Vocera Communications, Inc.
Q3 2021 Earnings Call Transcript

Published: 28 Oct 2021

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Vocera Communications Conference Call. My name is Tanya, and I'll be your coordinator for today. I would now like to turn the conference over to your host for today's call, Sue Dooley of Vocera Investor Relations. Please proceed.

[Sue Dooley:]

Thanks very much, and hello, everyone. Welcome to Vocera's conference call to discuss our third fiscal quarter of 2021 earnings. Joining me today are Vocera's CEO, Brent Lang; and Steve Anheire, our CFO. Earlier today, we distributed a press release detailing our announcement. The release is posted on our website at investors.vocera.com and is also available from normal news sources. This conference call is being webcast live on the Investor Relations page of our website, where a replay will be archived. Before we begin our prepared remarks, I'd like to take this opportunity to remind you that during the course of this call, we will make forward-looking statements regarding projected operating results and anticipated market opportunities. This forward-looking information is subject to risks and uncertainties described in Vocera's filings with the SEC, and actual results or events may differ materially. Except as required by law, we undertake no obligation to update or revise these forward-looking statements. On this call, we'll refer to both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release. With that, I would like to turn the call over to Brent.

[Brent Lang:]

Thanks, Sue. Welcome, everyone. We just completed a fantastic Q3, delivering record revenue growth, up 18% compared to Q3 last year. We saw broad-based strength across our business. Our teams are executing well and the market for our solutions is very strong. Our customers appreciate the breadth and depth of our products and our clinical solutions-based sales approach is resonating with key decision makers as demonstrated by this quarter's large new wins, expansions and success in our international and non-healthcare markets. Here are a few highlights from the quarter. In Q3, we achieved the highest bookings quarter in the history of our company. We continue to win large new customers and expansions. This quarter, we won another one of the largest deals in our company's history, this time at the Cleveland Clinic, capping off a quarter with an impressive 15 deals over $1 million. Our bookings in the federal market were impressive. We continue to leverage our strong position in the fed as the de facto standard for clinical communications and combine that with great sales execution. Software bookings were strong again, and our software solutions continue to drive many customer engagements as integrations and optimizing clinical workflows remain top of mind with hospitals. Our unique wearable badges continue to differentiate our solution as evidenced by strong device sales performance this quarter. In fact, Q3 represented our largest bookings quarter ever for both the Vocera Badge and our Smartbadge. Our newer growth initiatives are also being well received in the market. Specifically, we booked the largest ease expansion ever and we're driving good pipeline room for Vocera Edge, our cloud-based communication solution, which we officially launched in July. Overall, it was another amazing quarter with strong performance by our teams across the business. We have tremendous momentum. Our solutions are resonating with customers, our sales force transformation is really paying off, and I could not be prouder of our entire team. The sales highlights from the quarter include 15 wins over $1 million, demonstrating the strong demand for our complete solution. The standard among these wins was with the Cleveland Clinic, representing the second largest deal in our company's history, just slightly slower from last quarter's win at Providence Healthcare. This win with Cleveland Clinic's flagship operations in Ohio and Florida was the result of years of hard work by dozens of our skilled sales, clinical and technical experts as well as the demonstrated success of our solution already in place at the Cleveland Clinic in Abu Dhabi and in London. It's a shining example of our clinical expertise on how our customers look to us as the partner in defining and deploying best practices. During the evaluation process of this enterprise deployment spanning 18 hospitals, Cleveland Clinic prioritized streamlining clinical workflows, accelerating time to care and reducing alarm fatigue, and these priorities led to significant interest in our engaged software. Our wearable smart badge and the ability to communicate hands-free in isolation areas as well as our dedicated panic button were also key aspects of this win. We are now the standard for clinical communications across this world famous health system, which we believe will provide a great example of the value of our solutions for hospitals around the world. The federal market also continues to embrace our solution. Our federal sales team delivered several million dollar plus wins, including New Jersey VA, Albany Stratton VA and the Buffalo VA Medical Center to name a few. They also achieved success selling our recently FIPS certified smartbadge to both new and existing customers, including cross-selling into previously engaged only customers. We have plenty of room to land new facilities and cross-sell and up-sell within existing customers across the federal market. Turning to some of our newer initiatives. This quarter, we won the largest ever Ease expansion at Memorial Hermann Health System. We previously conducted a successful Ease pilot in a single surgical department and now Memorial Hermann is expanding Ease into surgery centers in all 13 of their hospitals. As they look to compete in the Houston healthcare market, they are investing in patient experience, and they placed a high priority on the patient-facing benefits of Ease. Nurses connect Ease to the patient ID upon admission and care team members can send messages throughout the entire to the patient's friends and family across the country and even around the world. Meanwhile, Edge, our cloud-based smartphone-centric clinical communication solution is also achieving healthy traction with robust pipeline growth since our launch in July. Customers are interested in integrating Edge with Engage to expand clinical workflows and Edge further differentiates our ability to maximize customers' EHR investments, while empowering mobile clinicians with meaningful information at the point of care. Moving to international. Our focus on localizing our sales initiatives is really starting to pay off. An example of this is in Australia and New Zealand, where we are making good progress expanding our presence in acute care. We had several acute care wins, including Royal Perth, Auckland City and Sydney Local Health District, part of the New South Wales health system of over 200 public hospitals. It's great to see this traction, and I believe we will build on this momentum in the future as these new wins set the standard for clinical communication in the region. Outside of hospitals, we won a large deal with the Ohio Department of Developmental Disabilities, which has eight centers providing temporary residential placement and programs that teach skills necessary for individuals with disabilities to live in community settings. Replacing overhead paging and heavy motor roll radios, the center aims to improve staff to staff communication and provide their teams with a panic button to connect with colleagues at any time. We also had a great win at a private school in Florida, which we believe will provide a leading example for schools everywhere. While it's still early days for our efforts in school safety, we believe our value proposition is resonating with school leaders looking to adapt to new operational demands, while also ensuring the safety of staff and students. Finally, it's worth noting that our supplies business and our software maintenance renewals, both performed