Earnings Call Transcript - APYX Q1 2021

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the First Quarter of Fiscal Year 2021 Earnings Conference Call for Apyx Medical Corporation. At this time, all participants have been placed in a 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. Before we begin, I'd like to remind everyone that our remarks and responses to your questions today may contain forward-looking statements that 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 those identified in the Risk Factors section of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission, as well as our most recent 10-Q filing.

Charlie Goodwin, CEO

Thanks, Operator. Welcome, everyone to our first-quarter earnings call. I'm joined on this call this morning by our Chief Financial Officer, Tara Semb. Let me provide you with a quick agenda for today's call. I'll begin with a review of our first-quarter revenue results. Following this discussion, I'll share an update on the operational progress we made during the quarter towards the four strategic initiatives we're pursuing to enhance our long-term growth in the cosmetic surgery market. Tara will then provide a detailed review of our financial results and an overview of our 2021 financial guidance, which we updated in our press release this morning. I'll then conclude with some additional closing thoughts before we open the call for questions. With that, let's get started with the review of our revenue results. In the first quarter of 2021, we delivered total revenue of $8.6 million, representing growth of 73% year-over-year, which was well ahead of our expectations. Our total revenue performance was especially noteworthy given the disruption created by the COVID-19 pandemic, which continued to challenge the overall operating environment, both in the U.S. and internationally. By geographic region, U.S. sales increased 54% year-over-year to $5.6 million, while total international sales increased 123% year-over-year to $3.1 million. The year-over-year increase in total revenue was driven exclusively by our sales of our Advanced Energy products, which increased 92% year-over-year to $7.7 million, more than offsetting a modest decline in our OEM business, which decreased 3% year-over-year to $1 million. Shifting to a more detailed discussion of our Advanced Energy business, I'm pleased to report that the 92% year-over-year growth we saw in total Advanced Energy sales was driven by strong global sales of both our generators and handpieces, reflecting encouraging adoption and utilization of our technology in our key markets around the world. As we mentioned on our earnings call in March, during the first quarter, we continued to see strong utilization of our handpieces in the U.S. coupled with demand from our distributors internationally, despite the elevated volumes of COVID cases in many countries.

Tara Semb, CFO

Thanks, Charlie. Given Charlie's detailed review of our first-quarter revenue results, I'll begin my discussion of our Q1 financial results by continuing down the P&L. Gross profit for the first quarter of 2021 increased $2.9 million or 96% year-over-year to $5.9 million. Gross profit margin for the first quarter of 2021 was 67.8% compared to 59.7% last year. The year-over-year increase in gross profit margins was driven by revenue mix between our two segments and as well as improved product margins in our Advanced Energy segment, due to the continued manufacturing efficiency initiatives that Charlie mentioned earlier. The year-over-year increase in gross profit margins was offset partially by revenue mix, geography, and product. Operating expenses for the first quarter of 2021 increased $0.1 million or 1% year-over-year to $10.6 million compared to $10.5 million for the first quarter of 2020. The increase in operating expenses year-over-year was driven by a $0.9 million increase in salaries and related costs and a $0.1 million increase in research and development expenses, partially offset by a $0.9 million decrease in professional services and a $0.1 million decrease in selling, general and administrative expenses. The very modest year-over-year increase in operating expenses reflects the continued benefits from our initiatives to control costs and reduce our discretionary spending, which began in the second quarter of 2020 in response to the impact of COVID-19 on our financial condition.

Charlie Goodwin, CEO

Thanks, Tara. We're raising our guidance for 2021 to reflect both our strong start to the year, including the encouraging adoption and utilization trends that we have seen as well as the continued confidence we have in our outlook for the remaining nine months. With a solid balance sheet, a global multi-billion dollar addressable market opportunity, and differentiated technology supported by an expanding portfolio of clinical evidence, we remain well-positioned to drive strong, sustained revenue growth and improving financial performance as the global environment continues to recover. We look forward to building on our recent momentum this year by continuing to deliver exceptional financial performance and strategic execution as we establish Apyx Medical as a leading player in the global cosmetic surgery market. I'd like to again thank our employees for their hard work, as well as our customers, distributors, and investors for their continued support for Apyx Medical and our mission. With that operator, let's now open the call for questions.

