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Synergetics USA Inc (NASDAQ:SURG)

Q3 2014 Results Earnings Conference Call

June 09, 2014, 5:00 pm ET

Executives

Dave Hable - President, Chief Executive Officer, Director

Pam Boone - Chief Financial Officer, Executive Vice President, Treasurer, Secretary

Analysts

Chris Cooley - Stephens, Inc

Joe Munda - Sidoti & Company

Charles Haff - Craig-Hallum

James Terwilliger - Wunderlich Securities

Operator

Good morning, ladies and gentlemen, and welcome to the third quarter fiscal 2014 earnings call. At this time, all participants are in 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 may be forward-looking statements for the purpose of the 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 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 31, 2011, filed October 11, 2011 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.

Dave 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 third quarter of fiscal 2014 ended April 30.

Here's our agenda for today's call. I will provide a high level overview of our third quarter performance and a brief review of our sales growth in our two primary businesses before turning it over to Pam for some detailed financial color. I will return to provide additional color on the pending launch of our next generation portable vitrectomy machine, the VersaVIT 2.0. We will then conduct a question-and-answer session.

Turning to our financial results. In the third quarter, we reported revenues of $16.1 million, down 0.8% year-over-year driven by 2% decline in our ophthalmic business and OEM sales essentially in line with the prior-year period. GAAP EPS was $0.04 compared to $0.05 last year driven by flat revenue growth and continued investments in our business. Despite softer implant sales in the quarter, we posted a solid improvement in cash flow from operations, which increased close to 25% year-over-year to $1.4 million.

On the ophthalmology side of the business, sales decreased 2% year-over-year. We reported 3.1% growth outside the U.S. offset by a 6.1% decline domestically. Total revenue growth in ophthalmology continues to be driven by contributions from our new products, including our VersaVIT disposables, as well as from the acquisition of our U.K. distributor M.I.S.S. Ophthalmics which occurred last year. However, our base ophthalmic business continues to face headwinds from competitive pressure especially in our top three base business disposable products. This quarter, product giveaways were particularly impactful, however it was only focused on a few large accounts.

While competitive environment remains difficult, we understand the areas of exposure and remain focused on regaining market share in those areas in our base business overall. To that end, our recent introduction of the next generation Directional II Laser Probe is a great example of taking action to improve results in our largest product category. Outside of the competitive pressures in the top three product lines, our base business saw incremental pressure relative to recent trends in the form of slower sales of base capital equipment which represented roughly one-third of the total domestic ophthalmic decline year-over-year.

Turning to our OEM business. Sales through our marketing partners were essentially flat year-over-year. The flat was a result of the net of our two OEM product lines, capital equipment and disposables. The capital equipment side of the business saw declines of approximate 30% year-over-year, while our disposable business showed strong growth of approximately 15%. On the capital equipment side, the reality is that this business remains a slow growth, inherently volatile category. Against this difficult backdrop the demand for our OEM capital equipment was notably weaker in the third quarter of fiscal 2014. We remain focused on shifting the mix of our OEM business away from capital equipment to disposables and have made significant progress toward this goal in recent years. Sales of capital equipment to Stryker and Codman represented roughly 20% of OEM sales today, nearly half as much as they did just three years ago. We expect the strength in sales of disposables to continue to shift our OEM mix away from capital equipment going forward. However, given its relative size today, our OEM sales results may experience similar periods of volatility going forward.

As we have shared in recent quarters, we have improved topline visibility into the order trends from our marketing partners. We continue to feel good about the order trends on the disposable side of business. However on the capital equipment side, based on our current visibility, we expect that revenues maybe flat to slightly down on a year-over-year basis in the fourth quarter compared to a record quarter OEM sales in the fourth quarter of last year. We expect OEM revenue growth for the full fiscal year period to be in the mid-single digits on a year-over-year basis. This compares to our previous expectation of low single-digit growth in our OEM business and reflects both our third quarter results as well as the trends we are currently seeing.

With that, I will turn the call over to Pam for a detailed review of our financial results. Pam?

