Vocera Communications, Inc.
Q1 2021 Earnings Call Transcript

Published: 2 May 2021

[Operator:]

Good afternoon and welcome to the Vocera Communications Conference Call. My name is Shantel, and I'll be your coordinator for today. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. . I'll now like to turn the presentation over to Sue Dooley. Please proceed.

[Sue Dooley:]

Thank you. Hello, everyone. Welcome to Vocera's conference call to discuss our first quarter fiscal 2021 earnings as well as the acquisition we announced today. This is Sue Dooley of Vocera's investor relations and joining me today are our CEO, Brent Lang; and Justin Spencer, our CFO.

[Brent Lang:]

Thanks Sue. Hello everyone. I hope you're all doing well. I'm pleased to report that 2021 began with an outstanding Q1. We continue our strong momentum from Q4 winning more new customers and expansions from existing customers. We start Q2 feeling great about our market position, financial outlook and product differentiation and are excited to share the latest updates on our business. We have a lot to cover on today's call. So I want to give you an idea of what to expect. First, I'll review the highlights of the first quarter along with a market update, and then I'll comment on our acquisition of PatientSafe that we announced today. Finally, I'll turn the call over to Justin and Steve who will go into detail around our Q1 results and discuss the financial aspects of today's M&A transaction and its impact on our guidance. After concluding our prepared remarks, we'll open up the call for your questions. Let me start by reviewing the highlights of Q1. We began the year with strong performance throughout our business continuing the momentum we had last year. COVID specific demand is being replaced by a broader awareness of the importance of our value proposition raising the priority of our solutions and translating into great performance in our business. Our field team executed well and delivered excellent Q1 bookings, and our services organization utilized our clinical and technical expertise to effectively deploy our solutions in some very strategic accounts.

[Justin Spencer:]

Thanks, Brent. Hello, everyone. We had a very strong start to the year exceeding our expectations across the board. Total revenue in Q1 was $48.7 million, up 20% over last year. Product revenue, which includes both devices and software increased 27% to $22.6 million. Device revenue increased 10% to $15.3 million, which we were pleased with considering that Q1 last year was such a strong quarter for bad shipments. Additionally, our Smartbadge momentum continued as we shipped a record number of units in Q1, including deliveries to several large customers.

[Steve Anheier:]

Thanks Justin and hello everyone. I'd like to start off by saying how much I have enjoyed working with Justin over the past few years. Now turning to the announced acquisition and guidance, I'll start by providing a financial summary of this transaction, and then talk about how the acquisition impacts 2020 guidance. The acquisition is an all-cash debt-free transaction of approximately $35 million. Much like our previous acquisition of Extension Healthcare and Ease, we are acquiring a software based high-margin business that nicely complements our product portfolio. While the acquisition will only add a modest amount of revenue in 2021 to the standard purchase accounting and associated deferred revenue adjustment, we expect it to contribute roughly $10 million in 2022 to revenue. I like to take a moment to discuss the PatientSafe revenue model. Historically, the company has sold licenses with multi-year terms with software revenues being recognized up front and then maintenance revenue over time. However, as the solution eventually moves to the cloud, we see an opportunity to grow and expand feature recurring SaaS subscription revenue. We plan to quickly integrate the business into our existing organizational structure to help us realize the cost synergies we have identified, and focus our investment on the cloud-based product capability. We expect to fully realize the cost synergies over the next 12 months to 18 months at which point we believe the acquisition will be accretive to our business. Now turning to guidance, reflecting on the revenue, we expect from this acquisition in 2021, we are increasing our annual revenue guidance to a range of $218 million to $228 million. The strength of our recent large booking increases our confidence in the priority being placed on our solution in the long-term growth and visibility in our business. As Brent and Justin discussed, the large enterprise bookings typically have longer deployment time and therefore, are projected to have a much greater impact on revenue beyond 2021. Our key drivers for revenue continue to be healthy, including our bookings, backlog, and deferred revenue, which provides strong visibility into 2021 revenue. We want to emphasize that we continue to expect approximately 45% of our revenue to occur in the first half of the year, and 55% of revenue in the second half of the year. Turning to guidance for profitability. We now expect adjusted EBITDA 2021 to be in the range of $26 million to $31 million, reflecting the impact of the acquisition. We expect to see our typical pattern of higher adjusted EBITDA in the second half of the year both from the increased revenue and ongoing realization of acquisition cost synergies. The rest of our GAAP and non-GAAP guidance, which now includes the expected impact of acquisition and our recent financing can be found in our press release. In closing, we are very pleased with the financial results in the first quarter and our overall business momentum. With this acquisition, we have an opportunity to accelerate our progress in our market and over time a greater reoccurring high margin software revenue. This is a transaction that aligned closely with our existing financial story and has a compelling long-term strategic and financial profile. Thank you for your time. I look forward to working with all of you in the future. And now, I will turn the call back to Brent.

