Dec 10, 2013
Executives
David Hable – CEO Pam Boone – CFO
Analysts
Steven Crowley – Craig-Hallum Chris Cooley – Stephens, Inc. Joe Munda – Sidoti & Company James Terwilliger – Wunderlich Securities
Operator
Good evening, ladies and gentlemen, and welcome to the Fiscal 2014 First Quarter Earnings Call. [Operator Instructions].
Please note that this conference is being recorded. Synergetics would like to remind listeners that certain comments made during this conference call may be forward-looking statements for the purposes of the Private Securities Litigation Reform Act of 1995.
In some cases forward-looking statements can be identified by words such as believes, expects and anticipates, plan, potential, continue, or similar expressions. Such forward-looking statements include risks and uncertainties and there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements.
These facts, risks and uncertainties are discussed in Synergetics' annual report on Form 10-K for the year ended July 31st, 2013, filed October 1st, 2013, as updated from time to time in our filings with the Securities and Exchange Commission. I would now like to turn the call over to Dave Hable, the company's Chief Executive Officer.
David Hable
Thank you and good evening, everyone. With me on the line today is Pam Boone, our CFO.
A press release was issued today after the market closed outlining our earnings for the first quarter of fiscal 2014 ended October 31st. Here's our agenda for today's call.
I will provide a high-level overview of our first quarter performance and a brief review of our sales growth in our two primary businesses, before turning over to Pam for some detailed financial color. I will return to provide an update on the commercialization of VersaVIT.
We will then conduct the question-and-answer session. Now turning to our financial results in the first quarter, we reported revenues of $15.5 million, reflecting growth of 6.2%, driven by strong growth in OEM sales, which offset modest declines in our ophthalmic business compared to prior year.
OEM improved nicely driven by the strong disposable demand from Cognant [ph] and contributions from our relationship with Mobius. This was partially offset by lower order volumes from Stryker compared to the prior year.
On the ophthalmology side of the business, we saw a 1.9% decline in sales year over year in the first quarter. U.S.
was down slightly and sales outside the U.S. declined in the low single digits.
Our base ophthalmic business continues to face headwinds due to large -- due largely to competitive pricing activity on our key disposable product lines. Fortunately we are able to offset much of this pressure with contributions from the commercialization of our VersaVIT system.
First quarter operating profit declined due largely to higher commercial expenses compared to last year. We are continuing to invest in our business according to our long-term strategic plans which include target investments in R&D and incremental sales and marketing expenses related to our VersaVIT commercialization.
Despite the decline in operating profit this quarter, we reported notable cash flow generation to the tune of more than $1.5 million, reflecting the strong sustainable cash flow characteristics of this business. Now for a closer look at our first quarter performance.
Beginning with the OEM business, sales to our marketing partners increased 19%, which is particularly strong given the first quarter strength in OEM we reported last year. Cognant [ph] was a primary contributor to the growth again this quarter.
Product sales to our large OEM partner increased more than 45% year over year, driven by the solid growth in the sales of disposable forceps in the period. OEM sales also benefited from modest contribution from Mobius.
In contrast to the strong disposable growth this quarter, first quarter OEM sales were below plan on the generator side of the business. While Stryker and Cognant [ph] remain valuable customers over the long term, our OEM business will be further impacted by their efforts to demand inventory levels in line with demand heading into the end of the calendar year.
As a result of the structural improvements in forecasting our OEM business, which we instituted earlier in calendar 2013, we now have improved top-line visibility and are proactively managing the order trends as they unfold. Specifically, we have refocused production capacity towards our current OEM backlog which was $1.1 million at quarter-end.
The key takeaway here is that our OEM business remains healthy and we have strong, sustainable relationships with our two largest partners who together will drive sustainable mid to high single-digit revenue growth on an annual basis. Turning to our ophthalmology business, sales declined 1.9%, driven primarily by a 3.4% decline outside the U.S.