very well this quarter, demonstrating the value of our solutions and the loyalty of our customers. Our strong bookings performance this quarter continues to underscore how our enterprise selling approach is working. Our team is effectively differentiating our offerings by working with our customers' clinical leadership to create solutions and demonstrate results that address the most severe and pressing clinical workflow challenges facing hospitals today. Vocera viewed not only is a priority must have, but also increasingly, we are considered a strategic partner. Hospital leaders are turning to us as they look for expertise to establish best practices and achieve operational goals. I'll speak more about this in my market commentary section. Now, I'd like to shift to some highlights from our services team. We continue to deploy our solutions through a combination of on-site and remote work, and our team had a very busy quarter. This quarter included the successful deployment of our solution at the London Medical Office of the Cleveland Clinic. The long-awaited opening at this state-of-the-art hospital was a great precursor to this quarter's big win at the Cleveland Clinic here in the U.S. We also had a sizable deployment at UCLA's Ronald Reagan and Santa Monica Medical Centers. UCLA has undertaken a broad initiative to replace pagers with smartphones across the system. UCLA care team members are very positive about our solutions and are already seeing the benefits. We had a large engaged deployment at the University of Vermont, where we are delivering patient waveforms to care teams across the hospital on their smartphones, and we went live with bench at six BayCare facilities, streamlining a fleet of disparate devices and unifying nursing documentation, clinical workflow and communications. And notably, in October, we had our first deployment of Ease in an emergency department at one of the largest EDs in the country, Lehigh Valley, Cedar Crest. Ease can send over 25 unique messages based on the patient's status as care team members update the EHR. This frees the care team up to focus on patient care. These emergency department deployments represent additional growth opportunities for Ease beyond the traditional surgical environment. Our professional services team is executing well through these changing times, continuing the level of excellence that optimizes in-person time while working in partnership with our customers. Now, I'd like to describe my observations on the market environment for our solutions. While the pandemic extends its impact, we continue to execute well with a combination of remote selling and deployments and valuable in-person engagement with our customers. We believe the events of the last 18 months have further highlighted how our solutions drive effectiveness and safety. We do not believe COVID is significantly impacting our ability to work with prospects and customers, although it has forced us to become more flexible as we react to changes in our customers' environment. We didn't see much in the way of urgent COVID orders this summer as hospitals were already prepared for the pandemic environment. However, we do believe our solution has risen to a new higher priority, which we believe supports our long-term growth aspirations as we work to modernize healthcare communications around the world. We continue to see evidence that we have entered a new era of focus on care team safety. We believe our solutions are the most complete in the industry today, connecting all of the people and information needed to deliver patient care and simplify communication and workflows. Hospital leaders are urgently looking to strengthen their staff safety, reduce alarm fatigue and cognitive burden and speed time to action and intervention. We also believe hospitals in pursuit of these goals are looking to consolidate the number of vendors they are working with, and they want to build platforms that are secure, unified, fully integrated and future-proofed. This plays right into the heart of our value proposition, our selling approach and our market leadership. As evidence of this trend, Jupiter Health became our first customer with all four pillars of our solution, enterprise voice and messaging, engaged clinical integration, ease patient family communication and edge for smartphone-based collaboration. Jupiter wanted to work with a single vendor to address a variety of communications and workflow challenges and will be using all of our solutions. At Vocera, we are helping our customers and our industry to find a new normal for hospital operations. Our clinical and customer experience give us a powerful seat at the table to discuss clinical workflow goals and the industry is increasingly turning to us for health and advice. The large systems standing rising on our solution provides the best testimonial to this. Here are a few other examples of how the industry is recognizing our leadership in transforming the market. First, we continue to lead the CEO Coalition working collectively to take action to protect the well-being of clinicians and ensure that they have the tools, technologies and resources they need to feel safe at work. I just read a stat in a Becker's article that 18% of healthcare workers have quit their jobs during the pandemic, worsening an existing labor shortage that further exacerbates the urgent need to improve the care team experience. Hospitals are working to address the staffing crisis that exists in healthcare today and are turning to products and technologies to drive empowerment and retention for their staff. We are collaborating with the CEO Coalition to drive meaningful change across the industry by promoting the Coalition's core principles of physical and psychological safety and health justice. Momentum is building, and the Coalition has already received very high-level visibility in media and has nearly doubled its membership among the top hospital leaders in our country. And finally, a class report on our industry that was just published ranked Vocera at the top for demonstrating positive outcomes. The customer feedback highlighted our deep experience, leveraging clinical integration with patient monitoring tools, which enables clinicians to respond more quickly to critical notifications and improve patient care. Improved nurse satisfaction was notices of top outcome, thanks to our ability to decrease the clinician's tool belt of communications devices, improved collaboration and reduce noise. The report also acknowledged the added capabilities Edge brings to our portfolio. Our solutions are resonating in the market. We are winning because our broad solutions are helping modernize communication and collaboration. We are winning because our customers -- we are winning because our outcomes based selling approach and our ability to integrate across different clinical systems to deliver alerts and alarms intelligently. And we are winning because hands-free communication is highly valued by those who are providing hands-on care to patients. Finally, our ability to innovate with a mix of internal development and careful M&A make us the clear choice as customers look for a partner who can help them establish best practices to deliver better outcomes and lead them through this new era of safety. In summary, during Q3, we achieved the highest bookings quarter in the history of our company. We advanced our strategic priorities, including further penetrating the market, expanding within our existing customer base, increasing our software momentum, growing our international presence and leading with new product innovation. We are in a great position to continue delivering on these priorities. Our large backlog and deferred revenue balance provide revenue visibility and help create a solid foundation for the future. Our mission is more relevant than ever, and we have remarkable momentum in the business. Now, I'd like to turn the call over to Steve, who will cover the financial details around our Q3 result s and our guidance for the rest of this year. Steve?