[Brent Lang:]

Thanks Steve. I'm really excited to be working with you through this transition, and as you step into the new role as CFO of Vocera. I'm happy to have you meet our investors on today's call. I look forward to a busy quarter of investor outreach with you during Q2. But also, I'd like to take a moment to thank Justin who has been a great partner to me for several years now. He has contributed so much to the building of our culture, growing our business, and bringing Vocera to where we are today. We wish you the best in your next chapter. Before we conclude, and as a follow-up to our last call, I wanted to let you know that we have recently published our initial framework for ESG. This is an important step for us, and we are excited to share the framework with you. I hope you will take some time to review it on our website. Our business is performing well and our uniquely differentiated solutions are in high demand. We began the year with great execution achieving impressive Q1 bookings, accelerating our revenue growth, and making an important strategic move with the PatientSafe acquisition. We have a resilient business, loyal customers, a strong cash balance, a powerful selling engine, and a large market opportunity in front of us. I am excited about our future. With that, we will conclude our formal remarks. Thank you for listening today. Operator, we're ready to open the line for your questions. Thank you.

[Operator:]

Our first question comes from Sean Wieland with Piper Sandler. Your line is open.

[Sean Wieland:]

Hi. Thanks so much. So my one question is around PatientSafe, and I want Steve to start with you. Congrats, on the new role. I want to confirm that the guidance change is entirely related to the acquisition, or were there some other moving parts in that.

[Steve Anheier:]

Hi, Sean. Well, thank you for that. And yes, that is to confirm that the guidance change entirely reflect the effect.

[Sean Wieland:]

Great. So now on the integration strategy with PatientSafe, are there any overlaps broadly for the team. Any overlaps with engaging in and if you can maybe talk a little bit about how the two complement each other.

[Brent Lang:]

Hey, Sean. So there's clearly some overlap in the products. We are competitors or we're historically competitors in the marketplace but we see the products as more complementary than competitive. The overlap is less on the engaged side and more on the smartphone communication side of our business. But what we found when we looked at the marketplace was that the customer base that they were serving was pretty complementary to our customer base. They tended to focus on smaller and regional hospital facilities where we are more focused on the larger facilities. And that combined with the fact that they had a more of a smartphone-centric approach to the business and the cloud-ready capabilities of their product offering meant this could be really complementary to our business and an opportunity to consolidate and build share and expand our reach within the market.

[Sean Wieland:]

And Justin, thank you. And just one more on the financial side, are there any acquisition-related intangibles any that can be written off that's going to mess with numbers?

[Steve Anheier:]

No, Sean. So you'll see the acquisition-related costs going through our updated adjusted EBITDA. I think from a bigger picture perspective, we've taken down EBITDA, but PatientSafe will be breakeven next year then accretive thereafter and what we're really excited about is the software-based business, high margins and it's really nice into our long-term financial profile.

[Sean Wieland:]

Superb. Thanks so much. And Justin, best of luck.

[Justin Spencer:]

Thank you.

[Operator:]

Our next question comes from Sean Dodge with RBC Capital Markets. Your line is open.

[Sean Dodge:]

Thanks for taking the question. I'm just telling you there's a little bit more about your partnership with status solutions and maybe some of those opportunities' you guys are seeing in the long-term care space?