Briefly on the international ophthalmology side, the sales decline was driven by weakness in our base business, lower order growth in three of our five largest direct markets, and sharply lower volumes in our four emerging markets compared to last year. This was partially offset by contributions from our acquisition of M.I.S.S.
Ophthalmics and sales of VersaVIT packs. Turning to the U.S.
market, as I mentioned earlier, VersaVIT sales growth continue -- offset continued pressure we were seeing in our base business in the quarter. As we have discussed in previous quarters, some of our largest disposable product lines, those that are associated with the existing installed base of vitrectomy machines face a challenging competitive environment.
The competitive pressure consists largely of aggressive pricing, including product giveaways which is driving revenue headwinds in the mid-single-digits over the course of the year. Importantly, we do not believe the market dynamics worsened in the first quarter.
We posted low single-digit growth year over year in the portion of our base business that is not directly exposed to these competitive issues. This is a continuation of the trend I have shared in recent quarterly calls.
On the margin, we are pleased with the revenue contribution from our continued progress with the commercialization of our VersaVIT system, although the pace of adoption has been impacted by competitive challenges, the details of which I'll provide shortly. Overall this was a solid but challenging quarter, particularly from a competitive standpoint, but we remain encouraged by our prospects going forward.
With that, I'll turn the call over to Pam for a detailed review of our financial results. Pam?
Pam Boone
Thanks, Dave. Sales increased 6.2% to $15.5 million, a first quarter record, versus $14.6 million in the prior-year period.
Total sales declined 13% sequentially in the first quarter, in line with the seasonal trends we've recorded in the last several years. U.S.
sales increased 9.6% to $11.9 million while international sales declined 3.4% to $3.7 million. International sales represented approximately 24% of total company sales this quarter, with the balance of 76% coming from domestic sales.
Our international sales mix last year was approximately 26%. Total company sales by product categories; disposables and capital equipment, reflect a 13% increase in sales of disposables year over year and a 31.6% decline in sales of capital equipment.
Disposable sales accounted for approximately 88% of total sales this year compared to 83% of sales last year. Turning to the US sales in our two main businesses, ophthalmic and OEM, which represented approximately 55% and 44% of total company sales, respectively, this quarter.
Total ophthalmic sales declined 1.9% to $8.5 million this quarter, compared with sales of $8.7 million last year. Total ophthalmic sales performance this quarter was impacted by 8.8% decline in the U.S.
and 3.4% decline outside the U.S. Ophthalmic sales both domestic and international benefited from increased sales of VersaVIT procedural kits this quarter.
As Dave discussed earlier, our ophthalmic business continued to face top-line pressure in our base ophthalmic disposable product lines. We continue to face competitive pressure on our base ophthalmic business, representing a mid-single-digit headwind to the ophthalmic business overall.
However, I wanted to provide additional color that may be helpful when evaluating our reported results for this business. Specifically, while we are seeing competitive pressures in three of our largest product lines which together represent approximately 60% of base ophthalmic sales overall, the remaining 40% of our base ophthalmic business is performing quite well, with growth in the low single digits year over year in the first quarter.
Contributions from our acquisition of M.I.S.S. Ophthalmics partially offset the weaker growth in base business sales internationally in the first quarter, adding more than 350 basis points to the year-over-year growth rate for our total ophthalmic business in the period.
Regarding the contributions to total ophthalmic growth from VersaVIT packs in the first quarter, we saw positive growth in VersaVIT disposable packs and related accessory both in the U.S. and internationally.
We were pleased with the order values for our disposable packs and related accessories in the first quarter which near term we believe represents an encouraging sign of overall market acceptance of our machine and longer term represents a driver of revenue growth for the company as utilization ramps over time. Shifting to our other main business, OEM, sales increased 19.1% to $6.8 million compared with $5.7 million last year.
OEM sales performance was driven primarily by a 45% growth in product sales to our largest OEM partner Codman, whose disposable forceps were particularly strong in the first quarter. OEM sales also benefited from sales of Mobius in the period.