[Steve Anheier:]

Thanks, Brent, and hello, everyone. We continued our strong momentum in the third quarter, highlighted by records across our financials, including bookings, revenue, margins and profitability, all of which were ahead of expectations. Starting with revenue. In the third quarter, we delivered $63.6 million or 18% year-over-year growth and through the first nine-months revenue increased by 19%. Q3 product revenue, which includes both devices and software, increased to $32.9 million or 16% year-over-year growth. Focusing on device revenue, this segment increased 21% from the prior year, driven by robust demand for the Vocera Badge and our Smartbadge. It is important to highlight that even after the strong revenue quarter, our device backlog grew significantly in Q3 and is now at an all-time high. While deployments can fluctuate from quarter-to-quarter, we believe we are well positioned for future device growth. Our strong device bookings, backlog and deferred revenue demonstrates the continued demand and compelling value of hands-free communication. Software revenue in the third quarter reached $12.3 million, a new high watermark for our software business and grew 7% above last year's strong Q3 performance. On a year-to-date basis, software revenue grew 42% and remains our fastest-growing revenue segment. As we discussed last quarter, Engage continues to be a significant component of our software business, which highlights the growing value customers place on our clinical integration and event-driven workflows. The Cleveland Clinic booking that Brent discussed is a great example of this with Engage being the largest element of the deal. Thanks to our strong bookings performance, our software backlog continues to grow. And as of September 30th is at an all-time high, significantly above the previous year. The growth in software backlog positions us well for continued revenue momentum and is a key driver for our operating model, which I'll touch on shortly. One final comment on our software results. As previously discussed, we evaluate the health of our software business by combining software with subscription and support revenue, which we view holistically as our software business. Software plus subscription and support revenue combined grew 17% in Q3 and represented 60% of our total revenue on a year-to-date basis, up from 56% in the prior year. We expect this mix to continue to increase over the long run, driven by demand for our software portfolio and growth in our backlog. Our services business continues to perform well. Service revenue increased 21% year-over-year to $30.6 million, with growth in both our subscription and support and our professional services revenue. Q3 was another quarter with healthy new customer deployments, resulting in professional services revenue and delivery of new software and devices. Now, turning to our combined backlog and deferred revenue. With a record bookings quarter in Q3, we have again significantly increased our backlog and deferred revenue. At the end of Q3, our combined backlog and deferred revenue was $253 million, up approximately $100 million or 67% versus this time last year. The increase was largely driven by organic growth with a smaller inorganic component. We continue to see strength in multiyear subscription and support contracts and large multi-facility wins, which contribute to our growing backlog. We view this as positive as our backlog and deferred revenue growth provides visibility into 2022 and beyond. I would like to briefly go into more detail on our non-GAAP gross margins and operating expenses. Non-GAAP gross margins in Q3 were 71%, representing a 170 basis point improvement from last year and again set a new high watermark for the company. Our product gross margins expanded to 78%, up from 76% in the prior year. We saw the benefit from device margin improvement related to healthy volume and pricing, reflecting the value our customers assign to the functionality of our devices. We also continue to have healthy software margins. Lastly, our services gross margin, supported by a high margin subscription and support revenue were well above 60% and grew approximately 100 basis points from the prior year. Non-GAAP operating expenses increased to $30.9 million or 22% year-over-year growth, mostly due to investments for our recent acquisitions. We also continue to fund key initiatives aligned with our growth strategies. Now, I'd like to comment briefly on our profitability. Our adjusted EBITDA in Q3 was $15.3 million, up 14% this quarter and up 69% for the year. As a percentage of revenue, adjusted EBITDA was 24% in the third quarter, which was well ahead of our profitability goals. While there can be quarter-to-quarter profit fluctuations based on revenue mix and spending initiatives, our growing software business, healthy device margins and our continued focus on operating leverage has resulted in expanded profitability, highlighting our strong business model. We continue to invest for growth with the objective of maintaining our top line momentum, while delivering on our long-term business model. Lastly, and also important to our profitability journey, we achieved GAAP net income of $2.1 million for the quarter. Now, transitioning to the balance sheet. We ended the quarter with approximately $305 million in cash and short-term investments, which is up $13 million from the prior quarter. Our strong cash position allows us to continue to invest in growth opportunities. Now, let me turn to guidance. On the strength of the first three quarters for both bookings and revenue, we are on track to deliver strong revenue growth for the full year. For the third quarter in a row, we are increasing our annual revenue guidance. The new revenue guidance range is now $226 million to $233 million, up from the previous range we gave last quarter of $221 million to $231 million. The high-end of our revenue guidance now represents 17% year-over-year annual growth. In addition, our substantial backlog and deferred revenue provides great visibility and enhanced line of sight to long-term revenue growth. Turning to our profitability. With the higher annual revenue expectations and our profitability performance in Q3, we are raising the top and bottom of our adjusted EBITDA guidance range for the year. We now expect adjusted EBITDA in 2021 to be in the range of $35 million to $40 million, reflecting the impact of the strong Q3 performance, greater top line revenue guidance for the year, the software-rich backlog and our continued operating expense discipline. The rest of our GAAP and non-GAAP guidance can be found in our press release. In closing, we are extremely pleased with the overall business momentum and financial results in the third quarter, capping off an outstanding first nine months and leading to our new guidance range. Our solutions are rising in priority, our growth is accelerating and our business model continues to be very strong. Thank you for your time. And now I'll turn the call back to Brent.