[Steve Anheier:]

Yeah, you can draw a lot of parallels between what we're doing with status solutions and what we're doing in the acute care market around delivering situational awareness and contextual insights to caregivers status solutions product is really designed as an integration tool that connects us to many of the others monitoring systems and clinical solutions inside the long-term care facilities and was a different set of integrations and a different set of clinical data. And what we are typically integrating within the acute care marketplace. So there are some parallels to what we do with engaging within the acute care marketplace. And we saw this as a way of delivering some of the same value proposition into this newer market opportunity. And we're really excited about the partnership with status.

[Sean Dodge:]

Congratulations Steve. And best of luck, Justin.

[Justin Spencer:]

Thanks, Sean.

[Operator:]

Our next question comes from Ryan Daniels with William Blair. Your line is open.

[Ryan Daniels:]

Yeah, thanks for taking the questions team and Justin and Steve, wishing you both the best in the future. Maybe we could start again with the transaction. I want to understand if you think there's an opportunity to cross-sell into your existing client base. Obviously, you've got relationships with large systems, but those systems often have smaller facilities and probably ambulatory offices, ASCs. So is there a kind of land and expand strategy there as well where you can leverage your base to sell and maybe facilities that your current product offering wasn't as applicable for?

[Brent Lang:]

Yeah, absolutely Ryan, that's core to the strategy. When we looked at their customer base there and around 85 hospitals today, there were portions that were unique that there was no overlap in. And as I mentioned, many of those were smaller facilities. And then there was a portion, maybe a third a little less than a third that was actually joint customers where the health system was using the center and certain parts of the environment and the PatientSafe solution in other parts of environment with different groups of users. And so we do think that there's a natural synergy here. We also feel that as the movement toward class or super sell rate there may be customers who want to have a portion of their customer running and the cloud solution. And then finally, I think we realized that there were just deals that we were not even aware of or maybe even being invited into. I think there's still a little bit of legacy associated with Vocera as the best company or whatever that may prevent us from getting visibility into some of the more smartphone-oriented deals. And so, this is a great opportunity to extend our reach there. But we see the products working very complementary together, and we definitely see this as a way of really accelerating our ability to penetrate all of our TAM as opposed to more the higher end of the marketplace that we've been focused on over the last couple of years.

[Ryan Daniels:]

Okay makes a lot of strategic sense and then one quick follow-up if I could. You mentioned the largest bookings in company history. I think it's a part of Barnabas, but why I want to check that. Number 2, more importantly, can you just discuss in a little bit more detail what led to the selection of Vocera there. I assume given the size of it was probably a highly competitive bid. So talk a little bit about some of the key things that help Vocera win that. Thanks.

[Brent Lang:]

Yeah. Ryan thanks for clarifying the question. Actually, if we have, we have a wealth of riches this quarter. So the same Barnabas deal was a very large deal in Q1. It was close - it was one of the top deals we've done in the history of the company., but that's separate from the deal that I was talking about in Q2, which was in fact the largest deal in the company's history. And we're not disclosing to that health system is at this point in time. But those are two separate deals, one in Q1 and one in Q2. I think part of this deployment was a situation where we have had a small deployment with them for a number of years and also had a deployment as I mentioned in the prepared remarks with the Ease Solution. So both solutions had a footprint in the marketplace. A big part of what drove the expansion was expanding the use of engaged to a broader set of users in use cases and then rolling off communication solutions across the marketplace. I think that's the classic case where we're looking at hospital customers who are looking to reduce the number of vendors that they're wanting to work with. They're looking for a unified platform that they can handle for voice messaging, clinical learning, and alarming, and having all kinds of run together with a common database and common administration from a trusted brand with the professional services to back it up and a long history of having delivered positive outcomes for them. So they were able to measure the impact of our solution in their environments and they were able to use that to justify the expansion out to the broader health system.

[Ryan Daniels:]

Perfect. Thank you for that color. And again, best of luck to Justin and Steve. Thanks, guys.

[Operator:]

Our next question comes from Scott Schoenhaus with Stephens. Your line is open.

