us a little bit more money. I don't think we did any cost control or cost sharing or cost cutting in Q3. This is the structure of our profitability and although it went a little bit down the gross margin and the EBIT, but that's natural because of the slowdown and the war on Israel.

Well, it's impressive and congrats on managing through that the end of the year. Maybe just as a follow up, any color or comments you can provide or thoughts on the turn, the potential turn, the timing of a kind of improvement in some of the end markets, particularly in the U.S. in this cycle that we're kind of managing through right now? Thanks.

Well, in the beginning of this year we thought that in the third quarter we will start seeing some relief on the slowdown. But you know, to be honest, unfortunately we don't see any change in the slowdown, especially not in the interest rate on lease packages and we don't see that on the fourth quarter as well. So I hope that it will start sometime next year. I don't think it will be on the first and maybe the second quarter. We don't know and we don't want to say anything on that because you know, in the last two quarters earning calls we said we believe it will start in the third quarter, but as I said, we don't see it yet.

Thanks so much for the color.

The next question comes from Mike Matson of Needham and Company. Please go ahead.

Hi. Hi guys. This is Joseph on from Mike. If maybe you could give us a little color on how maybe the last rate cuts helped leasing in your business and you know, looking forward into, you know, 2025, can you kind of frame us how another rate cut, maybe a similar size would help customers financing or do you think maybe the financing problem is going to be alleviated by multiple rate cuts from here, not just one?

Well the rate cuts or the interest cut, the general one did not affect yet the lease interest rate, the lease package that doctors buying with our equipment with. It's still very high and the process take much long, much longer because leasing company want to make sure that they are giving money to the right people. As we said last quarter, we helped with doing some pool and sharing some of the risk with the leasing company. But as you can see the results on the third quarter we did less than $100 million when the expectation was to go to $104 million, $105 million or whatever and we did only $98 million which is less than what we expected. So and I don't want to guess and tell you that it will start slowing down or the interest rate will start coming down sometime in the in the beginning of next year. We really don't know.

Okay. Yes, that's helpful. And then I guess maybe around gross margin. How can you guys, or what is your expectation around returning to the mid-80s gross margin is at the current revenue level, is a lot of this being driven by overtime and what have you in the manufacturing facilities? Do you need consumable to really return to growth to get back to the mid-80s?

I don't think we will go to the mid-80s, which what 85% or 86%? It would be very difficult. I still believe that 80% to 82%, it's a nice gross margin for a company like us being the size of InMode today. Cost of transportation goes up. The war in Israel which lasts too long does not help us with cost, does not help us with the manufacturing process. So going back to 85% maybe in the future, but we don't see 85% in the fourth quarter and not in 2025.

Okay, thank you very much.

The next question comes from Caitlin Cronin of Canaccord Genuity. Please go ahead.

Hi, thank you for taking the questions. Just a quick one. Not sure if I heard if you guys said, but if you could just give us the U.S. consumables growth for the quarter that would be great.

No, on the contrary, we know the consumable in the U.S. went down, not up and the total was again less what expected. And I said that in my speech because less minimally invasive treatment are being made right now. Now the reason for that is that our treatment with InMode equipment it's relatively expensive treatment. It's on thousands of dollars and not hundreds of dollars. So we believe the macroeconomics also reflect in that and also did not help doctors to do more treatment. And therefore we have realized that doctors in North America are making 40% less treatment than last year.

Okay, makes sense. And then I think you mentioned in your preannouncement press release about moving some operations away from Israel. Can you provide a little more color on what that means, the timing where, when?

Currently we're manufacturing only in Israel. We have two major facilities and three smaller ones which makes subcomponent, but the two main one are assembling the product. We have all to remember that in order to manufacture medical platforms or medical device which has to be regulated by 27 different regulatory bodies around the world; it's not so easy to find a facility that can handle it. We try to explore several opportunities with some companies in Europe. Mainly in Europe, so it will be close to us. If we go to China, it's almost impossible to control, but unfortunately we have no facility that can handle our product with the right regulatory approval from those regulatory bodies and therefore even with the war in Israel, we believe we can manage from Israel. Although it's difficult and there's uncertainty. I agree, but no, we have no other alternative.

Okay, thanks so much.

The next question comes from Tommy Han of Baird. Please go ahead.

Great. Can you guys hear me?

Yes.

Great. Thanks so much for taking the questions. Your U.S. systems installation number this quarter jumped to 610 versus 350 last quarter by RMATH [ph]. Does that third quarter systems place number include all of the pre orders delivered in the third quarter or were those preorders booked in the first half of the year? And could you remind us how you counted the old system you placed in offices in anticipation of the delivery of the preorders? Thanks.

I believe on the third quarter we delivered all the pre orders. We don't have more pre-orders to deliver.

Yes, we exclude them from the install base installation in the first half of the year and we include everything in Q3.

As you can see, the total gap number is $130.2 million, out of which $32 million are pre-ordered. The net sales of the fourth quarter, as I said before, was only $98 million less than expected, but we managed to deliver all the rest.

Perfect. Thanks for clearing that up. System ASP also jumped up to 140,000 from 115,000 previously. Were there any one timers driving that or have you been able to take price with your new systems? Thanks for the questions.

I mean the new system, the Ignite and the Optimus Max, just because this is some early bird, we can charge a little bit more, we raise the prices a little bit and that helps us with the price per platforms. But I believe looking forward it will be difficult to maintain the same price per platforms. But we are raising prices a little bit on the new platforms. We cannot raise prices on the current portfolio.

The next question comes from Sam Eiber of BTIG. Please go ahead.

Hi, good morning everyone. Thanks so much for taking the questions here. Maybe I can start on some of the changes to the commercial organization. It sounded more of a realignment and maybe splitting up some territories a little bit differently, but I guess any changes to the go to market strategy? Is the selling approach any differently or is it really just a realignment in terms of territories?

Well, it depends. In Europe we changed management in Spain, UK and France and the reason why we changed management in these two countries because we basically were not happy with the results and the dedication of the management on those territory. And therefore we have decided that we need to change them and we hire new management. And I believe that the new management are more dedicated and more eager to succeed. In the United States, it's a little bit different story. In the United States, we will leave two major VP Sales, one earlier in the year and one right now, and the President and the Chief Medical Officer, which was replaced with the VP Clinical Affairs in Israel. The President of North America, Shakil was with us for almost seven years. He did a great job. And after seven years of doing the same in the same position, I thought it will be we need to make some changes in order to realign the organization. So right now we don't have a President in North America. Canada reported directly to me, and the two new VPs for the East and for the West in the United States are also reporting to me. So actually in the meantime, I'm also the President of North America. I intend to spend at least week every month in Irvine in our office and visit doctors and the territories and work with them in order to realign the organization. In the meantime, I want to keep it that way. I'm not looking for President for the United States. Canada will continue to report to me until we found what exactly organizational changes we want to make with the new portfolio and with the current portfolio. It takes time, but we're in the process. s

Okay, that makes a lot of sense. And may be just following up on some of the newer products, we'd love to just hear any early feedback. Maybe you've heard from some of the early customers that adopted IgniteRF and Optimus Max. I guess, how many of these are upgrades versus new customers that that are now excited about the new platforms? And I guess just the third part of the question is that allowing you to maybe go beyond of the core plastic surgeons that you've typically gone after. Thanks for taking the questions.

Well, the two platforms are different. The first one, there is IgniteRF. It's minimally invasive and ablative platforms mainly for surgeon, plastic surgeon, aesthetic surgeon, dermatologist, any doctor who can perform surgical procedure. The second platform, the Optimus Max, it's more, I would say a platforms with different type of hand pieces all the way from laser IPL and also ablative with the Morpheus. We did not do any upgrade yet or maybe very little. We sold most of them to new doctors or to doctors who wanted a second system. We will put together a promotion on the fourth quarter and maybe early next year to do some kind of an upgrade to doctors who are having the body type, which will be replaced with the IgniteRF and the Optimus, which will be replaced with the Optimus Max.

Really helpful. Thanks for taking the questions.

This concludes our question-and-answer session. I would like to turn the call over to Moshe Mizrahy, InMode's CEO, for any closing remarks.

Well, thank you everybody. Thank you to all the shareholders, to all of InMode employees in Israel and worldwide, especially, I want to thank the Israeli employees that as everybody know, the headquarters and the two manufacturing facilities are -- I don't want to call it this way, but they are close to the border, to the north border and the war is here and they are still coming to work and everybody is dedicated so we can continue to serve our customers. I want to thank all InMode customers for the loyalty. I want to thank all the luminary doctors and looking forward to see you in the next earning call. Hopefully in Israel it will be a better day.