Pam Boone

Thanks, Dave. Total [AUDIO GAP] sales decreased 0.8% [ph] to $16.1 million compared to $16.3 million in the prior year period. U.S. sales decreased 1.9% to $12.1 million, while international sales increased 2.8% to $4 million. International sales represented approximately 25% of our total company sales this quarter with the balance of 75% coming from domestic sales. Our international sales mix last year was approximately 24%.

Total company sales by product category. Disposables and capital equipment reflect a 6.7% increase in sales of disposables year-over-year and a 33.9% decline in sales of capital equipment. Disposable sales accounted for approximately 86% of total sales this year compared to 80% of sales last year.

Now for a look at total company sales performance by our ophthalmic and OEM business lines. Total ophthalmic sales declined 2% to $8.5 million this quarter compared to sales of $8.7 million last year. U.S. ophthalmic sales decreased 6.1%, offsetting a 3.1% increase internationally. U.S. ophthalmic sales were adversely impacted by decreased sales of capital equipment and disposables in our ophthalmic base business, partially offset by increased sales of procedural kits. Our international ophthalmic sales performance was primarily driven by increased sales from M.I.S.S. Ophthalmics. Sales performance was favorably impacted by foreign currency and was partially offset by decreased sales of ophthalmic base business, capital equipment and disposables.

Total OEM sales were flat with last year. We saw increased sales of disposables to our OEM partners, Codman and Stryker, offset by decreased sales of electrosurgery generators to Codman and to a lesser extent lower sales of generators to Stryker compared to last year. OEM revenue also included deferred revenue of $322,000 recognized in the third quarter of both fiscal year periods.

Now for a brief review of the rest of the P&L for the third quarter of 2014. Gross profit for the third quarter was $8.9 million or 55.2% of sales compared with $9.1 million or 55.7% of sales in the year ago period. Gross margin in the third quarter of fiscal year 2014 was negatively impacted by the mix of products, including both the increase in our international sales and the increase in the percentage of our OEM sales. Total operating expenses were $7.5 million or 46.5% of sales in the third quarter compared to $7.3 million or 45.1% of sales last year.

Research and development expenses were 8.1% of net sales in the quarter, compared to 6.0% in the prior-year period and were the primary driver of the total increase in operating expenses in the third quarter. We continue to expect R&D expenses of approximately 8% of sales over the balance of the year as we continue to advance our high priority projects to meet the needs of our surgeons and we expect these investments to enhance our revenue growth in future quarters.

Our sales and marketing expenses were $3.4 million or 21.4% of sales, versus $3.5 million or 21.7% of net sales for the same period last year. General and administrative expenses were $2.6 million or 16.1% of net sales versus $2.7 million or 16.7% of net sales for the same period last year. The year-over-year declines in both our sales and marketing and our G&A expenses were primary lead related to our efforts to manage expense growth in the light of the lower than planned sales in the period.

Total operating expenses in the third quarter included $83,000 related to the impact from the medical device excise tax compared to $115,000 in the third quarter of 2013. We also incurred approximately $64,000 of incremental expenses related to the company's exit activities at its King of Prussia facility. We continue to expect to incur an estimated $586,000 of expenses related to the closure of this facility over the next three fiscal quarters, and anticipate more than $1.1 million in annual cost savings beginning in the third quarter of fiscal 2015.

GAAP operating income was $1.4 million in the quarter compared with operating income of $1.7 million in the third quarter of fiscal 2013. Reported GAAP net income decreased 18% to $943,000 or $0.04 per diluted share from $1.2 million or $0.05 per diluted share for the same period in fiscal 2013. Earnings before interest, taxes, depreciation and amortization, or EBITDA totaled $1.9 million this year compared to $2.2 million in the third quarter of fiscal 2013.

For the nine months ending April 30, total sales increased 4.1% to $46.8 million compared to $44.9 million last year. GAAP net income was $1.7 million or $0.07 per diluted share, compared to net income of $1.1 million of $0.04 per diluted share last year.

Turning to the balance sheet. At quarter end, we had $12.8 million in cash and no interest-bearing debt. Our DSO ratio is 87 days, up from 84 days at the end of the fiscal year due to timing of sales throughout the quarter. Our inventory position was $15.7 million, up 6% year-over-year, driven by investments to support new product introductions. This inventory balance represents 200 days of inventory on hand versus the 188 days last year.

Cash provided by operating activities over the first nine months of 2014 was $1.4 million compared to cash provided of $1.2 million over the first nine months of 2013. The change in cash flow from operations was largely the result of a higher net income and the benefits from deferred income taxes offset by higher working capital balances compared to last year.

Now I will turn the call back to Dave for an update on our progress with the commercialization of VersaVIT and our pending launch of VersaVIT 2.0.

Dave Hable

Thanks, Pam. Let me start with a brief update on our progress towards our commercialization of the first generation of VersaVIT this quarter, VersaVIT was a key contributor to our ophthalmic business again this quarter which is critical product to us given the challenges we face in our base ophthalmic business. We have completed more than 8,300 retina procedures, including evaluations with the VersaVIT with sub-24% sequentially more than twofold year-over-year. This remains the strongest evidence of the powerful market acceptance of our innovative technology.

We have 43 VersaVIT customers place orders for our VersaVIT disposables in the third quarter. These accounts represent the group of customers that have converted to VersaVIT, burned through their competitive and demo inventory and found themselves in a position to order disposables for their daily usage.

Finally on the sales and marketing front, the investments in additional clinical field specialists we have made this year, are getting to pay dividends. These specialists work with our sales teams to streamline the evaluation process, ensure physicians are seeing the requisite number and type of procedures to demonstrate the full utility of the system and to expedite evaluation times overall.

Today's announcement of the introduction and the pending launch of VersaVIT 2.0 vitrectomy system represents a significant milestone as we execute our strategy to capture market share with our innovative portable vitrectomy machine and related packs. We continue to receive positive feedback that the VersaVIT system addresses unmet market needs and does so with a compelling value proposition.

Early adopters have demonstrated the ability to leverage the VersaVIT simplicity of setup and its ease of use to facilitate procedure turnover, thereby improving the profitability of their practices. VersaVIT 2.0 builds on the strong technology in our first generation system. Based on valuable surgeon feedback, we have added features and benefits, which together reinforce the case for adopting our vitrectomy system and surgeon practices even more.

As we have shared in recent quarters, our experience in the field and feedback from the evaluation process to-date, has pointed us to the fact that while our machine is game changing, surgeons believe that we can do better. We have taken proactive steps to involve to improve technical attributes and functionality and further differentiate our product from existing alternatives.

Importantly, the VersaVIT 2.0 includes new features that surgeons have requested, enhancements to help facilitate procedure efficiency. Specifically the VersaVIT 2.0 provides surgeons with the option for high speed cutting in addition to active duty cycle control. Our retractors offers surgeons better precision, control and versatility as they navigate both the cutting and the removal of the vitreous. It offers a combination of smooth high speed cutting with variable flow control and this is resonating consistently among surgeons who evaluated the system thus far.

Note that VersaVIT 2.0 has been clinically tested in more than 500 procedures to-date. The performance has been strong. Surgeons have appreciated the added features and enhancements and perhaps most importantly, the 2.0 continues to demonstrate the level of simplicity that our first generation system established as a key differentiator versus the competition. The 2.0 offers surgeons a low-profile cost-effective system with strong clinical effectiveness, functional versatility and unmatched simplicity. It is clearly the best option surgeons have for improving the operational efficiency of the retina practice.

As we indicated in our press release this afternoon, we will be starting a targeted launch of VersaVIT 2.0 in the next few weeks. Our direct sales force and international distributors have been trained and are ready to go. We have a strategic targeted approach to our commercialization plan for VersaVIT 2.0 based on the valuable knowledge and experiences we gained during the rollout of our first generation product.

To be sure, the fourth quarter will be a busy one for the organization. We will be focused on optimizing the resources we are dedicating to this effort. We anticipate very modest contribution to fourth quarter results as we move through the early stages of the launch and look forward to progressing towards broad market adoption of the VersaVIT 2.0 system in fiscal year 2015.

As part of our commercialization of VersaVIT 2.0, we have planned a transition of current install base of VersaVIT generation systems. Approximately 80% of the current install base will be updated to our new 2.0 system over the course of the next nine months. We have prioritized accounts based on certain criteria in our sales, marketing and service teams are focused on executing a smooth transition to the new system.

Importantly, we do not expect seeing an impact on our current run rate in pack volumes during this upgrade period. We expect that our current users of VersaVIT will continue at similar levels utilization during the period leading up to their upgrade and will begin using the 2.0 system under a new pack and accessories agreement. While the impact on our existing VersaVIT revenue will be limited, we will see an increase in our sales and marketing expenses over the next three fiscal quarters.

The incremental cost will be approximately $0.03 after-tax over the next three quarters and are directly tied to the cost burden of upgrading a large number of our existing users at no charge to their practice. We view this as an investment to drive the long-term growth of the VersaVIT platform and allocation of capital today that will return handsomely as their utilization and our revenue from packs and accessories grow over time.

Together, our VersaVIT 2.0 commercialization and upgrade transition plans represent an exciting opportunity for the company. While this endeavor will surely challenge our organization in the coming months, I am confident that our team is prepared, focused and ready to execute. We will have upgrades to existing install base by the middle of fiscal 2015, while adding new VersaVIT surgeon customers, many of whom have been waiting for the functionality, simplicity and cost-effective solution our 2.0 provides.

Our successful execution against these two objectives will allow us to maintain momentum we have seen from our VersaVIT business and look forward to the continued contributions from VersaVIT to offset the weakness we have seen in our base business.

Having said that, I want to remind everyone that this remains a very difficult market to penetrate given the highly entrenched global players we are trying to replace. We continue to see an intense competitive response, largely in the form of aggressive pricing but we believe we have the right strategy to provide continued success in the commercialization of VersaVIT.

We remain confident the long-term growth opportunity this innovative system presents. We are competing in a highly volatile ophthalmology market, one that has not seen a compelling technology alternative in many years. We have listened to our physician partners throughout the commercialization of our first generation of product and have acted with notable responsiveness in an effort to provide a truly disruptive system we believe the VersaVIT 2.0 represents. Our ability to step on the peddle to invest in targeted areas to drive adoption is a dramatic advantage and we expect to see increasingly positive momentum as a result of these investments going forward.

Before we open the call for your questions, let me offer a few closing statements. Our topline performance this quarter was mixed. We had bright spots and headwinds in both our ophthalmic and our OEM business. On the OEM side, we are pleased with the sales of disposable products but overall sales were paced by decline in our capital business which was well below plan. Ophthalmic growth benefited from our compelling new products and our acquisition of M.I.S.S. Ophthalmics but the challenge in the base business pressured results overall this quarter.

The long-term growth opportunity for Synergetics remains compelling and we see exciting opportunities to improve our growth rate and gain market share with our differentiated offerings of systems and disposables. We look forward to the launch of VersaVIT 2.0 and the significant benefits it provides to our customers. We expect revenue contribution to ramp meaningfully over time as we achieve broad market adoption. We will continue to execute our strategy to drive improving and financial performance going forward.

With that, I will open up the call to questions. Operator, please?

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from Chris Cooley. Please go ahead.

Dave Hable

Hi, Chris.

Chris Cooley - Stephens, Inc

Hi. Good afternoon, Dave. Can you hear me okay?

Dave Hable

Yes.

Chris Cooley - Stephens, Inc

Super. A number of questions. I will lead off with a couple and then I will get back in queue. I want to specifically focus in initially on the ophthalmic business. I realize that that has been challenging for some time now. But if I am doing math right here this afternoon, it looks like your VersaVIT related procedures were basically half of what they were in the prior quarter and your decline in that business actually accelerated sequentially as well. While I realize VersaVIT 2.0 with a higher cut speed should help address this, talk to us about, maybe one, what you was during the quarter that might have precipitated that type of decline in the VersaVIT business, not just your base business? And then why you think 2.0 can really actually change this challenging pattern as we get to the back half of fiscal 2015? And then I have a follow-up. Thanks.

Dave Hable

Okay. So VersaVIT in the third quarter, two different dynamics, domestically and internationally, because we had notified and trained everybody in April actually, we saw a period on the international side a pause in the order of both boxes and packs as they anticipated the upgrade to 2.0. We saw marked increase on the domestic side and decline on the international side. That can be largely attributed to the dealer dynamic that's associated with the international business.

Chris Cooley - Stephens, Inc

Okay, and then with 2.0 launching, could you maybe just clarify that you mentioned $0.03 in terms cost? Is that recognized ratably over the launch through the mid fiscal 2015 or how do we think about those cost going to the P&L?

Dave Hable

Yes. So those cost will be kind of all over the next three quarters. So basically the launch of the 2.0 is a planned effort. We have identified the features we need in the next generation product, trained everybody up in April, have this highly vetted strategic introduction planning list that we did in collaboration with distributors. We are intentionally upgrading the install base because we believe that we can dramatically improve utilization in a number of procedures they use the device on. So there is a cost to that. It is not all, we feel, of the majority of units will be upgraded at our cost, which represents the estimate that we gave of $0.03.

Pam Boone

And yes, Chris, we will be ratably over the next three quarters. So about $0.01 a quarter.

Chris Cooley - Stephens, Inc

$0.01 a quarter. Okay. Thanks, Pam. And then maybe just two quick, just maybe housekeeping items, for you and I will get back in queue. Pam, I think it is actually a little bit lower than what I was thinking about in the quarter. Can you maybe just update us with your thoughts about the effective tax rate? And also I apologize, I know saw that your prepared remarks, to Dave's, you discuss the disposable growth rate in the OEM business, but I apologize, I may have missed it. I am sorry. If you could just repeat that, that would be appreciated. Thanks so much.

Pam Boone

Sure. So our disposable growth rate overall was 6.7%, and the OEM was 15%. The tax rate was actually -- not only impacted the tax rate what we did during the quarter, but it also impacted the cash flow, and we talked a little bit about the deferred assets being converted into cash. So as we filed our tax return this quarter, we were able to do some federal tax planning that allowed us to take the majority of our foreign NOLs, our net operating losses, and convert them to cash in the U.S. So it helped not only from a cash rate perspective but also from a cash flow perspective.

Chris Cooley - Stephens, Inc

I guess, Pam, I just want to be clear on this. So when I look at that tax rate, I am just trying to think about, of course you don't give guidance here, but as I think about modeling purposes, you said you used 100% of that NOL. So should I assume that that tax rate reverts back in the fiscal 4Q? Or how do I think about that?

Pam Boone

We have a little bit more than we can do when we file our tax return next year, but I would revert it back to a normal type tax rate.

Chris Cooley - Stephens, Inc

Okay. Thank you. I will get back in queue.

Operator

Our next question comes from Joe Munda. Please go ahead.

Dave Hable

Hi, Joe.

Joe Munda - Sidoti & Company

Good afternoon, Dave and Pam. Thanks for taking the questions. Dave, as far as, I know Chris touched on a number of issues, but as far as R&D is concerned, you mentioned 8% for 2014 but as VersaVIT 2.0 gets out there, what are we looking at in to fiscal 2015? Is that a similar number, as a percentage of revenue? Or is that expected to come down?

Dave Hable

No. I think 8% going forward and I just recalled that last quarter, second quarter, we had 10%, so meanwhile tough year-over-year, it is down sequentially. But we have said 6% to8% over the go forward period for 2015 and I think close to 8%.

Joe Munda - Sidoti & Company

Okay. As far as the OEM business is concerned, you talked about the visibility and it seems like disposables are growing on that line of business and you talked about trying to shift towards doing more of the disposables, but how exactly can you do that if you are still doing the capital equipment side of the business? How is that shift going to occur? Are you just going to discontinue offering the capital equipment, I mean the box business and just do strictly disposables? How are we going look at that?

Dave Hable

No. So the capital business is the most volatile piece. Again, as I said, it was 20% of the total in the third quarter. The answer to how we are going to grow the disposable is our new products in both the Stryker tips and the Codman forceps, two of which we are in the process of manufacturing right now for Codman. So the plan is, change the overall mix of products through enhancing disposable product lines that we sell to both the Codman and Stryker which we are actually well in the way of doing in the interest of eliminating the volatility in the overall OEM line, having more tied to procedure growth.

Joe Munda - Sidoti & Company

Okay. Thank you.

Dave Hable

Yes.

Operator

The next question comes from Charles Haff. Please go ahead.

Dave Hable

Hi, Charles.

Charles Haff - Craig-Hallum

Hi there. So I wanted to understand VersaVIT 2.0 a little bit better. In terms of, I understood your changes that you mentioned that you are making, but what was the feedback that you are getting from physicians in terms of improvements that they wanted to see with the first generation? Was it mostly the cutting speed or were these some of these other changes, things that you were hearing as well?

Dave Hable

In a way, the big thing was the cutting speed. So that was -- and even though we have confirmed that it's a relatively small percentage of procedures, it was something that went around talking about more than we would have liked to. So that was the most significant thing that we that we touched on. There are a couple of other features, like the silicone oil collection that came up as a big deal outside the United States than it is in United States but the predominant feature was the cuts per minute variable.

Charles Haff - Craig-Hallum

Okay. And you mentioned that this was a more cost-effective solution. Were you saying this is more cost-effective relative to the first generation or relative to the constellation in the other products out there?

Dave Hable

Relative to whatever they are using in the market, both in terms of the cost of the technology itself and the greater efficiency that the technology affords in the operating suite, especially meaning they can do more procedures during a given time period.

Charles Haff - Craig-Hallum

So do you foresee any ASP changes with 2.0 versus 1.0?

Dave Hable

Potentially yes, hopefully in the upward direction because we have got more technology in the package as well the (inaudible). There is a separate pack of consumables that goes with the 2.0 that would make sense to get a premium for the technology that's embedded in it.

Charles Haff - Craig-Hallum

Okay, great. And my last question is for Pam on working capital. As you mentioned DSOs went up to 87 days versus about 80 days in the previous quarter. Were there any changes to collection policies or anything that you could note here? I know you said that the timing of the sales were a little backend loaded, I guess, but has there been ready changes to collection policies or AR policies?

Then my second part of that question is on inventory. How should we think about inventory days going forward now that you have this new piece of equipment that you are rolling out? Thank you.

Pam Boone

So with respect to the collection policies, no changes around our collection policies. It really was timing of some of the OEM sales that made it out of here during the quarter. We made it out fairly late which gave us a lot of chance to collect them during the quarter.

On the inventory side, so from a new product perspective, inventory has hit a high water mark. We are, not from an overall inventory, but from a product inventory, and obviously that's the stuff we are going to be using to go through the launch. And the next quarter is the normal time of year to draw down our inventory as far as we get it and it will be accelerated behind the launch of VersaVIT 2.0.

So I would see inventory falling during the fourth quarter and then during that site build in first quarter as we get ready to approach the balance of the year. We typically like to build a little bit of inventory during that first quarter as it's seasonally a little slower than our other quarters.

Charles Haff - Craig-Hallum

Okay. Thank you.

Dave Hable

Charles, we have been building over $3 million of new product inventory in that total number, $3.4 million. So it's, even though while it went up, it isn't going anywhere near as much as a (inaudible).

Charles Haff - Craig-Hallum

Okay. Thanks for the additional color, Dave.

Dave Hable

Yes.

Operator

The next question comes from Chris Cooley. Please go ahead.