[Scott Schoenhaus:]

Hey, thanks for taking my question. And Justin, best wishes for your next journey and Steve congrats, again. So all my questions regarding the new PatientSafe acquisition I mean, let me go back to some of your legacy business and ongoing opportunities there. So, my first question is about federal certification. You guys received at the end of March, you guys are over 55% penetrated in the federal market exposure across over 100 hospitals, and some of these federal contract - contracts start to come up for renewal from 2016 when they were first signed or when they were signed. Can you provide some color on the up-selling opportunities here in the federal market from your legacy standard badge to the Smartbadge?

[Brent Lang:]

Yeah. It's something we're really excited about. The federal team has been waiting to get its certification and they have been talking about Smartbadge with the customers and the DHA with you both the customers as you mentioned and a large number of those VA customers, in particular, have badges that are reaching the three-to-four-year typical, useful life and many of them are now out of warranty. And so we do think that there's a replacement cycle that we can now pursue and the advantage of getting with its certification now early enough in the year that we can actually respond to this and sell into this marketplace during this fiscal year for the federal government, which would end at the end of September was an added bonus for us. And so, we had previously communicated that we were hoping to get this certification in the first half of the year. Now with the book and COVID and all those sorts of uncertainty within the federal government, there was some question in our mind as to when exactly we would get the certification. But I would say that this ended up happening sooner than we originally anticipated. So we're happy with that result and the sales team is now going to go back and start those conversations with their installed base customers about that the upgrade and replacement cycle.

[Scott Schoenhaus:]

That's a great color. Thanks, Brent. And I guess as a follow-up. You mentioned briefly about your Ease software. Can you talk more about the traction you're seeing there with the cross-selling? Correct me if I'm wrong, but if you're at 60 hospitals that had when you first acquired Ease. And just talk about kind of where you're cross-selling? Where you are in these cross-selling opportunities and where they can go in the next 12 months. Thanks.

[Brent Lang:]

Yeah. I think at the time of the acquisition it was closer to 80 customers that were using the product. And we continue to cross-sell. We're happy with the progress we're making there. The team is executing really well. We are continuing to invest in that business. We've added those salespeople and engineering and services people to that business unit to help them match the growth that they're seeing in the marketplace. And we're making introductions. I think it's in some cases, it's a different decision-maker, so it's not an automatic cross-sell but at least we have a relationship with those customers and we can use that to open doors. I would say that so far, the acquisition has exceeded our expectations in terms of the growth of new customers and overall revenue.

[Scott Schoenhaus:]

Thanks Brent.

[Operator:]

Our next question comes from Gene Mannheimer with Colliers Securities. Your line is open.

[Gene Mannheimer:]

Thanks, everyone, and great, great quarter and start to the year. I joined the call a little late, but can you tell us on PatientSafe. I mean this is a company that's been around for nearly 20 years and in various forms and iterations. Just curious what does - what these patients say forgive you that you don't already do or that you couldn't build yourself? And why is now the right time to acquire? Thanks.

[Brent Lang:]

Yeah. Gene, it's a great question. And you're absolutely right. The company has been around for a while. It has pivoted its strategic market focus a couple of times during that period time. You may remember early on they were in the med administration and bar-coding business and only in the last few years have pivoted moreover to the clinical communications and clinical workflow side of things. And they were a competitive product as I mentioned before, but serving a slightly different part of the marketplace. So for us, number one is really extends our reach into the middle and small hospital market. 70% of the US hospitals are less than 200 beds. But if you look at our installed base, only about 50% of our customers are less than 200 beds. So we are underpenetrated in the small to medium-sized hospital marketplace. If you look at PatientSafe customer distribution they're much more oriented toward that some 200-bed hospital market space. Secondly, this adds some great high-margin software revenue and recurring revenue streams to our business, particularly ones that we converted to a true fast cloud-based offering. We are on a march to add more fast-paced revenue to our business, and so we saw this as a great opportunity to do that. Third, we were really impressed with the product that they built. It was a cloud-ready product it was designed for the cloud in mind from the very beginning, smartphone-oriented solution and a little lighter touch. So for IT organizations it may not have the resources to manage an on-premise solution and are looking for something that's a little lighter touch. This seems like it's a really good match for that into the marketplace and will allow us to target a portion of our TAM that we hadn't penetrated very heavily in the past. And we see this as an opportunity to sort of drive down the total cost of ownership for those types of customers. And I think fourth, we were quite excited about the level of EMR integration that they have developed in the product around transitions of care working with the major each our companies, and part of their selling strategy had been in kind of an EMR compatible or EMR companion mode where they were augmenting some of their core capabilities that the EMR was driving in. For customers who sort of made a strong commitment to the EMR mobile applications whether that's at the Grover or some of the other mobile clients, we see this as a great opportunity for us to augment those environments and really have an important role to play forward. So strategically, it's a great way to increase our market share and consolidate the market a little bit and add some great strategic revenue streams to our business.