Operator, Operator

Thank you. And our first question will come from Dave Turkaly from JMP Securities.

Dave Turkaly, Analyst

Good morning and congrats on the broad strength you saw across the geographies and the different product lines. Charlie, we've asked this before and I'm just curious, given how balanced that growth was, I know capital has always been a larger component, but I assume it's got to be getting closer to 50:50. I just love to get your thoughts on sort of where that mix stands today between the handpiece and the generators, and if we are approximating that level.

Charlie Goodwin, CEO

Thank you, Dave, for the question. We are very pleased with our generators, which increased by 80% year-over-year in Q1, and U.S. generator sales rose by 67% year-over-year. This marks our first quarter of growth on the generator side post-pandemic in the U.S., and the growth is particularly impressive considering the ongoing COVID-related challenges. In the U.S., we experienced a 120% year-over-year increase, although this was partly due to easier comparisons. Nonetheless, we still saw a 6% growth compared to 2019. The demand for generators from various countries indicates a steady improvement in certain international markets. While we won't go into detail about the exact mix of generators to handpieces, we are extremely satisfied with the continued global growth and utilization we have observed, along with the adoption of Renuvion. This is very encouraging for us and reinforces our confidence about the future.

Dave Turkaly, Analyst

Yes, I appreciate that. And I had to drive a day. Thank you for that. And then I guess as a follow-up on the international front. You call that Brazil and Taiwan and the Hampi side, you mentioned strengthen, I guess, across other countries on a generator, but obviously that's been very strong last two quarters sequentially. So I guess any additional color you might give us there, maybe even particularly on the generator side would be helpful?

Charlie Goodwin, CEO

Well, I think that when you're talking about those two countries, in particular, and when you're talking about our long-term regulatory strategy that we've had to get new countries, obviously, there's going to be more generators that go into place, right when we get those because there's demand in a lot of those countries. And so this strategy has been a strategy that we've been talking about now, since we've been here for three years. And as we continue to keep adding new countries, obviously generator adoption starts, but then the handpiece utilization then follows. And so all of this really starts to build a nice business outside the United States with adoption of that, and you could see that with the handpiece growth up more than 120%. But as we talked about outside the United States from a COVID perspective, it is really, really a mixed bag outside the United States and some areas are really being affected more than others. And it is still hard to predict outside the United States how COVID is recovering; they're way behind on the vaccine and certain countries and things like that.

Operator, Operator

Our next question comes from Matt Hewitt with Craig-Hallum.

Matt Hewitt, Analyst

Good morning. Congratulations on the strong quarter. A couple of questions for me I was hoping to focus a little bit on the sales and marketing efforts. As you know, here domestically in pockets of OUS as vaccines are rolled out as COVID starts to decline. Are you able to get out and about more from a sales perspective, get into see your customers? How should we be thinking about some of those costs ramping up over the course of the year?

Charlie Goodwin, CEO

We were very pleased with the progress we made in the first quarter, especially in the United States, where we sold generators and experienced growth again. Despite COVID, we were active in this area during Q1. We just participated in our first in-person trade show in April. Looking ahead, we expect to have more in-person trade shows in the U.S. We also hosted a hybrid event for our PMP, combining in-person and virtual attendance, which was wonderful as it attracted around 200 doctors. This trend of hybrid events, mixing in-person and virtual participation, will continue this year. As we attend more of these events and increase our travel, we anticipate our expenses will rise throughout the remainder of the year.

Matt Hewitt, Analyst

Got it. And then maybe just a follow-up on that, it sounds like you've launched a couple of new marketing campaigns. Would it be safe to assume that Q3 early Q4, you received the dermal resurfacing approval, would it be safe to assume that you would add some sales resources, some headcount to the sales team to really drive growth in that market after the approval? Thank you.

Charlie Goodwin, CEO

Yes, that's a great question. For the dermal resurfacing study, as I mentioned earlier, we are still aiming for our 510(k) submission by the end of this month. We expect it will take at least 90 days to receive a decision from the FDA. Our guidance for 2021 does not factor in any revenue from dermal resurfacing sales. We intend to assemble our sales team in August to strategize for a possible limited launch in Q4. However, we do not anticipate any significant revenue contributions until our full commercial launch in 2022, and we feel confident about the current size of our sales organization.

Operator, Operator

Our next question is from the line of Matt O'Brien with Piper Sandler.