Chris Cooley - Stephens, Inc

Thank you for taking the follow-up. I just wanted to turn back on, maybe it was Charles question on the packs. In this kind of an acute competitive environment, do you really want us to assume a step up in ASPs for both the 2.0 and the related packs, especially as part of the, as we say the value proposition of the whole VersaVIT franchise has been a lower effective cost, not only in terms of utilization but also in terms of the reflected components? You had a pretty challenged, let's say, trailing 12 months here in terms of the ophthalmic business. Just wanted to make sure I am understanding the messaging correctly here in terms of volume growth versus volume and price. So if you could just clarify that for us? Thanks.

Dave Hable

Yes. So Chris, you can take the box out of it. We are not talking the box. We are talking about the packs. The ASP is not coming from an apples to apples increase, if you will, with the forcep in the pack than there is in the 1.0 pack. So that's why the ASP might be a little stronger. But we are definitely not doing a big price increase thing that would impact our volume.

Chris Cooley - Stephens, Inc

Okay. Thanks. I appreciate you clarifying that.

Dave Hable

All of which, by the way, is tied to volume covenants.

Chris Cooley - Stephens, Inc

Understood. Thank you.

Operator

The next question comes from James Terwilliger. Please go ahead.

Dave Hable

Hi, James.

James Terwilliger - Wunderlich Securities

Hi. Real quick. I missed some of the call, but walk me through the launch of the VersaVIT 2.0 in terms of your plans. Walk me through the launch if I am a current customer and I am using the VersaVIT 1.0 and is there a training component there? And then walk me through the launch if I am a brand new customer that wants to do a demo on the VersaVIT 2.0.

Dave Hable

Yes. So the targeted launch plan I referred to means that our sales representative have a highly vetted plan of target accounts that includes both, brand new customers and upgraded customers where they feel they can get a significant utilization improvement in a short period of time, all interested in excepted number of procedures and near-term revenue benefit.

So they are listed by representatives vetted by multiple levels of sales management. It has both brand new customers as well as folks that are going to go through the upgrade unit. The pacing of the upgrade will be determined by who can react almost quickly, the turnaround time inside is about a week from door-to-door after it's picked up, shipped out, comes back here.

We have dedicated specific weeks operational and quality resources to do both certain percent of brand new products to new customers and to upgrade. So we are trying to both. The majority we have dedicated resources to new products and new customers and the order of battle is different for each sales territory and dependent on how quickly the path to revenue success is, which means the representative has been able to identify any competitive consultants, budgetary monies that are available, all the variables that we come to learn play a part in the evaluation process. So we have done our absolute best to take onboard all the learning we have had from the initial experience and reflect that in our go forward targeting plan.

James Terwilliger - Wunderlich Securities

Just real quick, if I am an existing customer, do I have to upgrade to the VersaVIT 2.0? And if I do upgrade to the VersaVIT 2.0, is there a significant training component that's associated with the upgrade?

Dave Hable

No. You don't have to upgrade to the 2.0 and the 2.0 is very similar. Certainly, you would have a hard time telling the two units apart from outward cosmetic standpoint. So there is not a big learning curve associated with using the 2.0. Even though, I want to be clear that they are going to want to try it in surgery to confirm its efficacy. There will be some cases where we can just shell ship of an upgrade, but whose will be the minority.

James Terwilliger - Wunderlich Securities

Thanks for taking my questions and congrats on the VersaVIT 2.0.

Dave Hable

Thanks, James.

Operator

At this time, we have no further questions. I will now turn it back over to Mr. Hable for closing remarks.

Dave Hable

So, thanks, everybody. I recognize that we have forced a lot of stuff into the quarters base business and being challenged. Take note of the press release from a month ago about the new Directional Laser Pro designed to help fortify the most vulnerable part of our base business, which is our standalone laser probes. We announced what we think is a really compelling development, cooperative development agreement with the Cleveland Clinic, which in our mind is ratification that we are seen as a viable developmental partner by a world renowned institution. And finally 2.0 is, we all know VersaVIT has been a hard slog, but we have the product as right as we possibly can get it and we have learned from everything we have done, both from a technical standpoint and from a sales and marketing standpoint and everything is designed to bring in revenue as quickly as possible. So we are doing our absolute best. Thanks everybody for their attention. I appreciate it. Bye, bye.

Pam Boone

Bye.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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