Vocera Communications, Inc.
Q1 2018 Earnings Call Transcript

Published: 27 Apr 2018

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to Vocera Communications' Conference Call. My name is Josh and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the presentation over to your host for today's call, Sue Dooley, Vocera's Director of Investor Relations. Please proceed.

[Sue Dooley:]

Thanks very much. Hello, everyone. Welcome to our conference call to discuss Vocera's first quarter fiscal 2018 earnings. This is Sue Dooley and joining me today are Vocera's CEO, Brent Lang; and Justin Spencer, our CFO. We distributed a press release detailing our quarterly results earlier this afternoon. 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 will 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'd like to turn the call over to Brent.

[Brent Lang:]

Thanks, Sue. Good afternoon everyone. Thank you for joining us. Our first quarter provided a strong start to the year. We had another large strategic win at New York, Presbyterian made continued progress in our international markets and had good success cross selling and expanding our business. We also grew our product leadership position in the market with the introduction of Collaboration Suite 3.3 as well adding significant new integrations. First quarter revenue was $40, up 10% over the recast Q1 numbers from last year as a result of the new revenue accounting standard. Our leading software platform continues to have significant impact in the market. The completeness of our solution is becoming a meaningful differentiator for us and our wins are validating this impact. Our Engage Software continues to succeed with a marquee new customer wins. We are particularly excited about our large deal pipeline that has grown substantially as we began the year. Today, I will review some of the highlights of the quarter and showcase some major customer wins, cover some details from HIMSS and discussed the market environment before giving Justin an opportunity to review our financials with you in more detail. The highlight of the quarter with a $1.8 million dollars booking from New York, Presbyterian. This premier health system has launched an initiative to address alarm management and will use our Engage Software to reduce alarm fatigue. This transaction replaces a competitor's middleware offering and will cover 1,500 beds in the initial rollout. This win is an example of, our approach to selling our solution to strategic accounts at the C suite level to solve their unique pain points. We are thrilled to be their partner in this initiative. This win also illustrates how the addition of Engage to our software platform has changed the tone of the conversation and secures us a meaningful table with customers as they set their IT spending priorities. This quarter, we successfully cross sold our solutions to several customers including UNC's Nash Hospital and Kaiser Permanente. Nash in process of replacing a competitor with Vocera and will be integrating their clinical alarms by our Engage Software. In another example of across selling, Kaiser purchased our communications platform at two different facilities in Southern California which were existing Engage customers. We feel a lot more opportunity with Kaiser in the near future. Our business with existing customers was also healthy this quarter with expansions and supplies delivering growth and software maintenance and support services continuing to produce a very high renewal rate. The notable expansion including Hoag, Gather Health and Intermountain which is standardizing on Vocera. We also had a healthy badge refresh at a couple of long time VA customers. Our international business had a strong Q1, reflecting the impact of our additional focus. After completing clinical assessments, our team in the U.K. booked a sizable badge refresh with Altnagelvin Hospital in Northern Ireland. We think this sale shows a meaningful commitment to our solution and demonstrates a growth potential of our installed base. Another significant achievement was gaining approval from the Medicines & Healthcare Products Regulatory Agency to sell Engage in the U.K. We continue to invest in international and are gratified by our success and pipeline growth this year. International remains a top priority for us in 2018. Deployments of our solution continued on schedule. Our professional services expertise remains a meaningful differentiator in helping our customers achieve real improvements in their communications and workflow counter. One notable go live in Q1 was the 400 bed Yuma Regional Medical Center in Arizona. This is a terrific land and expand case study. Back in November 2015, we add Yuma's emergency department as a new customer. In Q2 of last year, the hospital went house-wide with a large experience in replacing in building wireless phones that were chronically dropping calls between care team members who are struggling to locate one another. The sale including 35 departments which are using our communication solution with both badges and smart phones. As of the mid-March go live date, Yuma is leveraging our integrations into nurse call and is using our care team sync software to ensure the care team information about each patient is up to date and available. Progress rolling out our solution in the VA and DoD continued as expected. We completed the professional services milestone through five MEDCOM go live in Q1 and we are progressing within the VA with both our communication and Engage Software Solution. We expect the remainder of the year will continue to be busy for our central deployments. On the integrations front, our customers continue to expand the use of our solutions and the number of integration our platform currently supports has grown to 140. We have just completed our first two integration for position on call schedule with market wheeling vendors MIN [ph] and QGenda. On call assignments information oddments existing staff schedules and expands the view of the care team. It strengthens our ability to deliver timely results and notifications to the most appropriate clinician no matter where they are. These integrations represented important step for Vocera as we seek to increasingly engage physicians in clinical communication collaboration. During Q1, we had a great HIMSS, we were pleased to see many of you at our investor event, where Joe showcased a few of the compelling ROI studies that won Parkland, the Prestigious HIMSS Davies Award this year. HIMSS is always a critical regeneration in customer event for us. This year, we had a major product introduction to the lineup. I'd like to spend a few moments on product launch and then we'll go