Recall, we reported close to 900,000 in initial stacking orders for Mobius's platform product Mitosol in the second half of fiscal year 2012, before tepid demand trends resulted in immaterial sales to this marketing partner throughout fiscal 2013. While we were pleased with the additional sales in the first quarter, based on the 12-month forecast we have currently, Mobius related sales volumes will likely be immaterial to OEM growth for the balance of fiscal 2014.
We continue to expect solid growth performance from our OEM business going forward, albeit with periods of mild volatility as we respond to demand trends quarter to quarter. On a rolling four-quarter basis, our OEM business posted year-over-year growth of approximately 10%.
Now for a brief review of the rest of the P&L for the first quarter of 2014. Gross profit for the first quarter increased 5.3% to $8.9 million or 57.5% of sales, compared with $8.5 million or 58% of sales in the year-ago period.
The year-over-year decline in gross margin was driven by higher OEM sales mix and foreign currency. Total commercial expenses increased 15.3% to $7.5 million or 48.5% of sales compared to $6.5 million or 44.7% of sales last year.
As detailed in our press release, total commercial expense growth was driven by increases in all three line items -- R&D, sales and marketing and G&A, compared to the prior year, as well as incremental expenses related to the medical device excise tax which did not occur in the first quarter of fiscal year 2013. The largest driver of the increase in commercial expenses this quarter came from R&D expenses as we continued to invest in new product development.
These investments includes new brain power and new accelerated timelines on our highest priority development projects, both of which are focused response to the trends we are seeing competitively. We expect to leverage these investments and the key drivers of revenue growth in the future.
While we saw a notable uptick in the level of expense in the first quarter, our annual spending falls well within the range of capital allocation as a percent of sales that we see from our medical device peers. Specifically, we expect to spend approximately 6% to 8% of our sales on R&D investments per year going forward.
Q1 commercial expenses also included incremental expenses related to our acquisition of M.I.S.S. Ophthalmics, although we are pleased to report that the acquisition was accretive to earnings in the first quarter.
As a reminder, first quarter results were not impacted by closing costs related to our plans to close our King of Prussia facility. We expect to spend approximately $900,000 over the next 14 months to complete the closure activities, the majority of which will occur over the balance of fiscal 2014 reporting period.
Reported Q1 operating income was $1.4 million compared with operating income of $1.8 million in the first quarter of fiscal 2013. Operating income was impacted primarily by the growth in commercial expenses, and to a lesser extent, the increase in cost of goods compared to last year.
Reported net income declined 31% to $935,000 or $0.04 per diluted share from $1.4 million or $0.05 per diluted share for the same period of fiscal 2013. Earnings before interest, taxes, depreciation and amortization, or EBITDA, totaled $1.8 million in the first quarter of fiscal 2013, down 23.6% year over year.
Turning to the balance sheet, at quarter-end we had $13.5 million in cash and no debt. Our DSO ratio is 73 days, down from 84 days at the end of fiscal year '13.
Our inventory position was $16 million, down 7% year over year. This inventory balance represents 190 days of inventory on-hand versus 242 days last year.
Excluding the additional inventory from our acquisition of M.I.S.S. Ophthalmics, our days of inventory on-hand was 185 at quarter-end.
Know that the majority of the increase in the inventories in the quarter was driven by new products, although we did see a modest uptick from planned [indiscernible] built to support our CAM [ph] pressure consolidation activities. We are pleased with the level and condition of our inventory at quarter-end and we continue to focus on optimizing our investments in this important working capital item.
Cash generated from operations in the quarter was $1.5 million, reflecting a more efficient use of working capital, particular accounts receivables. Now I'll turn the call back to Dave to provide an update on our progress in the commercialization of VersaVIT.
David Hable
Thanks, Pam. We continue to be encouraged with the overall market response for our innovative portable vitrectomy machine VersaVIT.
Our progress continues to validate that our machine addresses currently unmet clinical need and the feedback is consistent. Surgeons value the clinical effectiveness and increasingly the ease of use that our VersaVIT technology provides.
Simplicity of set up and ease of use continues to resonate with clinicians. These features facilitate procedure turnover which translates into more procedures within a given period of time.
Further, the machine's markedly smaller footprint is an added benefit as the industry continues to focus on surgical center optimization. Importantly, we believe that VersaVIT is the right product to meet our retina surgeon customers' needs and the ongoing feedback and sales experience we received since our initial launch a year ago has been invaluable as we look to enhance the system's versatility and overall utility over time.
The worldwide vitrectomy market is estimated at approximately $425 million annually, including both the machines and the associated disposable packs. Data suggests annual market growth rates in the mid single digits, driven by aging demographics, a growing diabetic population, and the structural shift in procedures from the hospital to the ambulatory surgery center or ASC.
For Synergetics, VersaVIT represents the right product and the right market and the response we have seen thus far continues to support our confidence that we have the right strategy to further adoption of this disruptive technology. Having said that, I want to remind everybody that this remains a very difficult market to penetrate given the highly entrenched global players we are trying to replace.
This is an evolving dynamic stage of commercialization effort, one that is defined by many moving parts, the most important of which I will update you on today. First, there are parts of our strategy that we continue to feel good about, and where we have seen marked progress in the first quarter specifically.
We are focusing on the most productive targets for our VersaVIT technology and have identified high-volume ASCs in select larger teaching institutions, particularly those with retina teaching programs. Both of these markets offer unique and interesting opportunities which we are addressing through our commercialization efforts.
We continue to increase the number of evaluations and progress around the country. More retina surgeons are testing the VersaVIT machine and their practices, and we believe this represents further validation that we have identified an unmet clinical need in our market, one that VersaVIT is well-positioned to serve.
We have completed more than 5,500 retina procedures, including evaluations with the VersaVIT, which was up nearly 50% sequentially and more than ten-fold year over year. This remains the strongest evidence of the powerful market acceptance of our innovative technology.
Finally, in the first quarter, 30 of our VersaVIT customers placed orders for our VersaVIT disposables. These accounts the group of systems that are converting to VersaVIT, burn [ph] through their competitive and demo inventory and found themselves in a position to order disposables for their daily usage.
Let me be clear, we are squarely focused on driving disposable volumes in the future and expect these sales to represent an increasing percentage for our total ophthalmology results going forward. Shifting to the aspects of our commercialization efforts that are presenting challenges, simply stated, as we have made progress towards market adoption, we have seen that increasing competitive response.
VersaVIT is truly a disruptive technology. The system is characterized by compelling features and benefits relative to the existing installed base of systems and we have come to market with a significantly lower cost of ownership.
We have seen increasing competition on the pricing side of the equation in recent months, and this is impacting our ability to reduce the evaluation time to the closing -- and the closing of sale of the unit. Recall that evaluation times include the need to test units on a wide variety of procedures of increasing complexity which we referred to as the clinical evaluation time and by what we call the administrative evaluation time which includes both the increasing use of committee-based purchase decisions and the time spent negotiating the terms of each deal.
While we remain focused on closing each evaluation as quickly and efficiently as possible, our average evaluation time through the first quarter stands at roughly 15 weeks, in line with the average length we saw in the fourth quarter. We saw progress on bringing the clinical evaluation period down this quarter while the administrative portion remains a tougher nut crack, particularly with respect to negotiating process which appears to be increasingly challenged by competitive pricing.
As we shared last quarter, longer evaluation times will continue to impact the pace of growth in VersaVIT over the next few quarters and we are committed to giving these valuations right the first time and we have invested in the field support ensure our customers are maximizing the utility of the device. Despite the measured growth rate we continue to expect in VersaVIT over the next few years, we remain confident in the long-term growth opportunities this innovative system presents.
We anticipate the VersaVIT system to gain share of vitrectomy procedures going forward through increasing the number of evaluations underway, growing our installed base, and expanding utilization. Additionally, each successful procedure completed represents another opportunity for surgeon feedback, improved clinical validation of the technology, and clinical credibility of the sales force which together will improve the effectiveness and continue to shorten the time from evaluation to close.
So to wrap up, we were generally pleased with the start of our fiscal year 2014. Our OEM business remained strong overall, with solid demand indications as evidenced by the $1.1 million backlog at the end of the Q1.
And while this period is subject to periods - or order volumes will be somewhat volatile, our disciplined review of underlying demand trends gives us improved visibility and allows us to manage order trends effectively. To that end, we expect to report growth rates in the high single to low double digits on an annual basis in the OEM.
On the ophthalmology side, we expect similar dynamics this year that we have faced in recent quarters, specifically mid-single-digit headwinds in the base business, offset by revenue contributions from the continued progress in rolling out VersaVIT and contributions from our acquisition of our U.K. distributor M.I.S.S.
Ophthalmics. On the margin front, we expect to face continued pressure on gross margins, driven by the pricing dynamics and mix shifts related to competitor activity.
And lastly, we expect the commercial expenses to be higher as we continue to invest in both personnel and marketing to drive further progress in our launch of VersaVIT and the incremental investments in accelerating the timelines on our highest priority development projects. Finally, we expect to generate solid cash flows from operations throughout the balance of the fiscal year.
With that, I'll open the call up to questions. Operator?
Operator
Thank you. [Operator Instructions] And our first question comes from Steven Crowley from Craig Hallum.
Please go ahead.
Steven Crowley – Craig-Hallum
Good afternoon, folks.
David Hable
Hey, Steve.
Steven Crowley – Craig-Hallum
I'm trying to rationalize what you just gave us in much more detail with the guidance you provided in your press release for improving profitability and financial performance as we progress through the remainder of the year, does that mean off of Q1 levels? Are you really looking at a year-over-year basis?
Help us understand what you're trying to message in that commentary.
David Hable
Pam?
Pam Boone
It would be off of Q1 basis, Steve.
Steven Crowley – Craig-Hallum
Okay. So in other words, sequential increases in sales and earnings off of Q1 levels.
Pam Boone
With the exception maybe of second quarter, which we did reference in our prepared remarks with respect to OEM and their calendar year and preferences.
Steven Crowley – Craig-Hallum
Okay. We might need some help as this call goes on with understanding what the foundation is so that we grow off of that, because it doesn't sound like it's Q1.
But let's segue in my second question to ophthalmology and understanding the competitive pressures that you were referencing, Dave. Is it additional pressure from existing competitors?
Is it a reinvigorated historical competitor who's moved - I'm trying to understand if it's more from the same or if it's more from more. And just one clarification, on the number of active VersaVIT accounts, did you say 30 and is that compared to the 31 you gave us at the close of fourth quarter?
Help us understand that dynamic.
David Hable
Okay. So on the competition side first, so in the U.S., it is the same with what I would characterize as one revitalized or reinvigorated historical competitor, and that drives most of the base business and on to the VersaVIT category.
So we've seen competition drive down the price of their box, the conversion of their box, it's still big delta, and we have also seen them drive down the price of the pack which is definitely an accelerated dynamic in the first quarter of this year. Outside of the U.S.
we've got a lot more competitors. So nobody knew in that standpoint.
But definitely more competitive pricing behavior in that period. And I think the last one, yes, I did say 30 in the -- on the base business.
Steven Crowley – Craig-Hallum
So the lack of growth compared to Q4 number, is that a function of some exiting the fold and others coming or just the same group but not many additions? And I'll hop back in the queue.
Thanks for taking the questions.
David Hable
The latter. So, you know, what is basically unfolding is that the pricing pressure that we're seeing is extending out the -- our ability to close sales and add people to the list of users.
That's the -- far and away the most significant dynamic we're seeing from that competitive effort.
Steven Crowley – Craig-Hallum
Thanks.
Pam Boone
In addition, Steven, you'll recall that first quarter is our seasonally-light quarter, and so there is also timing differences in there with the two orders when and where and the amount and volume of those orders.