Korinne Wolfmeyer, Analyst

Hi, this is Korinne on for Matt. Thanks for taking the questions and congrats on the quarter. So first just looking at your guidance with the no change to OEM guide, despite the segment doing a little bit better in Q1 than we had anticipated. Can you just speak to some of the trends you've seen with that business and why U.S. got unchanged?

Charlie Goodwin, CEO

Thank you for the question. For the OEM, our first-quarter results of $1 million were in line with our expectations. Our guidance for 2021 anticipates a 20% revenue decrease, roughly $4.4 million, and we achieved $1 million in Q1. Thus, the OEM revenue remains unchanged. As for the decline this year, we have consistently indicated that the OEM business is approximately a $5 million segment. Last year, it generated $5.5 million, and we project it will reach $4.4 million this year. This decline is largely influenced by demand trends related to COVID, as these products are sold to partner customers who primarily distribute them in hospitals, which have been significantly affected by the pandemic compared to our market in the aesthetic sector.

Korinne Wolfmeyer, Analyst

Great. Thank you. That's helpful. And then just on the gross margin front, how should we think about the ramp throughout the year to get up from where we are now to that 69% to 71% range? Should it be like a pretty good sequential improvement or will it be a little bit lumpy? Any color on that would be helpful.

Charlie Goodwin, CEO

Yes. So if you remember for the gross margins, it was primarily driven by our segment and by our product mix and the product mix specifically on the APR handpiece. And we rolled out the APR last year in the United States, and we're seeing obviously adoption of that in the U.S. and we just started to do that outside the United States. And so outside the United States, we would expect that there will obviously be more APR sold in the last quarter of the year outside the United States than we will in the first quarter of the year. And so that ramp will help drive the gross margin sequentially on a quarter-by-quarter basis.

Operator, Operator

Thank you. Our next question is coming from the line of Russell Cleveland with RENN Capital. Please proceed with your question, sir.

Russell Cleveland, Analyst

Hi gang, thanks so much for the great numbers. A couple of quick questions. First on the international scale there's a lot of places that we're not, for example, like Argentina and so forth. Can you comment on your international growth, how we're looking at the world and these places that we're not now?

Charlie Goodwin, CEO

Our OUS regulatory strategy has been a key focus for us, and we are working as quickly as possible, especially considering the COVID situation in various countries. The impact of COVID on health ministries varies, affecting our progress. While we can't comment on the timing of our approvals since it's beyond our control, we are pleased with the three new registrations we achieved this quarter, which reflects the hard work of our team. The strong international growth of 120% is also very encouraging. This is a long-term strategy for us, as we aim to expand into new countries. Our guidance mainly projects growth from existing markets and does not factor in significant growth from new registrations due to the uncertainty surrounding the timing.

Russell Cleveland, Analyst

Okay. My second question is about the FDA approval for the dermal resurfacing, which we refer to as a facelift. Currently, we are using our technology for this procedure, but we do not yet have the regulatory approval. Is that correct?

Charlie Goodwin, CEO

Yes. It is an off-label procedure. We cannot promote it, and we do not promote it. So it is being done. You're correct, because the clinician can decide to use the technology any way that they want to. But there are a lot of clinicians that will not use a technology off-label. They wait for the company to actually get an indication for that before they actually use it. So yes, it is being done, but it is being done off-label. And it is something that we as an organization do not promote or actually commercialize in the marketplace today.

Russell Cleveland, Analyst

So you mentioned earlier that it will likely be in the fourth quarter or early next year before we complete the study, receive approvals, and launch our marketing campaign; is that correct?

Charlie Goodwin, CEO

Yes. So we are on track to submit our 510(k) by the end of this month. It is at least a 90-day process after that for the dermal resurfacing. And then we plan to get the salesforce together towards the end of August to start planning for a soft launch. We always do a soft launch when we launch a certain product that will be in the fourth quarter, and then you would expect then to have material revenue from that in 2022.

Russell Cleveland, Analyst

Great. Thanks again for the numbers. That ends my questions.

Charlie Goodwin, CEO

All right. Thanks, Russ.

Operator, Operator

Thank you. We currently are showing no remaining questions at this time. And that does conclude our conference for today. Thank you for your participation.

Charlie Goodwin, CEO

Thank you.