Jun 10, 2013
Executives
David Hable - Chief Executive Officer Pamela Boone - Chief Financial Officer
Analysts
Chris Cooley - Stephens Joe Munda - Sidoti & Company Steven Crowley - Craig-Hallum Capital Group Todd Brady - Oppenheimer Bernie Harris - B.J. Harris
Operator
Good afternoon, ladies and gentlemen, and welcome to the Third Quarter Fiscal 2013 Earnings Call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session. 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 purpose of Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by words such as believe, expect, anticipate, plan, potential, continue, or similar expressions.
Such forward-looking statements include risks and uncertainties, and there are important facts that could cause actual results to differ materially from those expressed or implied in such forward-looking statements. The facts, risks, and uncertainties are discussed in Synergetics’ Annual Report on Form 10-K for the year ended July 31, 2012 and October 15, 2015, as updated from time-to-time in our filings with the Securities and Exchange Commission.
I will now turn the call over to David Hable, the company’s Chief Executive Officer. Please go ahead.
David Hable
Thank you, and good afternoon, everyone. Welcome to today’s call that is being simultaneously broadcast over the internet as noted in our press release.
With me on the line today is Pam Boone, our CFO. Press release was issued today after the market closed outlining our earnings for the third quarter fiscal 2013 ended April 30.
Our Form 10-Q was filed with the SEC this afternoon as well. The agenda for today’s call, I will provide a high level overview of our third quarter performance.
Pam will then provide detailed financial color and I will return to give an update on commercialization of VersaVIT. We will then conduct a question-and-answer session.
We have reported total sales growth of 11.6% in the third quarter driven by strong growth in OEM sales and positive sales growth in ophthalmic business compared to the prior year. Ophthalmology posted growth in both the U.S.
and international markets and we are encouraged that this year-over-year growth worldwide was fueled by contributions from the commercialization of our VersaVIT system, which offset continued top line headwinds in our base business for the first time this quarter. OEM sales improved nicely year-over-year driven by continued strength in our disposable demand from Codman and a return to normalized trends in capital equipment at both Codman and Stryker.
Third quarter adjusted operating profit was flat year-over-year, solid performance in our view given the incremental expenses related to our VersaVIT commercialization efforts and the medical device excise tax compared to prior year. Finally, third quarter operating performance drove strong cash flow from operations in the period results which we believe are indicative of the strong sustainable underlying cash flow characteristics of the business further supported by our strong balance sheet condition with a growing cash balance and no debt.
So, all-in-all, a good quarter for Synergetics with meaningful progress in the key areas of focus for the company, specifically in driving strong organic revenue growth with the commercialization of our innovative vitrectomy machine and the associated above average margin packs and solid top line contributions from growing order volumes from our marketing partners over time. Now, for a closer look at our third quarter performance before turning the call over to Pam for in-depth review of our financial results.
Beginning with the OEM business, sales to our marketing partners increased 24%. Both Codman and Stryker contributed to the increase in OEM sales this quarter with solid growth in sales of both capital equipment and disposables in the period.
Two important points to highlight regarding our OEM business, first, we continue to have strong relationships with our two largest marketing partners, which together will drive sustainable mid to high single-digit revenue growth over the long-term, although we anticipate a period of higher growth over the near-term. We have instituted structural improvements to our OEM forecasting process, which I personally oversee with the specific focus on improving our top line visibility and to prevent future surprises in this important portion of our business.
Turning to ophthalmology, total sales increased 3.1% driven by the combination of 5.1% international growth and roughly 2% growth domestically. Let me start with the U.S.
markets, first, specifically our base business. As we have discussed in previous quarters, some of our largest disposable product lines, those that are associated with the existing installed base of older vitrectomy machines continue to face a challenging competitive environment.
This market is best characterized as trench warfare. We are seeing aggressive pricing strategies by established retina player who was trying to defend its market share position.
Importantly, while these market dynamics in our base business remain challenging overall, the environment did not worsen in third quarter and in fact we posted year-over-year growth in the rest of our base business that is not directly exposed to these competitive issues. Despite these top line headwinds, we were pleased to report positive domestic ophthalmology growth in the period.
This was due entirely to our progress with the commercialization of our VersaVIT system. I’ll provide additional color on our progress with VersaVIT shortly.
On the international ophthalmology side, sales increased 5.1% year-over-year driven by strong growth in developed markets, specifically in Europe and Canada, which offset declines in Japan, the Middle East, and three of our four merging markets as the fourth India continues to report strong growth year-over-year in fiscal ‘13. VersaVIT systems were the primary contributor to growth in our international ophthalmology markets as we penetrate our direct international markets in Canada, France, and Italy, and our distribution partners purchase machines to support the early market response the compelling value proposition our VersaVIT system provides.