Steven Crowley – Craig-Hallum
Okay. Thanks.
Operator
Our next question comes from Chris Cooley from Stephens, Inc. Please go ahead.
David Hable
Hey, Chris.
Operator
And Chris, your line is open.
Chris Cooley – Stephens, Inc.
Can you hear me okay now?
David Hable
Yes.
Chris Cooley – Stephens, Inc.
Hello? Okay.
I'm sorry to the operator there. Let's just -- let's start with ophthalmology because that's clearly been the Street's focus the last few days, and you've clearly put up a strong sequential increase in the number of procedures that are being performed on VersaVIT, 1,800 versus approximately I think it was 1,300, if my math is right, in the prior quarter.
So I mean 30 versus 31 over in disposables, but you're getting better volume. I guess what I really want to drill down on here is, are you still confident that you can grow the ophthalmics franchise in aggregate year over year despite the competitive headwinds?
You know, that was, you know, your established growth in the back half of last year in terms of positive vein, and the focus this year was going to be lumpy growth but you were going to get growth nonetheless for the full year. I just want to, I guess kind of get a thumbs-up, thumbs-down, do you still anticipate being able to grow that franchise year over year for the full fiscal year?
Then I've got a follow-up.
David Hable
Yes. So importantly we did not see the, on the base business ophthalmic side, we did not see it worsen in the first quarter.
And while we have grown the number of procedures, the number of evaluations and the average installed base of units in the field, we haven't seen the throughput that we would have wanted and our ability to close these sales and add to our list of customers had been impaired by this competitive initiative.
Chris Cooley – Stephens, Inc.
Understood. Understood.
And then let's just quickly switch back to the OEM side for my follow-up. You know, I think in the past you've talked about low double-digit or roughly 10% growth.
I don't want to make too much out of semantics, but I also want to be clear here as well, in your prepared remarks you said high single-digit to low double-digit growth. Is that a broadening of the range?
Is that in your mind a reiteration of the growth rates that you had anticipated? And I'm just trying to understand that in conjunction with the softer volumes from Stryker in the quarter, could you give us some color there.
Thanks.
David Hable
Yes. No.
I'll reiterate the previously described growth rates, you know, the message on OEM is that the underlying business remains strong as evidenced by the demand trends we've put in this infrastructure change, so that we have a lot more visibility to their forecast as they unfold. Our challenge is in the second quarter making sure that we have aligned our production to take advantage our backlog, which I said was over $1 million, and utilize that to offset the weakness we can now see in generators, and particularly going into the end of their calendar year.
Keep in mind our second quarter closes at the end of January. So that's, you know, a timing heads-up that we are intent on not being surprised like we were last year.
Chris Cooley – Stephens, Inc.
Okay. And I apologize, can I just squeeze one just quick clarification in?
David Hable
Yes, sure.
Chris Cooley – Stephens, Inc.
Just looking at the comps, thinking about the fourth quarter, you know, prior year for Mobius, you had I believe it's around 700,000 in the prior year's fourth quarter, which kind of skewed your prior quarter's comp. And you mentioned that you thought that Mobius would be a material for the remaining balance of the fiscal year.
Can you just help us get a feel kind of order of magnitude, kind of what run rate that business would contribute for the year? I just want to make sure I'm kind of looking at the OEM number appropriately and that's not creating too much noise.
Thanks so much.
David Hable
Yes. Pam, run rate?
Pam Boone
It was 900,000 in the second half of fiscal 2012. So it did impact the comp at the end of the fourth quarter of fiscal 2013 -- that that was no sales in fiscal 2013.
The sales that we experienced in the first quarter of 2014, we don't expect those to build during the fiscal year based upon our current forecast, but they see [ph] some at the end of the first quarter. But in 2013 there were no material sales of Mobius in 2013.
And we don't expect that run rate to continue throughout the year in 2014.
Chris Cooley – Stephens, Inc.
Understood. Thank you.
Operator
Our next question comes from Joe Munda from Sidoti & Company. Please go ahead.
Joe Munda – Sidoti & Company
Good afternoon, Dave and Pam.
David Hable
Hey, Joe.
Pam Boone
Hi, Joe.
Joe Munda – Sidoti & Company
Thanks for taking the questions. First off, Dave, in your prepared remarks you talked about gross margins being pressured, and I'm just trying to get a sense of, well, really why.
I mean I understand the competitive pressures. Is it due more to the competitive pressures or -- any color there would be great.
David Hable
Yes. You know, we anticipate basically two things, one is the competitive pressure of discounting and pricing and that impacting, and then the mix shift.
So as we see more domestic business versus international, that plays into the equation, and OEM business which as you may recall is a lower gross margin business than the ophthalmology direct business.
Joe Munda – Sidoti & Company
Okay.
Pam Boone
But we are seeing some of that pricing pressure offset by our ongoing cost savings initiative. Therefore you're seeing actually a tick-up from the fourth quarter sequential run rate to our first quarter run rate.
Joe Munda – Sidoti & Company
And that rate, that 57-1/2 you put up in this quarter, is that a rate that you would expect to I guess continue to rise sequentially or is that a rate that basically with the pressures you're seeing, is that a rate that we would expect to kind of be flat for the remainder of the year?
Pam Boone
Obviously it depends on the things that Dave laid out with the competitive pricing and the mix shift, but we are trying very hard to offset those with our ongoing cost savings initiatives so that we can get to a balanced gross profit margin for the rest of the year.
Joe Munda – Sidoti & Company
Okay. Dave, as far as the investments that you're making, I'm assuming some of that would be adding reps, if I'm not mistaken here.
Can you give us an update on the number of total reps the company has as well as the number of reps devoted strictly to VersaVIT?
David Hable
Twenty-three is the total number. We already added the reps last year.
And we added additional what we call utilization specialists who remain after the sale and are dedicated 100% to VersaVIT. The base sales reps are not dedicated 100% to VersaVIT, they sell the breadth of the ophthalmic line.
So the additional expense of those reps, additional reps, and the utilization specialists carry through to fiscal '14.
Joe Munda – Sidoti & Company
Okay. Thank you.
Operator
[Operator Instructions] And our next question comes from James Terwilliger from Wunderlich Securities. Please go ahead.
James Terwilliger – Wunderlich Securities
Yes. Hey, guys.
Can you hear me?
David Hable
Hey, James. Yes.
James Terwilliger – Wunderlich Securities
Thanks for taking my question. Congratulations on a nice quarter.
Very quickly on the OEM business, you talked a little bit about Stryker and sales being down. Could you expand a little bit on what you meant by sales being down?
Is there any significant change in this relationship or in the market that we should be concerned of? Was this more of a timing issue?
Because you also mentioned inventory levels with some of your OEM customers, how they fluctuate going into yearend.
David Hable
Yes. No, the vast majority of Stryker was around the pain control generator, and so that was far and away the most significant piece of that.
We don't believe it underscores a market shift or a dynamic and based their forecast we expect that to be better as the year goes on.
James Terwilliger – Wunderlich Securities
Okay, excellent. And then my second question also was in the OEM business.
That business got 19% year over year. I just want to reiterate, maybe I missed this or I wrote it down incorrectly, that was driven by a 45% increase or growth in your Cognant [ph] business, is that correct?
David Hable
That's right.
James Terwilliger – Wunderlich Securities
And then lastly, I'll just sneak one more, and you recently had a clinical conference down in New Orleans, and I just want to get any type of feedback in terms of the booth traffic or how the VersaVIT show down at the conference. And thanks for taking my questions.
David Hable
Sure, James. Yes.
So James is referring to the American Academy of Ophthalmology, VersaVIT was the focus of the meeting. We wrote a record number of leads, including high-quality leads, not just lookie lous [ph] but people that want to schedule evaluations and come back.