into some regeneration metrics in details on the customer activity. At HIMSS, we introduced the benefits of real time situational awareness through the use of our new Collaboration Suite 3.3 three and Engage Software integrated together. Reaching the right care team members to avoid respond delay, this is critical for any communication platform today. Prioritizing and intelligently routing alarms and alerts to provide actual information to the right caregiver is a core benefit of our Engage Software. Our Collaboration Suite 3.3 takes the conversation to the next level. Real time situation awareness provides actionable, patient specific clinical and operational data including demographics, lab date and care team rosters. By making this information, part of the communication flow and informing clinical decisions, we have turned the paradigm upside down and made a patient the central focus for all communication. This enables the care team to make better informed decisions with actionable and accurate patient data at their fingertips. Our patient centric approach to real time situation awareness is resonating in today's complex and distorted care delivery system. Because of the breadth and depth of our solution, we can equip care teams with a robust and secure platform that interoperates with many other components of the care team ecosystem. Now on to regeneration, a major component of our HIMSS initiative. Our booth constantly busy with customers requesting demos. In fact our booth traffic was up over 50% this year, while HIMSS attendance was only up 4% overall. We conducted a record number of customer meetings which is a great way to build pipeline for sales team. HIMSS was also an effective platform for our customers to showcase their use of our technologies to achieve operational efficiency and patient satisfaction. Three of our customers were headline speakers this year. [indiscernible] Health recaps to their surface integration using Vocera and leveraging our badges as the last mile solution. Island Health accepted an award for healthcare innovation and highlighting the efficiencies gained by integrating clinical communication into their healthcare practice. And while presenting on best practices for patient engagement, the University of Chicago called the care experience a game changer. I also enjoy HIMSS, because I was able to spend time with existing customers to learn how they are innovating new ways to put our solution to work. One of my favorite meetings with Phoenix Children's, who is extending the value of Vocera to their patients with simple nudge reminders to the nurses' badge of the time of discharge. As a result, nurses can help patients remember to collect medications they brought from home or fresh med and they have stored during their stay. If left behind after discharge, these valuable patient belongings otherwise be thrown away and can result in great waste. Overall, Vocera commanded a strong presence of HIMSS, sending a message loud and clear that we are the leading provider, player in the healthcare communication and collaboration space. Now I'd talk for a moment off the market. In my interactions with hospital executives, improving margins and quality healthcare consistently rise at the top of their priority list, cost of those major reduce cost and waste by eliminating friction and bottlenecks and streamlining operations. And other area is on enabling physicians and nurses to do their job with less stress, spend more time with patients and give them better access to the resources they need. In our conversations with hospital leadership, they're increasingly striving to help their clinicians, maintain a level of resiliency that will keep them from leaving the profession. Just this month, we heard reports of the nursing shortage that is driving hospitals to make extreme moves including signing bonuses and educational credits to attract and retain nurses. American Nurses Association estimate the U.S. will need to produce more than 1 million new by 2022 to fulfill the country's healthcare needs. Hospitals are looking for ways to avoid burnout and retain vital care team members. And our vision to deliver workflow solutions to eliminate friction points along the patient's journey is resonating in the market today. We believe the pursuit of the quadrupling goals will eventually transform healthcare resulting in a large and expanding market opportunity for our solutions. One example of this is our work with major health partners in Southeaster Indiana. Major health is documented improvements in both clinical workflows and patient satisfaction as a result of using our solutions. A year after integrating our solution with the hospitals, EHR, telephony and nurse call system, the hospital reported a 5% increase in on time surgical starts. In the emergency department, they reported decreased door to decision time as multiple departments are able to efficiently collaborate on patient assessments and either quickly begin care or distort the patient. In addition, both patient experience and noise levels have improved measurably. Our technology continues to help us win in the market. Our ability to offer software functionality across a range of devices remains a meaningful differentiator for us. We see our customers providing workers with hospital owned devices specific to their needs. As a result, the hospital benefits by maintaining control of the devices, the security and the data. Our wearable badge remains instrumental for those care team members who operate close to the patient and require hands free access to clinical communications and collaboration. And as a result, this quarter, we had healthy device bookings. We continue to believe a combination of real time voice, secure texting and deep clinical integration wrapped into a single platform is essential for hospitals looking for a long term solution to their communication and workflow challenges. The marketplace is demanding a unified platform that delivers this combined functionality throughout the patient journey and across the health system. Our complete platform combined with our large customer footprint and unparalleled experience in implementing communication solution is unmatched in the industry. It's an exciting time for Vocera as we strive to grow the business and accelerate towards our profitability goals. I'm gratified by our continued progress in Q1 and our enhanced position in the market. Strong momentum in the business is continuing with strategic new customer booking, successful large scale deployments and high customer loyalty. Now I'd like to give Justin a chance to cover the financial details around our Q1 results and our guidance for Q2. Justin?

[Justin Spencer:]

Thanks Brent. Hello everyone. Vocera's first quarter results represented a strong start to our year, highlighted by year-over-year growth in revenue, profitability and cash flow. As a reminder, all numbers now including comparisons to 2017 reflect the new 606 Standard. Total revenue in Q1 was $40.2 million, up 10% compared to last year. Product revenue in the quarter was $21.1 million, up 5% from last year. Our device revenue was $12.6 million compared to $14.1 million last year. As a reminder, our device revenue last year included a large portion of hardware associated with the U.S. Army MEDCOM deal that we booked in 2016. But as Brant just mentioned, we had healthy devices bookings in Q1 and we continue to have a strong pipeline of device business across our new and existing customers. Software revenue grew 41% to $8.4 million, representing 21% of our total revenue. Our enhanced software platform continues to be a key driver of our growth, highlighted by a several cross sales and large deal at New York, Presbyterian. In addition, we continue to see celebrating adoption of our mobile smartphone solutions across the broader base of users. A significant number of our new customer bookings over the last few quarters have included either Engage or our Smartphone software. Most of our R&D spending is focused on our software popcorn and mobile solutions and we continue invest in this area to further distance ourselves from competitors. Services revenue in the quarter was $19.2, up 15% from last year. Our professional services revenue grew 13% to $5.2 million as a result of converting our backlog for our implementation services. The other large portion of our services portfolio is software maintenance and support. With our growing customer base and a renewal rate well above 95.5. Our software maintenance and support revenue grew 16% to $14 million. As a reminder, this revenue is all recurring and was approximately 35% of our total revenue. Now I'd like to make a few comments about our backlog in differed revenue. In addition to our disclosure of our deferred revenue on a quarterly basis, with the adoption of the 606 guideline this year, we will now also disclose our backlog each quarter. I'll provide the numbers for Q1 first and then I would like to add some important context. At the end of Q1, our backlog with $54.8 million and our differed revenue was $54.4 million. The combined balance was $109.2 million, down sequentially from Q4 2017. This quarterly decrease is typical in our business and was expected due to a normal seasonality. In fact, the quarterly decrease from Q4 2017 through Q1 2018 was much smaller than the sequential decrease a year ago. With this an enhance disclosure, I want to remind everyone three things that we have discussed in the past and which will hopefully help you to evaluate these metrics as we record in the future. First, our bookings are quite seasonal. As a reference, over the last two years, an average of 39% of our bookings [Technical Difficulty], while 61% were in the second half. This booking seasonality tends to cause large changes in our backlog and deferred revenue from one quarter to the next, which is what we believe a longer term view of the metrics at most appropriate. Second, we've seen a shift in mix between backlog and deferred revenue as a result of our transition to more of a software driven business. During the transition, our deferred revenue has grown faster than our backlog because we have a larger base of customers on software maintenance contracts. Deferred revenue today represents 50% of the aggregate balance of deferred revenue backlog, whereas two years ago it was 40%. It is also up on a percentage basis compared to Q1 last year. This trend has been favorably influenced by the larger deal sizes and deployments that we've seen over the last few years. Lastly and in keeping with what we said last quarter, we expect to be able to convert our backlog for bookings to revenue more quickly under the new accounting guidelines, thus requiring less backlog to meet our near term revenue objectives. While we always strive to build as much backlog in deferred revenue as possible, we've expect benefit from being able to convert a higher percentage of our bookings to revenue in a given period. Because of these factors, we believe the best way to evaluate our backlog in deferred revenue is on a combined basis over a longer term horizon and will therefore not likely provide additional commentary on that until the end of the year. I like now turn to profitability, another bright spot for the quarter. GAAP and non-GAAP profitability improved substantially compared to last year. Specifically, adjusted EBITDA was $1.8 million well ahead of our expectations. We also achieved positive non-GAAP net income in the first quarter, another milestone on our path to profitability. Now, here's some more detail on our non-GAAP margins and operating expenses. Non-GAAP gross margin in Q1 with 63% better than we expected and driven by a favorable revenue mix that enabled us to leverage our fixed costs. Product margin increased year-over-year to 74% on the strength of our software revenue. Our services gross margin was 52%, reflecting the higher utilization of our technical support and professional services teams. Non-GAAP operating expenses were $24.2 million in Q1, up 2% versus Q1 last year. Our operating expenses were 60% of revenue compared to 65% in Q1 last year. We continue to remain focused on becoming more efficient throughout our entire business as we scale. I'd like to wrap up my Q1 remarks with a brief comment on our cash flow and balance sheet. We added slightly to our cash balance in Q1, thanks to strong management of our working capital. We continue to have a very strong balance sheet with nearly $82 million of cash, a positive cash flow generation profile and no debt. With that, let me turn to guidance. Revenue and profitability are off to a strong start the year. Along with our backlog and deferred revenue levels, our healthy sales pipeline for bookings will be important to our growth through the remainder of the year. Our view of our business for the full-year remains unchanged from when we initially provided guidance. Therefore, we reiterate the annual revenue guidance for 2018 of $175 million to $183 million, and adjusted EBITDA of $14 million to $20 million. For the second quarter, we expect revenue to be between $39.5 million and $43.5 million, and adjusted EBITDA to be between $500,000 and $3 million. This quarter's guidance is in keeping with our previous comments about the typical seasonal pattern in our business, in which roughly 46% of our annual revenue is expected to occur in the first half of the year. In summary, we were very pleased with the financial results in the first quarter and the start to a year. We've remained focused on great sales and operational execution in Q2 in order to set us for a strong second half of the year. I'll now turn it back to Brent.

[Brent Lang:]

Thanks, Justin. In summary, I'm pleased to the start of the Q1 provide 2018, and I believe our success underscores the strategic importance customers are seeing in our products. With highly differentiated solutions and a large market opportunity in front of us, we are excited to build upon this momentum. We look forward to making a difference to the hospital bottom line, as well as to the quality of care and staff experience. There are two different items I want to mention. First, Becker's Hospital Review just announced Vocera is among the top 150 places to work in healthcare for the third year in a row. I'm really proud that we made the list again this year. And finally, as we announced last week, Bob Zollars will be transitioning off the board in June of this year after 11 years of service to the company. I will be taking over the Chairman role and Howard Janzen will continue to serve as the Board's Lead Independent Director. I want to thank Bob for his many contributions to the company both as CEO and Chairman and for the tremendous support inside in guidance that he has provided over the years to help the company succeed. Thank you for listening today. Operator, we're ready to open up a call for your questions. Thank you very much.

[Operator:]

[Operator Instructions] Your first question comes from the line of Ryan Daniels with William Blair. Your line is open.

[Ryan Daniels:]

Yeah, thanks for taking the questions and congrats on the strong start to the year. Brent, maybe one for you. It seems like a bit more focus on the size of the pipeline and your excitement there and particularly in regards to the larger potential enterprise accounts. So can you speak to that a little bit more about what's driving that maybe the sales investments you've made to capitalize on that and perhaps you could even use Kaiser as a case study with their recent purchases and how they could change from kind of these one to two offs to a broader system wide deployment? I know that's a lot of questions, so I'll hop back.