With that, I’ll pause and turn the call over to Pam for a detailed review of our financial results. Pam?
Pamela Boone
Thanks Dave. Total net sales in the third quarter increased 11.6% to $16.3 million versus $14.6 million in the prior year period.
Total sales increased 15.7% sequentially in the third quarter. Total U.S.
sales increased 13.8% to $12.3 million while total international sales increased 5.3% to $3.9 million. International sales represented approximately 24% of total company sales this quarter with the balance coming from domestic sales.
Our international sales mix last year was approximately 25.5%. Total company sales by product category, disposables and capital equipment reflected 7.4% increase in the sale of disposables year-over-year and a 37% increase in the sales of capital equipment.
Disposable sales accounted for approximately 80% of total sales in the third quarter of fiscal 2013. The increase in disposables revenue was primarily attributable to orders from our largest OEM partner, Codman, whose bipolar forceps and other disposable products were important contributors to year-over-year growth, again, this quarter.
Weakness in the ophthalmic base business pressured disposables growth in the period as we continued to face competitive pressures in three of our largest product lines, laser and illumination probes and our diamond dusted membrane scrapers. Capital equipment sales increased 37% year-over-year driven by strong order volume from our OEM marketing partners and to a lesser extent a modest comparison in the prior year period.
Sales in Stryker pain control generators and Codman electrosurgery generators were the strongest product lines in the period. The former of which reported sales volume growth of more than 100% year-over-year and the latter of which reported close to 20% growth year-over-year, impressive growth for our product line that is among the five largest for the company.
VersaVIT system sales also contributed nicely to the overall capital equipment sales compared to the prior year period. Turning to a review of third quarter performance in our two main businesses, ophthalmic and OEM, which represented approximately 53% and 45% of total company sales respectively this year.
Total ophthalmic sales increased 3.1% to $8.7 million this quarter compared with sales of $8.4 million last year. Total ophthalmic sales performance this quarter was driven primarily by a 5.1% increase in the international ophthalmic sales and to a lesser extent a 1.6% increase in domestic ophthalmic sales.
Ophthalmic sales both domestic and international benefited from increased sales of VersaVIT vitrectomy systems and procedural kits this quarter. However, unlike recent quarters, the contributions for VersaVIT offset the continued pressure we are seeing in our base business driving positive growth in the ophthalmic business year-over-year.
As Dave mentioned, we continued to face competitive pressure in our base ophthalmic business. However, I wanted to provide additional color that maybe helpful when evaluating our reporting 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.
This portion of our base ophthalmic business posted mid single-digit growth year-over-year in the third quarter. Regarding the contributions to total ophthalmic growth from VersaVIT systems and packs, we saw contributions from sales of boxes, both in the U.S.
and internationally this quarter though the mix replacements versus sales was higher domestically in the period. We also saw modest order volumes for our disposable packs and other accessories in the third quarter, which near-term represents an encouraging sign of overall market acceptance of our machine and longer term represents the driver of revenue growth for the company as utilization ramps over time.
Shifting to our other main business, OEM sales increased 24.1% to $7.4 million compared with $6 million last year. OEM sales performance was driven by the aforementioned strength in the sales of both capital equipment and disposable products to our marketing partners in the period.
We continue to expect solid growth performance from our OEM business going forward albeit with periods of modest 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 15.3%.
Now, for a brief review of the rest of the P&L for the third quarter of 2013, gross profit for the third quarter of fiscal 2013 increased 15.7% to $9.1 million, or 55.7% of sales compared with $7.8 million or 53.7% of sales in the third quarter of fiscal 2012. As detailed in our earnings release, excluding the inventory adjustment in the third quarter of fiscal 2012, our adjusted gross profit increased 11% year-over-year in the third quarter, and as a percentage of sales, gross margin declined 56 basis points driven by the shift in product mix of our ophthalmic product lines compared to the prior year periods.
Total commercial expenses increased 14.2% to $7.3 million, or 45.1% of sales, compared to $6.4 million, or 44% of sales last year. Total commercial expense growth was driven by a 22.8% increase in selling and marketing expenses to $3.5 million by a 5.6% increase in R&D expense to $1 million, and a 3.5% increase in G&A expense to $2.7 million compared to the prior year.
Q3 commercial expenses also included $115,000 in expenses related to the medical device excise tax, which went into effect in January 2013. Despite this incremental increase, our commercial expenses were essentially flat on a sequential basis.
Reported operating income for the third quarter of fiscal 2013 was $1.7 million compared with the operating income of $1.4 million in the third quarter of fiscal 2012. Adjusted operating income for the third quarter of fiscal 2012, which excludes the impact of the aforementioned inventory write-down in the third quarter of fiscal 2012 increased to $1.8 million representing an adjusted operating margin of 10.6% this quarter versus 12.2% last quarter.