So if anybody had a chance to see our profile at that meeting, you would have seen a company that people felt was -- looked larger than it had in the past maybe. So we were very excited about the feedback of customers, the booth traffic that we saw, and most importantly, the actual number of leads that were generated through the course of that experience.
James Terwilliger – Wunderlich Securities
Thanks guys.
David Hable
Thank you.
Pam Boone
Thank you, James.
Operator
And we have a follow-up question from Steven Crowley. Please go ahead.
Steven Crowley – Craig-Hallum
Hey, guys. Just in terms of understanding the growth you've seen in VersaVIT procedures, that 5,500 number that you just gave us, I think that includes evaluation procedures.
And I'm wondering if the vast majority of those 5,500 year to date have been actual revenue-generating procedures or the majority are evaluations. And even if we just looked at the first quarter, what's the composition of that number?
David Hable
I wouldn't say the vast majority, but the majority are revenue-generating and -- I haven't carded it [ph] this way, but there's been a big jump in evaluations in the first quarter, the actual number of procedures that are being done.
Steven Crowley – Craig-Hallum
And the number of accounts that are evaluating, has that continued to swell or has that been pretty constant relative to your last update?
David Hable
No, that continues to go up. So again the real thorn in our side is the fact that our ability to close these - or bring these to closure and convert customers into regular users has been impacted by the competitive pricing pressure I would say.
Steven Crowley – Craig-Hallum
And that competitive pricing pressure that you referenced from I think P&L, that so far elongated sales cycles. What do you think that's going to do to your actual pricing when the evaluations closed?
Can you hold price? Do you think you're going to see some erosion?
And how significant might the margin impact be there?
David Hable
Yes. So we've seen very modest erosion up to now.
You know, we're evaluating what our response will be, you know, from a pure pricing standpoint. Their competitor pricing is all over the board, so we've really got to take a rifle shot at what our pricing strategy will be.
And I'm not -- I can't tell you what accounts we're going to take as a result of that, for obvious reasons. But -- so, you know, [AUDIO GAP] determined, but so far we've been able to hold the line and not get as much price as we wanted, but we definitely haven't just flipped over and gone deeper than -- or, you know, way deeper than we might be indicating.
Steven Crowley – Craig-Hallum
That's very helpful. And then one follow-up for Pam.
In terms of the phenomenon from Q1 to Q2, especially with some of what you're telegraphing as a possibility for I guess a pullback in the OEM business because of yearend trends, you know, the consensus view going into this quarter was that there'd be a sequential decline of several hundred thousand in the business from Q1 to Q2. Does that still look like a pretty good dart to throw even though Q1 came in maybe a little bit lower than consensus on the top line?
Or how should we think about that? Again I want to get our feet planted so we can work with your guidance in the press release as you laid it out.
Pam Boone
I would think that would be a good shot. I think that we're doing everything we can to make sure that we have the product available, you know, for a month after their yearend requirements run out.
So we're trying to do everything we can to manage that to a level that won't hurt us. And then remember that the comps in second quarter are not that difficult.
So, yes, I think a sequential decline of a small amount is a good bet.
Steven Crowley – Craig-Hallum
Thanks for the granularity.
Operator
You have no further questions at this time. I would like turn the call back over to Mr.
David Hable. Please go ahead.
David Hable
Thank you, operator. So fiscal '14 has started on a solid trend.
Our strong relationships with our OEM partners fueled top-line growth and then the contributions from our recent acquisition and our progress on launching VersaVIT this year has helped offset revenue headwinds in our base ophthalmic business. While our margins were pressured by the combination of competitive pricing and higher operating expenses, we generated strong cash flows from the operations in the period.
Synergetics is well-positioned for a return to strong operating and financial performance as well as improving shareholder returns as we execute our strategy to drive the top-line trend towards our long-term margin and profitability goals and continue to generate strong cash flows over time. We continue to appreciate your interest in the company.
You all have a good night. Thank you.
Operator
Thank you. Ladies and gentlemen, this concludes today's conference.
Thank you all for participating. You may now disconnect.