[Brent Lang:]

Thanks, Steve. Before opening up the call for questions, I want to conclude by thanking the entire Vocera team which continues to excel as we navigate the pandemic. Our mission has never been more relevant than it is now, and I'm very proud of how our people have risen to the challenge. Our business has good momentum, and the results we delivered this quarter are evidence that our solution is in high demand and delivering tremendous value to our customers. Our customers are looking to us for leadership as they implement best practices around the future of care communications. We have a large market opportunity, a highly differentiated solution and a finally tuned selling engine, generating robust demand. With that, we're ready to conclude our formal remarks. Thank you for listening today. Operator, we're ready to open up the line for questions. Thank you very much.

[Operator:]

The first question is with Sean Dodge with RBC Capital Markets.

[Sean Dodge:]

Congratulations on another great quarter. I guess, Brent, you mentioned the strong bookings momentum. And I'm curious to hear your thoughts on how we should kind of expect to see that manifest itself in margin expansion over the next couple of years. You've made some pretty significant investments in the sales organization that are paying off. You pointed out software mix is increasing. You've got a couple of recent acquisitions, you'll be spending some integrated. But as we think forward to the next 12 to 18 months, do you see this level of spending continuing or do you think we're approaching a point where you can maybe not pull back but begin to more meaningfully taper growth and really start driving toward the longer term margin targets you all had laid out as part of the longer term model?

[Brent Lang:]

So, I guess, I'd start by saying I love our financial model. There's a tremendous amount of leverage in our financial model, and we see a lot of drop-through profitability as we grow revenues. And I think you saw evidence of that this quarter with the 24% EBITDA in the quarter. As you go through the different parts of our business, we're seeing big increases in sales productivity. We've been able to grow bookings pretty dramatically over the last couple of years without having to increase the size of our sales organization, and we'll continue to make investments that we think will drive growth, but I do think that there's leverage there. Obviously, from a G&A perspective and from the rest of the OpEx, we're seeing leverage in the model. As you mentioned, software, increasing software margins and increasing software as a mix of our total business is helping to drive profitability as well. So, I guess, we always try to strike a balance between growth and profitability. Our bias is towards growth. So, we're looking for areas we can continue to invest that will drive further growth in the future. But I think based on just the structure of our models, you're going to continue to see increases in profitability.

[Operator:]

The next question is from Ryan Daniels with William Blair.

[Ryan Daniels:]

Brent, maybe a somewhat philosophical one for you. Given the momentum you're seeing really across all aspects of the business, both on the badges and software, Ease, etc. and the fact that there's some vendor fatigue in the market with people wanting to move towards one vendor versus multiple point solutions. What's your thought on investing more heavily in the sales force, whether it's direct expansion or kind of novel marketing initiatives to really capitalize on all the momentum you're currently seeing? Congrats on the quarter.

