Apyx Medical Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 9, 2024

Key Takeaways

  • In Q1 2024, total revenue decreased 16% year-over-year to $10.2 million, driven by a 23% decline in Advanced Energy product sales (generators down nearly 40%) partially offset by 14% OEM growth.
  • The cosmetic surgery market remained soft as prospective customers delayed capital equipment purchases due to macroeconomic uncertainty and high financing costs, with U.S. sales lagging while EMEA and APAC showed pockets of strength.
  • Management delivered a 5% reduction in operating expenses (approximately $600,000) in Q1 to enhance cash efficiency and help offset market headwinds.
  • The company introduced the Renuvion APYX-one generator and micro handpiece and received two new FDA 510(k) clearances for subcutaneous tissue coagulation and contraction post-liposuction, expanding its differentiated clinical portfolio.
  • Apyx reaffirmed its 2024 guidance of $49.7 million–$52.9 million in revenue (down 5% to up 1%) and a net loss of $24.3 million–$26.5 million, expecting modest improvement in the second half while leveraging clinical evidence and DTC marketing to drive adoption.
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Earnings Conference Call
Apyx Medical Q1 2024
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Operator

Hello and welcome, ladies and gentlemen, to the First Quarter of fiscal year 2024 earnings conference call for Apyx Medical Corporation. At this time, all participants have been placed in the listen-only mode. At the end of the company's prepared remarks, we will conduct a question-and-answer session. Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly.

Operator

Before we begin, I would like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements and are based on the current expectations of management and involve inherent risks and uncertainties that could cause actual results to differ materially from those indicated, including without limitation, those identified in the Risk Factors section of our most recent annual report on Form 10-K, our most recent 10-Q filing, and the company's other filings with the Securities and Exchange Commission. Such factors may be updated from time to time in our filings with the SEC, which are available on our website. We undertake no obligation to publicly update or revise our forward-looking statements as a result of new information, future events, or otherwise. This call will also include references to certain financial measures that are not calculated in accordance with the Generally Accepted Accounting Principles, or GAAP.

Operator

We generally refer to these as non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the most comparable measures calculated and presented in accordance with GAAP are available in earnings press release on the Investor Relations portion of our website. I would now like to turn the floor over to Mr. Charlie Goodwin, Apyx Medical President and Chief Executive Officer. Please go ahead, sir.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

Thanks, Operator, and welcome everyone to our earnings call for the First Quarter 2024. I'm joined on today's call by Matt Hill, our Chief Financial Officer. Let me provide you with a brief outline of today's call. I'll begin with a discussion of our first quarter revenue performance and some of the important areas of operational progress our team has made to date this year. Matt will then review our quarterly financial results and guidance for 2024, which we reaffirmed in our earnings release today. I'll then conclude our prepared remarks with a brief discussion of our outlook and priorities for 2024 before we open the call for questions. Now let's get started with the review of our revenue results. In the first quarter, total revenue decreased 16% year-over-year to $10.2 million.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

The decrease in total revenue growth was driven by sales of our Advanced Energy products, which declined 23% year-over-year to $7.5 million. This was offset partially by growth in sales of our OEM products, which increased 14% year-over-year to $2.8 million. Turning to a more detailed discussion of our performance in our Advanced Energy segment, our first quarter Advanced Energy results were largely consistent with our expectations outlined in our most recent earnings call in late March. As a reminder, we had expected continued softness in the market for cosmetic surgery capital equipment purchasing, similar to what other companies in our industry have been facing since mid-2023. The dynamics observed during the first quarter remained consistent with these expectations.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

Specifically, our team continued to see prospective customers delaying investments in new capital equipment, mentioning broader macroeconomic uncertainty along with concerns about the financing environment and high interest rates. With this as a backdrop, the year-over-year decrease in Advanced Energy segment sales during the first quarter was predominantly driven by slower sales of generators, which decreased nearly 40% year-over-year. This performance was consistent with our range of expectations for the quarter. Global sales of our handpieces decreased modestly on a year-over-year basis, but this decline was within our range of expectations for the quarter as well. From a geographic standpoint, the year-over-year decrease in Advanced Energy sales was largely driven by slower sales in the U.S.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

Given the continued challenges in the cosmetic surgery market, our direct U.S. sales team has remained focused on working with prospective surgeon customers to help them understand the benefits that Renuvion can bring to their practice, appreciate its potential return on investment and payback period, and explore different financing options to help address any concerns on this front. Driving new customer adoption has remained an uphill battle in the current market environment, and I am pleased with both their performance and their efforts during the quarter amidst a challenging backdrop. Internationally, while sales to our U.S. distributors varied both by country and by region, we saw pockets of strength in multiple regions, most notably Europe, Middle East, and Africa, and APAC.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

All in all, our Advanced Energy sales were in line with our expectations for Q1 and continue to reflect the difficult market environment we and others in the industry have been experiencing. Importantly, we remain focused on controlling our costs across our organization as we navigate these headwinds. Cash efficiency is a key priority for our organization, and we continue to evaluate ways to minimize our expenses. We were pleased in the reduction in our operating expenses in the first quarter of approximately $600,000 or 5% year-over-year. This improvement provided us significant savings to help offset the impact of the challenging market environment on our business.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

Turning to a discussion of our recent operational highlights, as a reminder, in 2024, our team is focused on driving adoption and utilization of our Renuvion technology, in part by leveraging the important progress we made last year, which provided us an enhanced portfolio of clinical evidence, products, and regulatory clearances. Specifically, we entered 2024 with a clinical portfolio of over 90 published papers, 2 new products, our Renuvion Apyx One generator and Micro Handpiece, and most importantly, 2 additional 510(k) clearances for specific clinical indications. As a reminder, these new clearances enable us to market our Renuvion technology for the use in coagulating subcutaneous soft tissues following liposuction for aesthetic body contouring and to be used when contraction of soft tissue is needed, including subcutaneous tissue. Renuvion is now the only device that is FDA cleared for use after liposuction and the only device cleared for contracting subcutaneous tissue.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

According to the latest global survey report from the International Society of Aesthetic Plastic Surgery, liposuction continued to be the most commonly performed cosmetic surgical procedure in the world, with an estimated 2.3 million procedures in 2022. We believe aesthetic body contouring procedures, multi-stage procedures that target specific fat deposits and typically involve fat transfer and skin laxity treatments, will continue to be an important long-term driver of demand for liposuction. Renuvion has an integral role to play in these procedures, given its ability to achieve soft tissue contraction safely, effectively, and deliver impressive and lasting results. With all of this in mind, our team continued their efforts during the first quarter to drive awareness and educate potential new customers about our enhanced Renuvion offering.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

As I mentioned earlier, our team is engaging with both surgeons and their staff to drive the awareness of Renuvion's benefits, walk them through its ROI, and discuss ways to position the technology within their existing offering. As part of this initiative, we also participated in 9 medical meetings and trade shows, supplementing 29 podium presentations featuring our technology with additional programming to engage and educate potential new surgeon customers. Our team also hosted 5 Physician Mentor Programs during the quarter, providing the 45 prospective physician customers who attended these events to observe cases and learn directly from some of our most successful surgeon users. In addition to our focus on potential new customers, we continue to support and educate both our OUS distribution partners and existing surgeon users, helping them better capitalize on the unique benefits of our Renuvion technology.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

As part of our global sales meeting, which we hosted during the first quarter, we were able to bring in distributor personnel based in over 30 different countries. The meeting provided them an opportunity to engage with and learn from our direct sales and marketing personnel and key customers, which we believe will benefit their activities in the countries and regions they cover. With respect to our existing surgeon customers, on April 12th, we hosted our third Renuvion User Summit in Las Vegas, which was attended by over 150 clinicians from 13 countries. Our user summit featured a day of presentations enabling users to hear from 27 of our key opinion leaders as they discussed findings from the latest research, ways in which our technology can be applied to enhance patient outcomes, and insights from their clinical experience with our technology.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

This provided many of our users with new ideas to apply to their own practices. All of this content is now available on demand for all of our customers. My personal interactions with surgeons' users at this latest event underscored for me the passion they have for Renuvion stems from their own personal experience using the technology and the difference they see in terms of what they're providing to their patients. From a patient marketing standpoint, we also continue to develop and enhance our direct consumer advertising initiative. Following the reorganization of our marketing team last quarter, we are pleased to have new senior leadership in place with expertise in DTC advertising campaigns and significant prior experience in the cosmetic surgery market.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

Our team recently engaged a new advertising firm with whom to partner on our strategic marketing initiatives, including DTC campaigns, and are collaborating to create and test new content. We look forward to establishing a best-in-class program to more fully capitalize on the benefits of our new regulatory clearances. In addition to our efforts to raise awareness, educate the market, and support our existing customers, we continue to leverage and expand the portfolio of clinical evidence demonstrating the safety and efficacy of Renuvion. In January, we were pleased to see the publication of a peer-reviewed article in the Aesthetic Surgery Journal Open Forum, which evaluated the safety of Renuvion for contracting subcutaneous soft tissue following liposuction. The article summarized the results of an analysis conducted by Dr.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

Sheibani and team, which included real-world data from 483 patients who were treated with Renuvion for the contraction of subcutaneous soft tissue following liposuction on a total of 1,184 areas of the body. They evaluated the adverse event rates for these procedures and compared them to the rates for procedures that only involved liposuction alone, which they sourced from previous published systematic review of liposuction safety studies. The authors drew two important conclusions from the analysis. First, they found the use of Renuvion following liposuction demonstrated no new or increased risk compared to the use of liposuction alone. Second, they found the risks associated with the use of Renuvion for subcutaneous soft tissue contraction following liposuction did not differ significantly by body area.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

This important analysis represents additional compelling clinical evidence demonstrating the excellent safety profile of our technology, and we were pleased that it is now widely accessible to the medical community as well as the broader public. At the AACS annual scientific meeting in February, we were pleased to see a presentation by Dr. Michael Kluska discussing the results of a retrospective clinical study that compared the use of Renuvion to a commonly used competing technology. The study was conducted by Dr. Kluska and several colleagues who collected and evaluated demographic, procedure, and safety data from a continuous series of over 450 patients. Roughly half of these patients were treated with Renuvion following liposuction, and the other half were treated with the competing technology. The researchers found a statistically significant difference in the number of adverse events for each patient group.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

Specifically, the group treated with Renuvion had significantly fewer burns, hematoma, hypertrophic scarring, and seroma in comparison to the group treated with the competing technology. This study represents an important addition to our body of clinical evidence as it demonstrates Renuvion's compelling safety profile when compared directly to alternative devices commonly used for treatment. We hope to see this study published and its full results made available. In summary, by capitalizing on important operational progress made in 2023, supporting our existing customers, and continuing to expand our portfolio of clinical evidence, our team is focused on driving adoption and utilization amidst a challenging backdrop while positioning Apyx Medical for future success as the market environment improves. Before I turn the call over to Matt, I would also like to take a minute and discuss an important announcement we made via press release this morning.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

After more than 40 years of service to Apyx Medical, Andrew Makrides is retiring today as Chairman of our Board of Directors. It would be an understatement to say that Andrew has been an instrumental contributor to the success of Apyx Medical and its predecessor, Bovie Medical, since the company's founding nearly a half-century ago. One of the Co-founders of the company, Andrew, has served as Chairman of the Board since 1982. During much of the time, he has also guided the company's strategy and operations as a member of the company's executive team, serving as its president for over 25 years and Chief Executive Officer for more than 15 years. Andrew has been an invaluable resource to me since I joined the company as CEO and Director in 2017.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

On behalf of my fellow board members, colleagues, and shareholders, I would like to take the opportunity today to thank him for his strategic vision, guidance, and dedication to Apyx Medical and wish him the very best in retirement. I would like to welcome Stavros Vizirgianakis, who has been appointed to serve our new Director and Chairman. Stavros is an investor and strategic advisor to companies in the medical device industry. His impressive career in medical device space includes significant experience leading public and private companies as a member of the board and as a member of the senior leadership team. In terms of his past senior leadership experience, Stavros is perhaps most widely known as former president and CEO of the publicly traded medical device company Misonix, a role he held from 2016 until the company was acquired by Bioventus in 2021.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

Stavros also co-founded Surgical Innovations, one of Africa's largest privately owned medical device distributors, which later became part of Ascendis Health. Stavros' recent board experience includes current positions at Tenon Medical, Theragenics Corporation, and the publicly traded Xtant Medical Holdings. He is both well-qualified and well-suited to guide the strategic vision of Apyx Medical going forward, and we look forward to leveraging his experience and insight as we embark on our next stage of growth and value creation. I look forward to working together as we explore additional opportunities to improve our sales growth and profitability with the goal of increasing shareholder value. Matt will now review our first quarter financial results in more detail along with our financial guidance of 2024, which we reaffirmed in today's release.

Matthew Hill
Matthew Hill
CFO at Apyx Medical Corporation

Thank you, Charlie. Given that Charlie discussed our revenue results, I will begin with the gross profit line. Unless noted otherwise, all references to first quarter financial results are on a GAAP and a year-over-year basis. Gross profit for the first quarter of 2024 decreased $1.6 million or 21% to $5.9 million. Gross profit margin was 58.1% compared to 62.4% in the prior year period. The decrease in our gross margin was driven primarily by changes in the sales mix between our two segments, with our OEM segment comprising a higher percentage of total sales, and by geographic mix within our Advanced Energy segment, with international sales comprising a higher percentage of total sales compared to the prior year period. As Charlie mentioned, we were pleased with the reduction in our total operating expenses of $0.6 million or 5% to $12.6 million, reflecting our continued emphasis on controlling costs.

Matthew Hill
Matthew Hill
CFO at Apyx Medical Corporation

The change in operating expenses was primarily driven by selling, general and administrative expenses, professional service expenses, and salaries and related costs, which decreased by $0.4 million, $0.2 million, and $0.2 million respectively. These decreases were offset partially by research and development expenses, which increased by $0.1 million. Please note, our operating expense in the prior year period included a reclassification of $150,000 from salaries and related costs into research and development expenses to better align senior leadership team costs and expenses with the areas that they lead. This will continue in coming quarters. Loss from operations for the first quarter of 2024 increased $1 million or 18% to $6.6 million. Total other expense net was $0.9 million compared to $0.2 million in the first quarter of 2023.

Matthew Hill
Matthew Hill
CFO at Apyx Medical Corporation

The change was driven by an increase in net interest expense related to our outstanding debt obligations in the first quarter of 2024, as we had lower borrowings in the prior year period. Income tax expense was $53,000 compared to an income tax benefit of $2.3 million last year. The income tax benefit in the prior year period was primarily related to the reversal of liability for uncertain tax positions. Net loss attributable to stockholders increased $4.1 million or 118% to $7.6 million or $0.22 per share compared to $3.5 million or $0.10 per share in the prior year period. Adjusted EBITDA loss increased $1.3 million or 34% to $5.3 million compared to $4 million in the first quarter of 2023. As a reminder, we provided detailed reconciliation for net loss attributable to stockholders to non-GAAP Adjusted EBITDA loss in our earnings press release.

Matthew Hill
Matthew Hill
CFO at Apyx Medical Corporation

For the three months ending March 31, 2024, cash use from operating activities was $6.3 million compared to $1.9 million in the prior year period. The increase was driven primarily by the year-over-year change in net loss and the paydown of certain accrued expenses. As of March 31, 2024, the company had cash and cash equivalents of $37.3 million compared to $43.7 million as of December 31, 2023. Turning to a review of our 2024 financial guidance, which we reaffirmed in our earnings press release today, for the 12 months ending December 31, 2024, we continue to expect total revenue in the range of $49.7 million-$52.9 million, representing a decrease of approximately 5% to growth of approximately 1%.

Matthew Hill
Matthew Hill
CFO at Apyx Medical Corporation

Our total revenue guidance range continues to assume Advanced Energy revenue of $41.6 million-$44.6 million, representing a decrease of approximately 4% to a growth of approximately 3%, and OEM revenue of approximately $8.1 million-$8.3 million, representing a decrease of 10% to 7%. In terms of our profitability guidance for fiscal year 2024, we continue to expect net loss attributable to stockholders of approximately $26.5 million to $24.3 million compared to $18.7 million last year. The low end of our formal financial guidance for net loss attributable to stockholders continues to assume the following for modeling purposes. First, gross margins of approximately 61% this year compared to 64.5% last year.

Matthew Hill
Matthew Hill
CFO at Apyx Medical Corporation

The year-over-year decrease in gross margins is primarily driven by changes in revenue mix, with roughly half attributable to changes in revenue mix within our OEM segment and the other half attributable to geographic revenue mix in our Advanced Energy segment and the full-year impact of incremental rent expense related to our sale-leaseback of our Clearwater facility in 2023. Second, total operating expenses of approximately $52 million, a decrease of approximately 3% year-over-year. Third, GAAP net interest expense of approximately $4.1 million compared to $1.6 million in 2023. Fourth, the low end of our net loss guidance range also assumes income tax expense of approximately $0.2 million compared to income tax benefit of $2.4 million last year, as well as non-controlling interest benefit of approximately $0.2 million.

Matthew Hill
Matthew Hill
CFO at Apyx Medical Corporation

Lastly, at the low end of our net loss range, we continue to expect cash used in operations in 2024 of approximately $19 million compared to normalized cash used in operations of approximately $13 million in 2023, excluding the one-time tax benefit. The year-over-year change in cash used in operations is driven by the change in net loss offset by improvements in our working capital. With that, I will turn the call back to Charlie for closing remarks.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

Thanks, Matt. The reaffirmation of our 2024 guidance reflects both our performance in the first quarter, which was consistent with our expectations, as well as our outlook and key assumptions for the balance of the year, which remain unchanged. Our guidance continues to assume slower generator sales in 2024, given the challenging capital equipment environment in the cosmetic surgery market. Specifically, we continue to expect that this challenging environment will persist throughout 2024, with modest improvement in trends in the second half of the year. Our guidance also continues to assume that the impact of slower generator sales in 2024 will be offset either fully or partially by year-over-year growth of sales of our handpieces, driven by demand from both existing customers and new users. With respect to our OEM segment, our guidance continues to reflect a return to more normalized ordering from our OEM customers in 2024.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

Lastly, it's important to note that the second and fourth quarters of each year are typically when we see the highest quarterly revenue in our Advanced Energy segment, given the seasonal trends we have experienced historically. Stepping back, as we continue to navigate this difficult near-term environment, our team continues to focus on leveraging the recent operational achievements I discussed earlier to expand awareness and build momentum in the cosmetic surgery market. With more than $37 million of cash and cash equivalents at quarter's end, we believe our financial resources enable us to pursue our strategic initiatives. As I mentioned earlier, controlling costs remain an important priority for our organization, and we continue to evaluate opportunities to preserve capital as we execute our growth strategy.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

Looking ahead, we remain focused on capitalizing on our multi-billion-dollar addressable market opportunity, as well as the favorable longer-term tailwinds in our industry, including demand for body contouring procedures, the adoption of GLP-1 drugs for weight loss, and the increasing social acceptance of minimally invasive cosmetic procedures. Once the market environment improves, we believe Apyx Medical will be uniquely positioned to benefit from these important tailwinds to drive strong, sustained growth and value creation over the coming years. I'd like to conclude by thanking our employees and distributor partners for their efforts in the past quarter, as well as our customers and shareholders for their support. With that, operator, let's now open the call for questions.

Operator

Thank you. The floor is now open for questions. If you do have a question, please press star one on your telephone keypad at this time. If your question has been answered, you can remove yourself from the queue by pressing one. Again, ladies and gentlemen, it's star one. Our first question comes from Matthew O'Brien from Piper Sandler. Go ahead, Matthew.

Philip Dantoin
Philip Dantoin
Research Analyst at Piper Sandler

Hey, this is Philip Dantoin on for Matt. Thanks for taking our questions. I was just hoping to start with a little bit more color on the guidance as it relates to the sequential ramp implied over the remaining quarters. What gives you confidence there? Are you starting to see some of the capital equipment overhang lift, and could this accelerate in the back half of the year?

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

Yeah. Obviously, we introduced our fiscal 2024 guidance in late March, and that included our assumptions for the operating environment for the entire year. Nothing has changed in that operating environment over the last few weeks of Q1. With respect to what we have seen so far in April, we're not providing interquarter updates. The capital equipment environment still continues to be challenging, and our guidance continues to assume modest improvements in capital in the second half of the year. As I stated in the prepared remarks, typically, second quarter and fourth quarter are much better from a seasonality perspective. It is what we talked about at the last call, and it's right in line with what we've been expecting all year.

Philip Dantoin
Philip Dantoin
Research Analyst at Piper Sandler

That's helpful. then just shifting gears, an update on the GLP-1 dynamic. I know you've talked about it on many previous calls, but are these patients really in your funnel yet to be treated, or perhaps are we still waiting on these patients to finish out their weight loss journeys?

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

Yeah. I think that when you look at the challenging macro environment right now, part of that story is the GLP-1s, where you have patients that are on at different time intervals, if you will, on that weight loss journey. A lot of those patients are waiting to get to their ideal weight in order to have then a procedure done. Quite honestly, it depends on the practice. It depends on where they have been along this journey. We have practices that have patients coming in from that funnel because they've been out in front of this for over a year now. We've got other practices that are just getting involved in this, and they're still waiting for a lot of those patients to come through.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

It is part of this macro environment that we have right now in the aesthetic space, this disruption with the GLP-1 drugs. The point is that most of these patients are going to come through this funnel, and a lot of these patients are going to be seeking body contouring procedures to take that last step. We think that this is a tremendous long-term tailwind for our technology, and it is just something that we've got to get through right now.

Philip Dantoin
Philip Dantoin
Research Analyst at Piper Sandler

Very helpful. I'll jump back in queue. Thanks so much.

Operator

Thank you. Our next question comes from Frank Takkinen from Lake Street Capital Markets. Go ahead, Frank.

Frank Takkinen
Senior Research Analyst at Lake Street Capital Markets

Great. Thanks for taking the questions. I've got two, and I'll ask them both up front. First, on the alternative selling model, I think you kind of referenced some financing options or different unique ways you can get equipment into customers that may be reticent to purchase it. Maybe talk a little bit about that and if there's a broader strategic rationale for going to just a straight placement model where you're placing that equipment free but charging a little bit more on the disposable side just to start to reaccelerate those placements. Then two, on OEM, can you just call out if there was any stocking orders or any inconsistencies with that Q1 print and how we should think about the rest of the year? Thank you for taking the questions.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

Yeah. No, no problem, Frank. As far as the acquisition models that we have for doctors to acquire the capital, we will be selling the product, and we've got a lot of different options for the doctors. Obviously, we've got straight purchase, which is something that we've always had. We've got leasing options where we can help them with the interest rate if that is a route that they want to go. Then we have our subscription partner that is MedShift that we can use to do that. We don't believe that placing generators is an option for us, and we will be selling generators along those three lines. We believe that those three options give the customer adequate room or adequate choices in order to acquire the technology, and so we will stay with that.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

As far as the OEM guidance goes, we reported 2.8 of OEM in Q1. That was in line with our expectations. Our 2024 guidance continues to assume a roughly high-single-digit decrease in OEM sales year-over-year. The low end of our guidance is roughly $4 million in both the first and the second half of the year. There obviously is some fluctuation in the year-over-year growth rates in a given quarter, and that's just the lumpiness of our ordering partners of when they want to place their orders.

Frank Takkinen
Senior Research Analyst at Lake Street Capital Markets

Great. Thanks for taking the questions.

Operator

Thank you. Our next question comes from Matt Hewitt from Craig-Hallum Capital. Go ahead, Matt.

Matthew Hewitt
Matthew Hewitt
Senior Research Analyst at Craig-Hallum Capital

Good morning. Thank you for taking the questions. Maybe first up, if we could dig in a little bit on some of the geographies. It sounds like you're seeing some better or a better performance in a few OUS geographies. Could you talk a little bit about what's driving that and whether that's sustainable?

Matthew Hill
Matthew Hill
CFO at Apyx Medical Corporation

Yeah. Our AE sales OUS were stronger than the US, number one. The results still varied by country and by region. We did call out two areas, if you will. Well, actually, it's a couple of areas, but Europe, Middle East, and Africa, and APAC were strong demand from our distributors. I think that when you ask if it's sustainable, I think it was still in line with what we expected. It is nice to see that strength in those markets. We've made some changes in APAC, and we've been spending more time in Europe and the Middle East in doing a lot of the PMPs and things like that. Those things are starting to pay dividends. We would expect continued strength in those areas for the rest of the year, but that is already factored into our guidance for the year.

Matthew Hewitt
Matthew Hewitt
Senior Research Analyst at Craig-Hallum Capital

Got it. Then shifting gears a little bit on the gross margins, I heard you comment regarding roughly 61% on the year. As you're seeing the strong utilization trends here, remind me, but I think there's some volume benefit that you'll get on the handpieces from a margin perspective. Are you seeing that, or should we expect to see that as the year progresses? And maybe talk a little bit about the margin front? Thank you.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

Well, I think that Matt can answer specific questions on the margin, but the low end of our guidance still assumes gross margins of 61%. That hasn't changed. I think, as Matt outlined, it was really because OEM was a higher percentage of the total revenue, and then it was geographical mix within the AE segment. When we're talking about handpieces and things that we've talked about in the past with that, Matt, remember that there's still a lot of areas outside the United States where the APR handpiece is still not registered and still not the predominant thing. As we migrate more people to the APR, obviously, that will have a positive impact over time too. All of this is factored into the guidance that we gave for the gross margins for the year.

Matthew Hewitt
Matthew Hewitt
Senior Research Analyst at Craig-Hallum Capital

Got it. Thank you.

Operator

Okay, ladies and gentlemen, it's star 1 to ask a question on the phone. Our next question comes from George Sellers from Stephens. Go ahead, George.

George Sellers
George Sellers
VP of Healthcare Research at Stephens

Hey, good morning, and thanks for taking the question. Maybe on the operating expense side of the house, I've heard your guidance about expecting a decline of 3% for the year. You also talked about some increased D2C spending, it sounded like. Maybe can you just flesh out some of the quarterly cadence for that OPEX decline, when we should see maybe an increase of D2C spending, and maybe what some of the areas you'll be pulling out operating expenses from?

Matthew Hill
Matthew Hill
CFO at Apyx Medical Corporation

Thanks for the question. The low end of our 2024 guidance continues to assume approximately $52 million of OpEx, like we said in the end and you said as well, a decrease of approximately 3% year-over-year. Where we continue to focus our spending is investing in R&D to support our future growth initiatives. Those costs will be offset by lower SG&A, salary-related costs, and professional services. We are allocating costs into the DTC in order to get that message out and ensure that we are achieving the goals that Charlie discussed as part of his prepared remarks.

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

Yeah. And George, if I could just jump on that for a second, on the back end of that is, as with most small medical device companies, the first quarter from an expense point of view is always one of the highest, and you start to have some things flatten out or even out as we go forward. That $52 million that Matt just talked about, that has the increased DTC spending in it.

George Sellers
George Sellers
VP of Healthcare Research at Stephens

Yep. Okay. That's helpful. Then maybe on the macro side of it, and specifically thinking about your handpiece revenue, it sounds like that declined a little bit in the quarter. Just curious how the underlying market performed in terms of liposuction procedure volumes and how handpiece sales compared. Then with your guidance assuming growth in handpiece revenue throughout the year, can you just help us parse out what that implies for the sequential increase in handpieces and what that assumes for the underlying macro in terms of the procedure side of it? Not the generator sales, but more on the procedure side?

Charles Goodwin
Charles Goodwin
President and CEO at Apyx Medical Corporation

Yeah. As we said in the prepared remarks, both generators and handpieces were in the range of expectations for the quarter, okay? Both of them were there. Global sales of our handpiece, as you pointed out, decreased modestly on a year-over-year basis. Again, that was expected and contemplated with our expectations that we provided on the Q4 call. We still continue to expect, though, a year-over-year growth in handpiece sales in 2024, which will help offset the slower generator sales either fully or partially. We do expect growth. It's just sometimes when you look at it on a quarter basis, it's different. If you remember, in Q4, we had actually really strong growth in our handpieces. We'd still expect growth year over year.

George Sellers
George Sellers
VP of Healthcare Research at Stephens

Okay. That's helpful. Thank you all for the time.

Operator

At this time, this concludes our question and answer session. I would now like to end the call. Thank you all, and have a wonderful day.

Executives
    • Charles Goodwin
      Charles Goodwin
      President and CEO
    • Matthew Hill
      Matthew Hill
      CFO
Analysts
    • Frank Takkinen
      Senior Research Analyst at Lake Street Capital Markets
    • George Sellers
      VP of Healthcare Research at Stephens
    • Matthew Hewitt
      Senior Research Analyst at Craig-Hallum Capital
    • Philip Dantoin
      Research Analyst at Piper Sandler
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