[Gene Mannheimer:]

Great, Brent. I appreciate that. Makes a lot of sense. Thanks.

[Operator:]

Our next question comes from Matt Hewitt. Your line is open.

[Matt Hewitt:]

I guess software sounds like it was an area of strength during the quarter. Could you give us an update on the Engage product specifically, and how they attach rates for that that have been trending lately?

[Justin Spencer:]

You bet. The software is a real bright spot for the quarter up over 85%. And we've been having a lot of success at selling our software really the broader platform, which includes Engage. And we attach rates are very high. In fact, Engage in many instances is actually one of the leading areas of the product for the solution that customers start by becoming interested in and then it often grows beyond that to a much broader communication place. So there are - now we have over time gradually increase the penetration or the rate at which our customers have Engage and there's now a very meaningful portion of our base that has that. There's still more growth. We think is that we can do and in more expansion within our installed base, but we're just really, really pleased with how that product has performed both individually in terms of its contribution or our software but more significantly because it allows us to get deeper and deeper into the clinical workflow of the hospital and that makes our solution even that much more sticky. And there's a nice recurring component to it through the maintenance contracts that we have associate with that software.

[Operator:]

Our next question comes from Stephanie Davis with SVB Leerink. Your line is open.

[Stephanie Davis:]

Thank you for taking my question. A lot of my thoughts on the PatientSafe acquisition on our behalf, I have a little bit of an out-of-the-box question. As a result, we've seen some of the tech names start to raise concerns around the microchip shortage and follow-on supply chain issues that they have a hardware component. So two parts, first, are you seeing anything band the supply chain side just given it could be a little bit less adjacent beyond your Smartbadge solution? And secondly, what does your cadence look like booking a new RAM to fulfilling the full badge order?

[Justin Spencer:]

Hi, Stephanie. Yeah. You're exactly right. There is a broad-based concern for around components currently in the overall supply chain more broadly in the industry. I will say that we anticipated this. And we have historically maintained and if it's actually been building a little bit more inventory that we have added over the last few quarters to hedge this risk. And so we feel very comfortable given the amount of inventory that we currently have on our books that we can just continue to manage this. But we're obviously, watching it very, very closely. We do stay in very, very close contact with our two contract manufacturers that manufacture our badges. And feel like we've got very good visibility to our specific and unique supply chain. But we have purposefully built one inventory just to give us the buffer that we feel that we need to continue to satisfy demand. You know in terms of the timeframe. Typically it varies by customer. You know somebody of these larger customers that we've recently, but won't likely take delivery of barges for several quarters. On the other hand, if we receive a booking from an existing customer, they're oftentimes wanting that product fairly quickly. So we design our supply chain to be able to respond. We never want to be in a position where we're not able to if the customer wants those badges sooner rather than later. And we feel like we've got an adequate level of inventory to manage through this over the next several quarters.

[Operator:]

Our next question comes from Michael Polark with Baird. Your line is open.

[Michael Polark:]

Hey, good evening. Just a couple of numbers questions on the deal so perhaps it's for Steve. The $10 million of revenue for 2022 got that. For 2021 guidance adjustment as all the detail that's on revenue $3 million. But that's restrained because it's the partial year and there's the accounting adjustment. So what is kind of a pro forma - but what is PatientSafe they've expected to do for 2021 on a pro forma basis. I'm getting to like $7 million, is that the ballpark?