[Brent Lang:]

It's something we spend a lot of time thinking about. I think if you talk to our sales organization, they would say that they feel like they've got pretty good coverage across the accounts in the U.S. So, a lot of this is driven by just when hospitals are ready to make some of these transitions. I will say that we look potentially to bring in more specialists to help drive some of the newer products and newer initiatives where maybe the broader sales force doesn't have as much experience, and so we'd look for investments there, as well as continuing to grow the international business. But with increasing deal size, we feel like we've still got an opportunity to drive continued sales productivity and so it's always a balance there. I don't feel like we need to grow sales nearly at the where -- sales people nearly at the growth rate we're growing bookings just because of increased deal size allows us to do fewer transactions to continue to grow bookings. But I do think as our solution becomes more complete, and we've got more products in the back of them to sell than adding some specialists to help drive that growth.

[Operator:]

The next question is with David Larsen with BTIG.

[David Larsen:]

Congratulations on the very, very good quarter. Did I hear you say that you won a hospital system in Australia that had 200 hospitals, was that correct?

[Brent Lang:]

We won a single hospital that's part of a 200 hospital system in Australia that we didn't win the entire system. It was a hospital in Sydney that's a public hospital that's part of the New South Wales Public Hospital System. But I think the significance of why we talked about it is because, obviously, now that we've got traction there, we can use that as kind of a like house account and use it as a reference to hopefully expand to other facilities there. And for us, you may remember that most of our business in Australia and New Zealand historically has been in aged care and long-term care types of facilities. We were just starting to break into the acute care market, both last quarter and this quarter, we started to see some nice traction there with some new selling and marketing activities we've had going on down there. And so this is just a continuation of that activity and we now look forward to hopefully being able to expand to some of these other facilities.

[David Larsen:]

That's sort of what I was getting at, like with the Cleveland Clinic expansion, as an example, I would think that you have a very good in-sell opportunity in that site in 200 hospitals. It sounds like it's in a countrywide opportunity. And then the backlog itself, if I'm doing my math correctly, it looks like it was about $200 million in the quarter, up 110% year-over-year. These are just fantastic growth numbers. I guess, what was the -- do you have an organic growth rate in deferred revenue and backlog for the quarter? I think you gave one last last quarter of like 45%. Do you have another one for this quarter or...

[Steve Anheier:]

So, we grew our backlog and deferred revenue 67% year-over-year, up approximately $100 million, is actually up $102 million. I'd say the majority of the increase is the organic. Last quarter, we broke out Ease and Edge as being $34 million of backlog. Now, that we've had a full cycle of Ease, we consider Ease organic. And so we're really excited about Ease and Edge. We think it will drive long-term growth. But right now it's a relatively small part of our business. I think what we point to is how successful Engage has been. We purchased Engage in 2016 and now that's leading deals as evidenced by Providence and Cleveland Clinic. So, while Ease and Edge are still pretty small right now, we're excited about the future.

[David Larsen:]

And then just broadly speaking, like the momentum of the business is very, very good. It's the highest sort of growth rate I've ever seen. Can you maybe just talk a little bit the pandemic and the delta variant? And it seems like Vocera has become more of a must to have than a nice to have, just any additional color there would be helpful.

[Brent Lang:]

I think you're touching on a really important point. I think our solution is really aligned with where the market is right now. Some of it's related to pandemic, but I think more of it is just a change in the mindset of our customer base. Probably the top of mind issue for many of our hospitals right now is the nursing shortage and retention related to that. And so they're looking to invest in technologies that can help address that and make their nurses more empowered and reduce the stress level and hopefully increase the retention level. The second piece is this focus on staff safety and reducing cognitive proven, which I think has become very much at the top of mind issue for them. Patient experience is rising in importance and the focus on clinical integration that drives a reduction in cognitive burden. And then obviously, the hands-free piece has continued in pandemic to be a really important driver. So, I think if you just kind of look at the core elements of our value proposition, they're really lining up nicely with the priorities that the C-suites of these hospitals and health systems are focused on in their spending.

[Operator:]

The next question is from Meta Marshall with Morgan Stanley.

[Meta Marshall:]

You noted your gross margin seeing uplift for some pricing power. I just wanted to get a sense, is that different in the small hospital, large hospital mix or just less discounting due to value proposition kind of more bundling upfront, just anything on just kind of the gross margin uplift you were seeing.

[Steve Anheier:]

So, our margins were 71% in the quarter. That represents an all-time high. But I think you see with quarters that we have high revenue and scale and especially with a significant software contribution, we can start reaching these 70%, 71% margins. Margins last year were 70%. As a note, software was the highest we've ever had for an individual quarter on the software revenue at $12.3 million. And then the last thing that was a real bright spot for us was the device margins. So, we had the volume growth where device revenue increased over 20% year-over-year and so the fixed costs were spread out over more badges. But we also saw a healthy pricing environment, and that wasn't isolated just to the enterprise deals or just the fed. It was kind of across the board on both B3 and Smartbadge.

[Operator:]

The next question is from Matt Hewitt with Craig -Hallum.

[Matt Hewitt:]

Congratulations on the strong quarter. Just a couple of questions for me. First off, and I think it kind of touches on the prior response regarding gross margins. But regarding the supply chain, are you seeing any issues there? I think you've been in a good position the past couple of quarters, but has there been any changes? Are your price increases are a result of some of the increases you're seeing with your supplies or is it more a function of just recognizing the value proposition that your devices are bringing and the software is bringing?

[Steve Anheier:]

And I'd start by saying it's more pricing discipline than price increases. But specifically to the supply chain, I think the team has done a good job. Pre-pandemic, our inventory levels were about $5 million. We've increased that throughout the pendemic from kind of a range $8 million to $10 million. And so we worked really closely with our two contract manufacturers. Obviously, it's a global situation. It's evolving. Our teams continue to monitor and watch it closely. But we've done a good job to our and our -- the cost of our badges have stayed relatively flat year-over-year.

[Brent Lang:]

I would just add that I'm super proud of the job the operations team has done working with the supply chain. We got ahead of this early and they've been very diligent on it, and I think we've avoided any major issues as a result of that diligence.

[Matt Hewitt:]

And you kind of touched on this in one of your earlier responses, but I want to dig in maybe a little bit further regarding talent. And there's two different aspects. One is talent for Vocera. It sounds like you're in a pretty good place, maybe not needing to add a ton of people. Others that we're hearing from so far this earnings period are struggling to find talent or replace talent where there's been turnover. It sounds like you're in a good position. I just want to confirm that. And then regarding the customer that has been in the headlines, that has been a pain point. And it sounds like based on your early response that they're really viewing the badges, the software as a bridge until they're able to necessarily find the headcount that they need and maybe even then the -- your products will help. But at least until then, this could be a bridge to help hospitals that are struggling to meet quotas from a hiring perspective.

[Brent Lang:]

So, let me start with the Vocera employees. I think we're very fortunate to have very high retention rates amongst our employees. There's a tremendous amount of loyalty and connection to mission within the organization. And we historically have had retention rates that are well above kind of industry benchmarks. And we've seen retention drop during this tightening labor market, but we're still well above the industry benchmarks and happy with that. I think we have to be more diligent in our hiring practices and we're getting creative in terms of ways to generate more pipeline of candidates to come in, but it hasn't been an issue for us until now. Within our customer environments, you're absolutely right. This is a very much of a top of mind issue. And I think you're also correct in sort of labeling it as using technology as a way of bridging the gap between the work that needs to be done and the resources that are available. And this is a way to empower the front line nurses to enable them to do their jobs more effectively and spend more time on patient care. It's also a way to reduce their stress levels and improve their feelings of safety that may prevent them from making a decision to leave the professional in the first place. And so I think the hospital decision-makers are recognizing the role that technology can play in connecting them back to their purpose, protecting them and keeping them safe and preventing any kind of earn-out from them and/or making them more empowered to be able to get the job done with reduced labor force. I think that recognition of our broad category is really exciting for the industry as a whole and specifically for Vocera.

[Operator:]

The next question is with Iris Long with Berenberg.

[Iris Long:]

So, I'm going to switch the topic a little bit. I have a couple of questions on the VA market. I'm wondering how has the VA market performed versus your expectation? What's the demand like for the Smartbadge versus the Badge? I know that typically, Q3 is a strong quarter, but can you remind us what the cadence for that business is like and what your expectations for the next few quarters are?

[Brent Lang:]

I think you're exactly right. Q3 historically has been the strongest quarter for our federal business, and this was no exception to that. We had a very strong quarter and the fed closing a number of large deals and also a number of refresh and expansion orders within our existing customers. This is really the first quarter when we saw substantial orders of the Smartbadge within RBA customers. As you may remember, we received 5th certification for the Smartbadge in late Q1, early Q2 time frame. And so this is really the first buying cycle that they had access to that. And we did see Smartbadge orders that were both from new customers as well as from existing customers who are either expanding or replacing existing B3000n badges. We expect the federal market to continue to be a strong part of our business. We are effectively the de facto standard in both the VA and DoD and there's a tremendous amount of loyalty and excitement about our products. There's still plenty of room for expansion there. And this quarter, this Q3 was pretty much in line with what we've seen in previous years where we saw the bulk of the federal business occurring during the Q3 time frame.

[Operator:]

The next question is from David Windley with Jefferies.

[David Windley:]

Compliments on the quarter. I wanted to ask a question, a follow-up to Matt's around he label that talent, I'll ask a little more specifically around your implementation resources and with the growth in your backlog. Are those ones with the kind of hybrid environment that you still feel like you have some scalability in that capacity or is that an area where you need to hire more specifically? And then again, maybe specifically in that labor market is that labor available?

[Brent Lang:]

So, we're definitely hiring more implementation resources to help deal with these large deployments that we're working on. It's not anything new. We've been continuing to grow that part of our business over the last year or more as the business scales and we've gotten more of these larger deals. But the nice thing is we typically have good visibility into these deals working their way through the pipeline. And then even after they're booked, there's usually some period of time between the booking occurring and when the revenue is going to roll out. And as an example, the Providence deal that we announced last quarter, the large deal we closed in Q2, that really won't start rolling out until the first part of next year. And so it gives us a little bit of time to scale up those resources and do the resource planning associated with that. And I think so far, we've been able to stay ahead of that, but we're definitely adding reasons. The other thing I would highlight is that we're really trying to get creative around the virtualization of that work. We've moved more of it to online training and online configuration, and that's actually delivered a level of efficiency that we might not have otherwise seen by reducing the amount of travel time and downtime associated with getting to a customer site. Pandemic sort of forced that upon us early on. And what we found was that for certain portions of the professional services work, we could continue to do that remotely, which kind of gave us a boost in terms of capacity as well. But our utilization rate of our professional services team in Q3 was high. And so that's a good sign. We want to keep it high. We're continuing to look at a combination of both in-house resources and then potentially some outsourcing of some of the components of the work as well to kind of create a variable capacity as well.

[David Windley:]

Just a quick follow-up then. If we go back really before the pandemic, you were describing and experiencing a lengthening of sales cycle as deals were getting bigger and moving to a more centralized decision process and pandemic kind of probably through that into -- or through that into the background. But has that come back? Is that a stable environment not changing much now or are you still seeing, I mean, obviously, you're closing a lot of deals, but is that sales cycle still kind of centralizing and getting bigger and longer or is that a more stable environment at this point?

[Brent Lang:]

I would say it's stabilized. It's longer than it was before, but now that we've sort of transitioned the business where the bulk of the deals are on that same cadence, it's just a matter of building pipeline. So, whether it's a 12-month or 18-month sales cycle doesn't matter in as long as you've made the transition to the new cadence. And the Cleveland Clinic deal is one we've been working on for a long time. So, I don't think it's any -- it's not to say that was certainly an overnight success, right? There was a tremendous amount of work that went into that deal. But as we plan to prepare for those as long as we have a number of these larger deals in the pipeline and I would like to think about the analogy of the planes landing at airport, but it's a question of having enough planes in the air that you can have coming in on a regular basis regardless of whether they're making transatlantic flights or just flying to Chicago.

[Operator:]

The next question is from Jessica Tassan with Piper Sandler.

[Jessica Tassan:]

Congratulations on the quarter. So, I think what we're interested in is you guys are managing to achieve record bookings without kind of commensurate increases in OpEx spending. So, within your existing health system customer base, where do the biggest opportunities for increased penetration exists? So, would it be an expanded device deployment, additional penetration of Engaged, Ease or Edge? Can you just kind of help us understand in the existing health system based where the largest opportunity exists?

[Brent Lang:]

It's really all of the above. We see examples of customers who have maybe deployed badges into safety departments that are looking to go house-wide or health system-wide and Providence is a good example of that. Last quarter we see other deals where they may have been a badge-only customer and they're adding Engage or they're looking to upgrade to Smartbadges. It's really each of those elements you talked about into being growth drivers. I think with Ease and with Edge, we're just getting started with that. So, they today represent a relatively small piece of the business, but we're hopeful that we can drive the same sort of cross-sell and expansion selling into our installed base with those products that we've seen with Engage and with the Smartbadge.

[Jessica Tassan:]

Can I just one quick follow-up, I guess, how should we think about the total addressable revenue opportunities for each of those solutions, so kind of comparing the magnitude of the TAM available for badges, Engage, Ease and Edge?

[Brent Lang:]

It's hard to quantify it succinctly. So, I think maybe a longer off-line conversation. I would tell you that the Engage opportunity is quite large. Those deals tend to be very large software deals, because they're typically going house-wide or hospital-wide. And once they make the decision to do these kind of clinical integration, they want to standardize it across the health system. And so those end up being very, very large software opportunities. The Ease subscription typically starts out in just the operating environment, although as I mentioned in the prepared remarks, we have started to see some expansion into the ED and even in the Medsurg floors and so those deals, while still quite a bit smaller than a voice or an Engage deal represent meaningful size revenue. The Edge business is more similar to our voice and messaging business. If a customer decides to go in that direction, then that deal size is going to be similar to a voice or messaging deal. So, I think there's a tremendous amount of cross-sell and up-sell opportunity represented by each of them.

[Operator:]

Ms. Stephanie Davis with SLA Bank.

[Stephanie Davis:]

I was hoping to follow up on the supply chain question, if possible. Just given some market commentary that the chip shortage could persist until the second half of next year. In that context, how should we think about that $8 million to $10 million devices figure? And what it could mean for that sort of time frame?

[Brent Lang:]

We do planning on our business year in advance. There are some components that are at 52-week lead times. Our supply chain or contract manufacturers work very closely with us to monitor that. We're providing forecasts out to them well in advance. And so even though Steve commented earlier on the inventory that we have kind of on our books, if you sort of look at it throughout the entire supply chain with our contract manufacturers inventory, the working process piece and then orders that they play stat-on to chip components, you're looking well out into the future. As I mentioned earlier and Steve mentioned as well, I think we're feeling comfortable about where things are right now. I think you're right. I think there is certainly a possibility that these supply chain issues could extend well into next year or even beyond. But I think for us, it's just a matter of doing good planning and making sure we're staying ahead of it and then keeping close communication with our contract manufacturing partners. And so far, we've done a really good job of that. It hasn't been an issue.

[Stephanie Davis:]

And I guess following up on that as well. One of your largest suppliers did have some commentary on passing through cost from the current supply chain debacle on to its clients. Is that something that you'll be shielding from because you have this large stock of devices or is that something you've already kind of heard from some color on conversations?

[Steve Anheier:]

We've been fortunate where we've seen some very, very modest price increases on a few parts, but that's been offset by also price declines in other parts that we worked really hard to lower the over cost. So, I'd say our cost position for our badge is very similar to what it was a year ago. We talked about earlier, our pricing discipline has resulted in actually our device margins increasing pretty substantially year-over-year. And so we think we're in a great position from a cost position on our badges.

[Operator:]

The next question is from Michael Polark with Baird.

[Michael Polark:]

Understanding it's early, and I don't think you typically do this, but given all the momentum you're seeing in the business and the mix shift towards longer term multi-year deals. Curious if you'd hazard a comment on 2022 revenue, whether any takeaways from your initial planning or comfort with where the street may be, which looks about 13% to 14% growth?

[Steve Anheier:]

As you said, it's early to talk about 2022 guidance. But we do feel like the momentum is building for us. And what we look at our key levers and drivers of the business are our bookings, our backlog, deferred revenue, and we feel like our value proposition is resonating. So, we do take a very disciplined approach to our guidance. We'll take historical conversion rates. And just a reminder, this year is the top end of the guidance is 17%. We always aim to be at that or above. Last year, we grew 10%. So, our growth is accelerating. I think you're right, we do have enhanced visibility to 2022, and that's a few of the reasons are the large enterprise deals, the Providence, the Cleveland Clinics that take multiple quarters to deploy, but also the longer-term maintenance contracts, which is just really a sticky solution for us. And then Ease and Edge, which is a pure SaaS business. So, Q4 will be important for us. We want to generate more bookings. We're really focused internally on finishing the year strong, and we'll give guidance on the next call.

[Operator:]

The last question is from Scott Schoenhaus with Stephens.

[Scott Schoenhaus:]

You got my last name. Congrats team on the quarter, like everyone else said, very impressive. So, I kind of want to drill away from devices and talk about your new smart-based app approach. You're obviously in the early stages, but talk about the success you're going in kind of down market into the mid hospital stream. I think you had -- you inherited 85 hospital systems with patients safe and you've expanded your offerings with the Edge. Can you talk about what you're seeing in your early roll out of that? How it's contributing to backlog? And then I'll just put my follow-up question in as part of this since it's a one-question deal. But if we think about that smart phone application expansion as a mix -- how does that contribute to the margins? Obviously, gross margin should be favorably impacted from the smart-based app versus devices. So just a two-part question there, all in one.

[Brent Lang:]

So, as it relates to Edge, which is our more smartphone-based cloud-based solution, we're really happy with the launch. We launched it in July. The sales force is really excited about the new product in their tool bag and they're having some really strong conversations with customers. It's too early for us to have had a meaningful impact, either in terms of bookings or backlog or revenue. But I would say in terms of pipeline, we're encouraged by the reception that we've gotten so far. And I think it's very consistent with our strategy around offering customers a choice. They can choose between on-premise or cloud-based solutions. They can choose between the wearable badges and more of the smartphone-based solutions. We've heard a lot of interest in combining the Edge solution with Engage, where they would be able to bring clinical integration into that Edge solution. And so we're working diligently on integrating those two products together. And I think that over time, we'll see the relative mix between the on-premise and the cloud-based versions. Obviously, we inherited some revenue and some backlog at the time of the acquisition and some deals that were in process in the pipeline, and we're sort of monitoring that closely. But I'd say early returns have been really positive. And I'll let Steve comment on gross margins. But I think at a high level, you're directionally correct. The more software we drive, the higher gross margins we're going to see in the business.

[Steve Anheier:]

And Scott, just on the margins quickly. If you think about the last three acquisitions we've had, Engage, Ease and patient as now rebranded as Edge, they've been all 100% software businesses. And I think you're starting to see that in our margin profile as we hit a high watermark this quarter and it should continue. It can be lumpy and fluctuate quarter-to-quarter, but we're definitely focused on the software side, which is driving our margins.

[Operator:]

I will now pass the conference over to Brent for any closing remarks.

[Brent Lang:]

Thank you, everyone. I appreciate your time today, and we look forward to the following conversations. Have a good evening.

[Operator:]

That concludes the conference call. Enjoy the rest of your day.