Operating income was impacted primarily by the growth in operating expenses when compared to last year. Reported net income increased 14.3% year-over-year to $1.1 million, or $0.05 per diluted share from $1 million, or $0.04 per diluted share for the same period of fiscal 2012.
Reported net income per diluted share in the third quarter of fiscal 2012 includes approximately $0.01 related to an obsolete inventory write-down in the period. Earnings before interest taxes, depreciation, and amortization, or EBITDA totaled $2.2 million in the third quarter of fiscal 2013, up 16.7% from EBITDA of $1.9 million in the prior year third quarter.
Turning to the balance sheet at quarter end, we had $13.1 million in cash and no debt. Our DSO ratio was 72 days up from 68 days at the end of Q2 driven primarily by the effect of the third month of the quarter being our strongest.
Our inventory position was $15.1 million, down 1% sequentially. This inventory balance represents 188 days of inventory on hand versus the 192 days at the end of Q2.
Total cash provided by operations during the first nine months of fiscal 2013 was $1.2 million compared to cash usage from operation to $3.1 million during the first nine months of fiscal 2012. The year-over-year change was driven primarily by the absence of a $5.8 million tax payment related to the outcome settlement agreement which occurred in the second quarter last year and the working capital benefit associated with the write-off of excess inventory in the second quarter of fiscal 2013.
We continued to anticipate cash flow from operations to be positive in fiscal 2013. Now, I will turn the call back to Dave to provide an update on our progress in the commercialization of VersaVIT.
David Hable
Thanks Pamela. I would like to update you on our progress this quarter in the commercialization of VersaVIT.
Simply stated, we remained very pleased with both the overall market response for and the early adoption of our innovative, portable vitrectomy machine. We believe that our early results validate that our machine addresses a currently unmet clinical need and the feedback of our sales people is consistent.
Surgeons value the clinical effectiveness, the cost benefit equation, and increasingly the ease-of-use our VersaVIT technology provides. The latter point is powerful in the eyes of surgeons and clinicians and is echoed in the feedback from each procedure our sales people take part in.
From setup to customization and troubleshooting, the VersaVIT scores exceptionally well in terms of ease-of-use. The machine’s markedly smaller footprint is an added benefit as the industry continues to focus on surgical center optimization.
We know we have the right product to meet our retina surgeon customers’ needs. The worldwide vitrectomy market is estimated at approximately $425 million annually, including both machines and the associated disposable packs.
Data suggest annual market growth in the mid single-digits driven by aging demographics, 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 in the right market and we are confident that we have the right strategies to drive top line growth in the future.
Regarding our strategy to drive market adoption and sustainable growth in utilization, recall that we identified three primary segments to target for our VersaVIT technology, high volume ASCs, corporate for-profit entities, and select teaching institutions. Each of these target markets offers unique and interesting opportunities, which we are addressing to our commercialization efforts.
Importantly, based on the early results we have seen, while evaluations vary amongst our target segments, we are seeing early success and again insight to optimize our sales processes and continued to improve our overall effectiveness. Please be aware that while these are our primary targets, we will be opportunistic as I reported last quarter when we were pulled by our customers upstream into a greater number of larger accounts than we had originally anticipated.
I am pleased to report that we have established beachheads in the majority of the teaching institutions we had originally targeted. By beachheads, I mean, we have an initial unit whose utilization will grow over time.
We are spending proportionately less time in large accounts as time goes on. Turning back to an update on our progress in the third quarter, specifically we want to provide additional context and support on our early commercialization efforts.
Simply stated, we are enthusiastic about the launch. We are conducting and closing more evaluations, and we are clearly gaining momentum on these fronts.
As we have previously discussed, we are entering a market that hasn’t seen this type of competition. We have stimulated increasingly vigorous competitive response, which has resulted primarily in discounting, as we gain traction with our VersaVIT.
We are confident that we have unique technical attributes to this technology that will be very difficult to duplicate in the near to mid-term. As such, we are approaching this strategically and with purpose.
We are still in the early days and remain laser focused on building an installed base of VersaVIT machines with the goal of driving above average pack sales across the installed base in the future. So, for a quick review our progress to date.
First, we continued to increase the number of valuations and progress around the country. We estimate the number of evaluations in progress to represent approximately 35% of the total target accounts we had originally identified.
Secondly, we are keenly focused on closing each evaluation as quickly and efficiently as possible, but given the mix towards larger marquee retina accounts, we discussed earlier on last quarter’s call, our average evaluation time through the third quarter remains approximately 15 weeks. The most consistent variable in the extension of an evaluation is expanded utilization, which means simply is being used on a wider variety of procedures.
We expect this to improve over time as our mix of accounts evolves and we improve our sales efficiency. To provide a bit more color in the larger academic centers, we can separate the evaluation time into two segments, the clinical evaluation time and the administrative time.
We are focusing on working, bringing down the clinical evaluation period, while the administration portion remains somewhat fixed. Third, we have completed more than 2,400 retina procedures with the VersaVIT worldwide vitrectomy machine up-to-date.
More than 100% increase sequentially, including the strongest evidence of the powerful market acceptance of our innovative technology. 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 the clinical credibility of the sales force needs to improve effectiveness, and continue to shorten the time from evaluation to close. Finally, in the third quarter, 13 of our early VersaVIT customers placed orders for our VersaVIT packs having converted, burned through their competitive inventory, demo inventory, and found themselves in a position to order packs for their daily usage.
We share this as an example as the clearest illustration of our early success in commercializing VersaVIT. Let me be clear, we are squarely focused on driving above average pack volumes, margin pack volumes in the future, and expect these sales to represent an increasing percentage of our total ophthalmology results going forward, but the pace of growth will be measured over the next few quarters, we are committed to getting these evaluations right in the first time, and we have invested in field support to ensure our customers are maximizing the utility of the device.
We expect that placement versus purchase will increasingly dominate the business model as time goes on. We estimate the average payback on a place machine to be less than a year requiring only a modest number of procedures.
However, we expect VersaVIT pack volume to post solid growth in future quarters and plan on sharing our progress in that regard on future earnings calls. In summary, we are very pleased with our progress on VersaVIT based on tangible results.
As you may have observed, VersaVIT reinvigorated our growth in ophthalmology both domestically and internationally in the third quarter. We posted flat adjusted operating profit despite incremental spending related to the commercialization of VersaVIT as well as the medical device tax, and we generated strong cash flows from operations in the third quarter.
We continue to be very encouraged by the early market response to our compelling vitrectomy technology, and we were pleased with the revenue contributions from the adoption of VersaVIT in the quarter, as well as the first three order of packs from our installed base of machines to support ongoing daily usage. We believe we have the right product serving the right market supported by the right strategy for growth in our ophthalmology business and we have strong relationships with our largest marketing partners, which we expect will drive sustainable growth in our OEM business for the foreseeable future.
Synergetics is well positioned for a return to strong operational and financial performance and we expect improving shareholder returns going forward as we execute our strategy to drive the top line to trend towards our long-term margin and profitability goals and they continue to generate strong cash flows over time. We appreciate your continued interest in support of our company.
And with that, I will open up the call to your questions. Operator?
Operator
Thank you. We will now begin the question-and-answer session.
(Operator Instructions) First question is Chris Cooley with Stephens. Please go ahead.
David Hable
Hey, Chris.
Chris Cooley - Stephens
Hey, good afternoon, David and Pam. Are you okay?
David Hable
Yes, yes.
Chris Cooley - Stephens
Super. Well, congratulations on a great quarter.
I guess, I want to start off with the ophthalmic business and it clearly seems to imply that if you continue to have competitive headwinds, not really abating that you saw strong acceleration there with the VersaVIT and VersaPACK, so I was hoping to get a better understanding of what’s driving that. I know you have like the pay it forward program, you added field clinical support and of course the accelerator became available late, I am just hoping to get a little bit more clarity about what’s driving that acceleration?
And also if you could give us a little bit more color as to what type of account or accounts you saw the accelerated pull-through during the quarter and then I had just one quick follow-up on the OEM business? Thanks.
David Hable
Sure, yes. So, the marketing programs Chris that you mentioned, I think the impact of those is in front of us.
Chris Cooley - Stephens
Okay.
David Hable
The pull-through, the acceleration as you described that we saw in the third quarter came from those accounts that we have been working on since the get-go, and we saw them for the first time significantly, hopefully you caught this, reorder day-to-day pack volume which is a huge indicator of the market adoption for the technology. So, I would overall characterize the impact in the third quarter as being from our early accounts as opposed to our increasingly aggressive marketing programs, which is a….
Chris Cooley - Stephens
Could you just paraphrase that back and so that should provide upside as we play forward as opposed to really driving the growth in the most recent quarter, is that a correct assumption?
David Hable
Yes, yes.
Chris Cooley - Stephens
Okay. And then just briefly on the OEM side, just for clarification, the three new tips for Stryker, that begins to contribute in the current quarter or when do we start to see that, we think about consumables in that business?
David Hable
Yes. So, I would break that down to saying the impact we saw in the third quarter was relative to the adjustment that we have the negative impact of in the second quarter than buying their initial quantities conservatively of the new disposable tips which are for cutting applications.
The growth associated with that new application, I hope is in front of us. And so we went from a negative position last quarter to a single-digit growth on the Stryker tips into third quarter.
So, a positive impact, but hopefully the growth associated with those new applications is in front of us.
Chris Cooley - Stephens
And if I could squeeze one last one and just very briefly, do you expect to be able to sustain positive growth in the ophthalmic sector as you finish out the fiscal year and then going into next fiscal year, fiscal ‘14 or do you think that there will be some lumpiness if you will to this business growth that’s based on your prior experience today? Thank you so much.
David Hable
Yes, positive growth, yes. Over 20% growth, no, and we have tried to even out the lumpiness by having this literally a biweekly review of the changes in their forecast which reflect their underlying demand.
I talked before about how we believe we have relatively unique insight and collaboration with both our marketing partners. And so we were – I’ll be taking it back by the surprise we experienced in the second quarter.
So, I’d be hesitant to describe the go-forward as lumpiness we are going to try to make sure that’s not too lumpy, but I also wouldn’t advertise that this is a 20% growth business quarter-after-quarter.
Operator
Thank you. (Operator Instructions) Our next question is Joe Munda with Sidoti & Company.
Please go ahead.
David Hable
Hey, Joe.
Pamela Boone
Hey, Joe.
Joe Munda - Sidoti & Company
Hey, good afternoon, Dave and Pam. Real quick Dave, I think in your comments you had mentioned on the OEM, correct me if I’m wrong, higher growth in the near-term and then it kind of slows down, I think you had said mid to high single-digits.
I am just wondering if we can get a little bit more color we are expecting this 20% growth in the next quarter as well just trying to get a sense on the timing of your comments, and I guess my other question would be Pam any further inventory write-downs? Thank you.
David Hable
We can take the second one quickly.
Joe Munda - Sidoti & Company
Okay.
Pamela Boone
No further inventory write-downs in the quarter.
David Hable
Yes. So, what I was trying to talk to Joe on the projected OEM volume is that we don’t want everybody to sit there modeling or thinking about 20% growth on ongoing basis.
I have said consistently we had originally forecast the business at a high single-digit growth rate, that growth rate has surprised us. I expected to moderate.
We have visibility to the next quarter, but I don’t have hard visibility beyond that. So, I don’t want to create undue expectations for the longer term.
Joe Munda - Sidoti & Company
By visibility, Dave is there like a preliminary purchase order that you are looking at how…
David Hable
No, we actually see their – we see their forecast on, we can tap into it anytime. They don’t, as I have said before, give us have to give us purchase orders that we have the authorization to build to these desired inventory levels that they have.
So, that’s what I am referring to their forecast and the consequent desired inventory level that we do have visibility to.
Joe Munda - Sidoti & Company
Okay, okay. Thank you.
David Hable
Yes.
Pamela Boone
Thanks Joe.
Operator
Next question is Steven Crowley with Craig-Hallum Capital Group. Please go ahead.
David Hable
Hey Steve.
Steven Crowley - Craig-Hallum Capital Group
Good afternoon. Good afternoon folks and congrats on the nice bounce back performance.
David Hable
Thank you.
Pamela Boone
Thanks.
Steven Crowley - Craig-Hallum Capital Group
In terms of – I am going to try and sneak in a follow up to Chris’ question, so it doesn’t count against my counter question.
David Hable
Unfair, unfair.
Steven Crowley - Craig-Hallum Capital Group
But Chris was asking about….
David Hable
(Indiscernible)
Steven Crowley - Craig-Hallum Capital Group
He was asking about the ophthalmology business, or ophthalmology business and its potential to continue growing on a year-over-year basis whether or not you could establish a streak and keep it alive, and Dave you answered a question on OEM, which was useful for us, but on ophthalmology, how does that look given the pipeline of business that you see in front of you?
David Hable
If you are asking does it describe growth, the answer is yes, it does describe growth, but with that, I want to emphasize we are in a competitive volatile market, and the bad guys are reacting. And the most direct impact continues to be on our base business.
So, with that revisal, I can tell you that we envision growth in the ophthalmology business going forward.
Steven Crowley - Craig-Hallum Capital Group
Alright, that’s helpful. And then for my first question, you are mentioning you gave us some nice color on VersaVIT in the fact that 35% of the accounts you originally targeted are now in active evaluation at some stage.
Can you tell us how many, what percent of accounts that you originally targeted have come to definitive yes, no answers on VersaVIT and how you did in that context?
David Hable
Yes, I will hold back that exact number, but I can tell you that the majority have been extended both because of the longer clinical utilization cycle and some cases competitive activity. So, the picture is incomplete at this point in time in terms of close ratio.
Steven Crowley - Craig-Hallum Capital Group
So, there has been a very limited percentage of accounts that started an evaluation and had completed an evaluation. So, in other words, there hasn’t been a large number that evaluated and said now, we are going to do something else?
David Hable
That’s correct.
Steven Crowley - Craig-Hallum Capital Group
Okay, that’s helpful. Now, in terms of the neuro business, you have talked about one of the drivers which is Stryker in the new tips, but in terms of Codman’s continued momentum with the business, can you tell us what’s driving that as the new geographies?
Is it new marketing programs? Is it additional indications for the system?
Just help us understand the feel that’s driving that business nicely and I will hop back in the queue? Thanks for taking my questions.
David Hable
Yes. So, talking Codman and talking OEM think about two pieces of business, the box, the CMC V electrosurgery generator, that is being driven by a generational change over to a latest generation of boxes well as a geographical spread, which is regulated by registration.
So, that’s one factor which is a smallest growth factor. The largest growth factor in the Codman equation is around the disposable forceps.
And the most significant growth factor in that is this conversion from a reusable to disposable format on a surprisingly consistent basis supported, I would say, by the promotional enthusiasm of the Codman sales organization. As you may have heard me say in the past, this is a legacy – electrosurgery is a legacy product line for them.
This is a fairly straightforward sell relative to all the other things that are trying to do. So, in my estimation, it gets an undue proportion of their attention.
And in addition, the third element in the Codman forcep growth story would be in expanding geographic footprint. Again, it has as dictated by registration which can go from 6 months to 18 months depending on the individual country you are talking about.
Operator
Thank you. Our next question is Todd Brady with Oppenheimer.
Please go ahead.
David Hable
Hey Todd.
Todd Brady - Oppenheimer
Hi, good afternoon.
Pamela Boone
Hi Todd.
Todd Brady - Oppenheimer
Actually, my questions have been answered for the most part, however, Pam, maybe we can address this issue from a different angle. The market was clearly concerned that the drop off your legacy business while we are getting the excitement of your new products last quarter.
Pam, if you were to be looking out 9 to 12 months, what does OpEx look like as a percent of revenue? So, maybe we can get a better handle as to stabilization at the legacy business following and the excitement and tempered growth that we are hearing on the new products?
Thank you.
Pamela Boone
Well, that’s a great question. So, we did spend on the commercialization this quarter as you saw in the operating results.
I would expect that dollar growth to start to maintain and the percentage growth to start to go down as sales of the VersaVIT materialize against those commercialization expenses.
Todd Brady - Oppenheimer
Okay.
Pamela Boone
So, you will see sales and marketing up as you have seen, you would see R&D flat and you would see G&A down.
Todd Brady - Oppenheimer
Okay. As a quick follow-up to maybe just keep this issue open ended as the management team regains some credibility, talk a little bit more about the stabilization of the legacy business, because that caught you by surprise, it caught the market by surprise.
We are all very, very excited about the new products, and thank you Dave for giving some clarification that 20% sequential growth going forward is not realistic at this time. Can you guys just kindly expand upon that?
Thanks.
David Hable
Yes, I think the surprise you are referring to is around the OEM neuro piece of that. That’s what really it surprised us in the second quarter when both Codman and Stryker took their inventory and their orders down at the end of the second quarter within the timeframe that couldn’t react to.
So, that was the surprise that surprised us all. So, to prevent that sort of surprise we have implemented this what we feel is a much more disciplined approach to looking at their inventory and underlying dynamics I have been both in the case of Codman and Stryker being personally the marketing people.
So, I understand the growth dynamics and I am going to be at Codman on Friday and they are going to present to me what the future looks like and how supportable those growth dynamics are, but I can tell you that they are very positive. They want to know what our capacity is to drive their forecast for their next year, which they are in the midst of working on.
So, I remain very bullish, but I do want to emphasize that the surprise in the base business and the legacy business came on the OEM side, which was the big factor in the second quarter of our ‘13.
Operator
Our next question is Bernie Harris with B.J. Harris.
Please go ahead.
Bernie Harris - B.J. Harris
Good afternoon. I am confused about the ophthalmic sales and the Pam what percentage of the basic business equipment is of their sales?
Pamela Boone
So, the base business Bernie is not our new products, and what we said in the prepared remarks is 60% of that base business comes from our big three, laser and illumination probes and diamond dusted membrane scrapers. And those are the ones that are feeling the competitive pressure and that the non-big three, the other 40% had mid single-digit growth during the quarter.
Bernie Harris - B.J. Harris
You know what I am confused about is we are saying how well the VersaVIT did, because of course last quarter wasn’t very good, now it’s a big increase, but really did it – it sounds like it hasn’t really brought the sales that much from before from this, because of the 1.6% increase in the industry itself?
David Hable
1.6% was domestic.
Pamela Boone
Domestic.
David Hable
Yes.
Bernie Harris - B.J. Harris
Which is ophthalmic sales increased 1.6% was really due to the increase in VersaVIT?
David Hable
3% overall ophthalmology, 5% internationally, Bernie that was negative last quarter those numbers. So, admittedly, it is not as dramatic as we would like and plan on in the future, but it’s a significant step in the right direction.
Bernie Harris - B.J. Harris
You mentioned that some of these tests are being extended I heard that the problem is getting the equipment to them properly, just like other leaks come out with earnings. So, what is production like, and what is the equipment – are we having problems getting the equipment to people?
David Hable
Without knowing what you are referring to, the dynamic that I described before is we have taken a very conservative approach to getting the technology right in the field. So, we have taken back, sales samples, even advisory units to update the software to replace components that our long-term burn-in tests showed as being not problematic, but less vigorous than we would like.
So, whatever you are referring to is probably referring to whatever they were, whatever time it took them to get their unit back in the field. And we have purposely scheduled those upgrades around valuation, so that we don’t create this problem.
Operator
Thank you. (Operator Instructions) Our next question is a follow-up from Steven Crowley with Craig-Hallum Capital Group.
Please go ahead.
Steven Crowley - Craig-Hallum Capital Group
Hey, guys. You made reference to you are making progress towards your long-term margin objectives, can you just refresh us on what those long-term margin objectives are, I think their gross profit margin and operating margin objectives?
David Hable
60% on the gross margin line and 20% on the operating margin line. And early this year I talked about that 20% is going to take longer than we had anticipated.
Pamela Boone
We take it from our investment in VersaVIT commercialization.
Steven Crowley - Craig-Hallum Capital Group
But still within our lifetimes.
Pamela Boone
Yes.
David Hable
I don’t know, Steve, I am not sure how to respond to that, but anyway.
Steven Crowley - Craig-Hallum Capital Group
Now, one of the variables in that equation, I trust you have alluded to although is a little confusing about above average pack volumes or above average margin pack volumes, I think it was more the latter that you were referring to Dave, which was that your packs business carries higher than corporate margin and you are really – average margin and you are really trying to drive volume there, but could you just clarify some of your objectives in some of the landscape items there?
David Hable
Yes, I am not sure I caught that.
Steven Crowley - Craig-Hallum Capital Group
Well, are you talking about, you mentioned in a couple instances above average volume packs, and then you mentioned late in your commentary above average margin packs, I think you meant…
David Hable
I think I just spoke…
Pamela Boone
On average margin.
David Hable
I was talking about above average margin associated with the packs.
Steven Crowley - Craig-Hallum Capital Group
Okay. And you are talking about relative to your corporate average gross margin or?
David Hable
Yes.
Steven Crowley - Craig-Hallum Capital Group
Okay, okay. So, as that percent of your mix goes up, that should be a very nice mix driver to gross margin and that should show up that the reversal of a trend here in gross margin, I trust has the chance of happening in the fourth quarter, is that how the math should work Pam?
Pamela Boone
Well, you got to think about those base business, those three base business items that we lay out have above average margins on them as well. So, those lines haven’t crossed yet with respect to the margin.
David Hable
The gross margins on the products that are under competitive threat have way above average margins.
Pamela Boone
Right.
Operator
Our next question is Chris Cooley with Stephens. Please go ahead.
Chris Cooley - Stephens
Good afternoon. Thanks for taking the follow-up.
Dave and Pam, I just have two quick follow-ups. I want to understand if you think in response to one of the prior questions, you reiterated that you do believe that you will be able to sustain ophthalmic growth on a year-over-year basis going forward.
And as a backdrop against that assertion, I want to make sure we understand what kind of a macro outlook you are seeing? Are you assuming that the pressure that you see on the core 60% of the base business continues?
Are you starting to see one or more of the competitors beginning to lighten up in terms of their pricing or their aggressiveness on pricing? I know you didn’t see that in the current quarter of your prepared remarks, I am just trying to directionally think about what we can expect in terms of both growth and in terms of margin as we look longer term when you have that confidence in year-over-year ophthalmic growth?
Then I have one quick follow-up.
David Hable
Simply put, we expect the competitive pressure to continue and the whole estimation is that the pressure we are seeing on the basis will be overwhelmed by the VersaVIT growth going forward.
Chris Cooley - Stephens
Okay. And then just to put another – just quick clarification, you mentioned in your prepared remarks that you sold boxes versus boxes in both the U.S.
as well as abroad, but the mix between being sold or boxes sold versus placed or maybe just the type of structures replacement of those boxes, did those change in the fiscal 3Q versus the 2Q and do you see any changes in those trends as you move forward? I’ll get back in queue.
Thanks.
David Hable
Yes, to the second part, we see changes. What we are experiencing is different both internationally and domestically.
Domestically, we see a much higher proportion as a matter of fact, a vast majority of placements. Internationally, initially, we see a higher percentage of sales that are going to distributors.
So, we anticipate that mix changing as they move further down their sales process. So, different domestically and internationally it’s changing over time as the effort matures.
Operator
We have another follow-up from Steven Crowley with Craig-Hallum Capital Group. Please go ahead.
Steven Crowley - Craig-Hallum Capital Group
Guys in terms of the VersaVIT business and the margin, well, actually the VersaVIT business in general, I think you made the point, but it’s an important clarification about competitive landscape for VersaVIT. Have you seen anything come to market or have you heard of anything rumored to come to market that really bring similar capabilities to what you brought to the market with VersaVIT?
David Hable
To answer that is a simple no, we have not seen or heard in any fashion, a unit as you describe that has similar capabilities.
Steven Crowley - Craig-Hallum Capital Group
And as you penetrate accounts with VersaVIT, should there be some ecosystem benefits for your other consumable products in the base business that help you reverse some of the pressure on the base business. It seems like a reasonable theory, but does it have any basis in reality of your thinking or of your experience to-date?
David Hable
Yes, that dynamic should occur over time, but I don’t want you to forecast it in any near-term way. Fundamentally, what we are trying to do is become a supplier of more mainstream products and get customers to turn to us across a broad range of product alternatives on a more regular basis.
We should benefit the base business, but again don’t forecast that for the fourth quarter.
Steven Crowley - Craig-Hallum Capital Group
Okay, thanks very much.
David Hable
Alright.
Operator
Our next question is Joe Munda with Sidoti & Company. Please go ahead.
David Hable
Hi Joe.
Joe Munda - Sidoti & Company
Hi Dave. Real quick, I guess following up on Chris’ earlier question, as far as the competitive pressure, I am sure you guys are tired of hearing this, but the competitive – so just to get some clarity here on the competitive pressure that you are seeing your way around or navigating through that is through the placements and getting more sales people in front of these people, and really targeting those high volume ASCs, is that correct?
I am just trying to see get a picture of how you were navigating, because a lot of people asking a lot of questions, I am just trying to get a sense of how you guys are going to navigate and how the larger competitor may respond to what you guys are doing and how would you then respond to them?
David Hable
Yes. So, the dynamic we are talking about is on the ophthalmology side first of all.
And the effort from competition includes discounting as I mentioned and for the base business, it’s trying to drive and increase adoption of their technology and doing more basically doing more evaluations and giving way product during the course of those evaluations, which directly affects our base business products, the ones that are under pressure, if…
Joe Munda - Sidoti & Company
No, I understand that. And how do you respond if they continue to do that, if you are going to continue to see that pressure most likely, so how do you basically overcome that?
David Hable
Yes. So, we will continue to see that pressure.
We keep in mind the products that are under pressure are relatively small market niches. Our whole strategy is to in effect have the erosion displaced from the base business ophthalmic products by VersaVIT.
So, becoming increasingly effective with VersaVIT evaluations from collapsing to the degree that we can the evaluation time and the aggressive marketing programs will hopefully create this user base of increasingly impactful VersaVIT volume that we can use as a clinical reference point and will hopefully build on itself and increase the overall volume.
Joe Munda - Sidoti & Company
Okay, so that’s the endgame.
David Hable
That’s definitely the endgame.
Joe Munda - Sidoti & Company
Okay, thank you.
David Hable
It’s not to fight the brush wars on these individual base what we described as base business products, which are great products, don’t get me wrong, but they are a relatively small piece of the product.
Joe Munda - Sidoti & Company
Not the 60% you are saying of the base right of the base ophthalmic.
David Hable
Of our current base.
Joe Munda - Sidoti & Company
Okay, okay thank you.
Operator
(Operator Instructions) We have no questions. At this time, I’d like to hand it back to David Hable for closing remarks.
David Hable
Yes, I want to thank you all for your attention and the good questions. I think they brought out the issues of that on the ophthalmology side.
The growth story is really weighted on the whole VersaVIT effort and for the first time we are seeing indications that we are getting to traction that we described to you in the past that we think the product has the capability of and that’s a huge takeaway. And on the OEM side, we are doing everything we can to manage the what people have described, lumpiness, or the rollercoaster ride and make sure that we don’t get surprise in the future, but more importantly assure ourselves that there is underlying demand, so that the volume we see on this piece of the business is not a tangent phenomenon.
And we have done everything we can to assure ourselves that, that is not the case and we continue to believe that’s unusual OEM business and that it has an unusually high growth profile. So, I know there is a lot of moving pieces to the Synergetics story.
I appreciate your patience in trying to understand and vet them, and we are doing our best to execute and make it happen. Thank you very much.
Operator
Thank you. Ladies and gentlemen, this concludes today’s conference.
Thank you all for participating. You may now disconnect.