[Steve Anheier:]

Yeah. Hi, Michael. So I think you had the right factors absolutely where it is a pro-rated year, so our revenues from May through December instead of the full year. And then you have your standard purchase accounting adjustments. And yes, you are in the ballpark to your number.

[Michael Polark:]

Perfect. And then on the margin profile, several solutions to higher margin revenue stream can you perhaps help us with a finer point or a range on what their gross margin profile looks like.

[Steve Anheier:]

Sure. Without getting into too many specifics you know as this expands over time, we do see software based high margins. And what I'll say is though we add Vocera above our standard margins right now. So it should be accretive to our business just because there's a software nature.

[Michael Polark:]

Yeah, got it. Thank you.

[Operator:]

Our last question comes from Dave Windley with Jefferies. Your line is open.

[Dave Windley:]

The question got a lot left to ask, but Brent in your prepared remarks you talked about the services team managing a full schedule of a mix of on-premise and remote deployment. And I wondered as we kind of get closer to pulling out of restricted access, how much of that deployment do you anticipate will be permanent - remote? How much can be virtualized on a permanent basis?

[Brent Lang:]

Hey, Dave. Yeah. Great question, I think it's too early to know, but we're excited about the prospect. Obviously, there are some great synergies associated with doing more than work remotely both in terms of people's time and travel expense. I've been really happy with the way the teams have innovated and redefined some of the processes. There's always going to be a demand for onsite capabilities and so it's not going to stay as low as it has been during COVID. But we challenge the teams to sort of think about driving more efficiency and synergies with more remote work. And we're building tools actually to allow us to do more remote analysis and remote monitoring as well. So I can't give you a specific number, but I think it will definitely be more remote than it was historically, and we were actually really excited about the virtualization of our business more broadly both in services and sales in marketing and even in investor relations. So there are some great opportunities across the board.

[Dave Windley:]

And I have to try to launch one when it's virtual, I guess. The other question I have for you is if you could provide us with an update on renewal rates in your support line and maybe unofficial metric, but as you are engaging with clients around you like you mentioned some of these deployments in the federal that are three or four years old and you're coming back around replenishment there. What might we think about as a revenue up sell as a typical metric expansion of your relationships as you hit these renewal points? So kind of renewal rate, but then also what's the revenue on those renewals growth.

[Justin Spencer:]

Yeah. Hi Dave. So we continue to see very high rates of all of our software maintenance contracts including our federal business. And we've stated publicly that those are in the mid to upper 90s and that's - that was the case in Q1 and we expect that will continue. And I think it's just a great reflection of both the stickiness as well as the loyalty and the utility of solution that our customers have. You know our software maintenance is not inexpensive, and so we recognize that and we aim to really deliver great value for that in exchange for the revenue and the fee that we usually charge there. The upside opportunity and the fact is there's a great opportunity I would say. It's going to be very fluid and it's not like there is a kind of a massive wave of upgrades coming right away. I think it's going to be gradual over time. The Smartbadge the first certification on a Smartbadge is a great new development for us that we're excited about it. And certainly, for those customers that have badges that they purchased back in 2015, 2016, and 2017 as Brent mentioned. Those will eventually need to be replaced, and so over time, we believe that those customers will do that either by purchasing new badges or we hope also the Smartbadge. Each sale that we make is different and unique. We have some customers that are smaller in the Fed space where the initial size was in that few hundred thousand dollars range and then we have many other hospitals that were much larger than that. And so each up-sell opportunity or cross sell opportunity will be differences depending on who the customer is, but our federal team is actively engaged now and on top of all those opportunities.

[Dave Windley:]

Sure. Thank you.

[Operator:]

There are no further questions at this time. I'll turn the call back over to Brent Lang for closing remarks.

[Brent Lang:]

Thank you. And thanks, everyone for taking the time to join us today. We're really happy to share our Q1 results with you and rationale behind today's acquisition and we look forward to continuing the dialogue with you in the quarter to come. Have a great day.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect.