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Good day and welcome to the InMode Limited Third Quarter 2020 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 third quarter 2020 financial results conference call. With us on the line today are Mr. Moshe Mizrahy, Chairman of the Board & CEO; Dr. Michael Kreindel, Co-Founder and CTO; Mr. Yair Malca, CFO; and 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 handover 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 third quarter 2020 financial results conference call. In this earning call, we will discuss our third quarter financial results in the context of COVID-19 pandemic, our strategy during the crisis and our outlook of going forward. We are an international company. With me on the line today, Yair Malca, our CFO from California; Shakil Lakhani, our President of 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 a 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 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 US 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 technologies provide 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 depts. In addition, we were recently granted a patent covering our fractional RF technology. We intend to protect our IP vis-à-vis anyone who infringe 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 market. 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 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 the mark for that commitment and a strong belief in our value, we announced a share repurchase program of up to 1 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 to $195 million 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 Lakhani, who will go into more detail on our activities in our 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 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 guideline 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 first technology announced last month. The Morpheus8 Platform is a state-of-the-art workstation complete with dual hand pieces and four fractional tips and different micro needle 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 were following the successful formula we have developed for 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 are 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, 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 by the 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 totaled 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 was $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 30, 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 1 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. Thank you, Yair. I believe now we need to go to the Q&A.
[Operator Instructions] The first question today comes from Matt Taylor of UBS. Please go ahead.
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.
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&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 are adding more sales people 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 two conferences in South America, in Brazil, we did two in China. We also invest in distributor meeting. Also, we will do it virtual in Asia on December 3. So, 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. So, we see no signs of slowing down in any of our business activity.
And it's also started in the fourth quarter. 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 second wave. In countries like Italy; UK now is in a lockdown for four 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 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?
Well, we have announced a program, which we have approved on the Board of Director, to repurchase 1 million 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 share for all the $234 million, but maybe we will do first the 1 million 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 applied for American company. But to tell you today, if we have plan to allocate or invest the $230 million, the answer is no.
Okay. And then, maybe last one from 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 [indiscernible] treatment. 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 organization as to most of our marketing -- "marketing 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 Moshe's support to get this body of work published and out there. And especially if we're the leader in radio frequency, 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 radio frequency technology to lasers. And we know with lasers, it's is a very well established fact, there's plume and there's virus in there. 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, all these, you have to consider. The 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 are 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, Spero. 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 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, 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?
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 and 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.
Spero, did you want to talk a little bit about what you're seeing in the clinics?
Yes, thank you, Shak. Absolutely. We're seeing a lot of demand. We thought -- can you hear me?
Yes.
Yes. So, we're 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 Shak said, it's not necessarily everywhere the same, but the continued demand is an aberration because traditionally, in the aesthetic world, usually, September things typically drop off from the more plastic surgery procedures and 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 and 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 would you 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, those one-time disposable per treatment. The last quarter, we had a record sales of disposables, and that's continued in the fourth quarter. This is a record. We have 6,400 system already installed worldwide and we see increase every month. We see increased demand for disposables. So, basically, that tells 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 two 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. Is 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 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? 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. Well, as we said, the international market, what we call outside US, double itself 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 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 and 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. And in the third quarter, we grew in China compared to the second quarter. And I believe on the fourth quarter, we continue the momentum. Other countries that will see some growth is Brazil, although Brazil is under 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 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 platforms. And 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 and 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, but 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. 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 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 6400 installed base a few minutes ago. Could you give us the split US versus O-US on that? And 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 -- Evolve and Evoke is doing so well, you've got all the various Tite 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 two as well?
Shakil, would you answer that?
Yes, sure. So, you're bang on. And we're actually in the process of a few things right now to further enable that. But 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. 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 two of those together and it's a nice one-two punch, it's a nice return on investment for the physician, the patients get the results that they are very, very happy with. We've heard some great success on Morpheus8 Body so far. Obviously, Morpheus8 for quite some time, but we do see it overall. There are different areas depending on what specialties that we go after. If it's, say, an OB-GYN, while they can start treating people with a Votiva 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 Evoke or the Evolve kind of come into place.
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 in 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 US/OUS, if you could anyway? Or Shak, any kind of systems per office number?
I'll let Moshe handle that.
Yes, we can. It's 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 US.
Thank you. I guess I missed that. I apologize. And 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 to $50 million 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 kind of how absolute revenue trend should maintain into 2021? Just the typical $40 million to $50 million 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 on February next year. But, 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 and probably will be the same in the next year. 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.
[Operator Instructions] The next question comes from Asaf Barel Chandali of Oppenheimer. Please go ahead.
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 it's -- we cannot say it because, as you know, we are not launching any product before we completed a full study to prove safety and efficacy, before we file 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. 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 first quarter if everything goes well. And the last -- and the second one -- a second platform before the end of the third quarter towards Christmas and the fourth quarter.
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, 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 kind of the higher growth levels, should we be thinking about accounts receivables being closer to the current levels, which are up -- it's still an absolutely low number, but on a relative basis, it's a little bit higher.
Yair, do you want to take?
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 in 2022, we will go up to the maybe 11%, 12% that you've mentioned. Regarding the -- it comes to receivable, yes, it's probably now that international markets started 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 Mizrahy, CEO, for any closing remarks.
Okay. Thank you, operator. Thank you, everybody, for joining us to the third quarter of 2020 financial results. Hope to see you in the next conference call. Stay healthy and be safe. Thank you, all.
The conference has now concluded. Thank you.