[Brent Lang:]

Thanks, Ryan. I think that's a really critical point. And I think it's a combination of market factors and company factors. What we're seeing in the market is that hospitals and health systems are starting to centralize the decision making for our product category. I think this represents a maturing of the category of sales and having it become something that's a recognized decision making process and product area that they want to focus on. And as a result, the decision making is being pulled into more of a centralized basis. That coincides very nicely with the sales approach we've been taking where we've been up leveling the selling efforts more up into C-suite across the entire sales organization. But more specifically, we have been investing in the strategic accounts sales rep. So last year during 2017, we had really one person that was focused on those strategic accounts. And as we head into this year, we've got four people that are taking on that role selling at the strategic account level. And it seems to be paying off and it's generating a very large pipeline both because I think that's the way the customers are willing to buy as well that's the way we're tracking the deals. And so we're monitoring a large number of deals. And one other things that we talked about in the past is that some of the ways to counteract the volatility of these larger deals is just to have more of them in the pipeline and so we're really happy with the fact that we've got a number of them that we're tracking and we're not reliant on any single deal to be a make a break situation for us in any given time period. So I think that the strategy appears to be working and C-suite well received. Kaiser is a really interesting example. Vocera has had limited success with Kaiser in facilities, I think we have probably 8 to 9 facilities that were using our communication solution prior to the Extension Healthcare acquisition. But one of the big win that Extension had made before the acquisition was actually - essentially a system wide rollout of the Engage Software. And that deployment has been going on successfully over the course of the last 18 months or so. That increased relationship with Kaiser is now leading towards other sales for our communication solution. And as I mentioned in the prepared remarks. we added two additional facilities in Southern California where the cross sell was actually in the reverse direction of what you might otherwise expect where we were selling our communication solution into what was in engage environment prior to the sale. So, I think we are excited about the large deals. Obviously they take a lot of work and want to focus, but we are encouraged by the result that we seeing from the team and their progress in selling of the C-suite and it's certainly going to be an important part of our strategy on a go-forward basis.

[Ryan Daniels:]

Okay. And I know you said one question, maybe one real quick follow-up. Just the length of the sales cycle, you got some one hand bigger deals could take longer, but if it's become more strategically important and you're selling to the right people they can make the decision quicker. So what's the end taker? Thanks.

[Brent Lang:]

Yeah, I think on far, it's likely going to extend the sales cycle. Obviously sales cycle is very quiet a bit from deal-to-deal, but we haven't seen a huge increase in the link of the sales cycle. In some cases historically since nine to twelve months now you know may be longer than that but obviously the deals in many cases are words of magnitude larger. So we're able to take that trade off. In some cases where they have a strategic initiative around it where they may be identified specific budget dollars and even established NRP process, it will actually accelerate the timeline, because they're on a specific process that they're following and there's a dedicated team focused on that decision making. So it creates a little bit more uncertainty based on the level of approvals that are required. And one of the keys tied back to the comment I made earlier which is that we just need to have more of these deals inflated in given time because of the potential uncertainty of the specific timing of our particular booking. And I highlight booking because just as a reminder, most of the time even with these large deals that may come in as a large booking but the conversion to revenue will be spread out over a more extended period of time. And so it creates less volatility on the revenue side that it might on the bookings side.

[Ryan Daniels:]

Okay, great, thank you so much.

[Operator:]

Your next question comes from Matthew Gillmor with Robert W. Baird. Your line is open.

[Matthew Gillmor:]

Hey, thanks for the question. Brent had mentioned some competitive displacements and he referenced New York present and I think that was on the Engage side, and I was hoping you could provide some more details about why that customer chose Engage and what sort of the competitive differentiation is versus some of the other vendors that was out there?

[Brent Lang:]

Yeah, it was hard but that will have to commend our sales team because we were obviously not be encumbered in that deal and we had to reestablish the conversation with them. It's one of the example I like to point to when I talk about the fact that Engage has changed the tone of the conversation, because Vocera did not have a strong presence there prior to the acquisition. We didn't have a whole lot to talk about. But with the addition of the Engage Software, it gave us an opportunity to go back and essentially reeducate the customer on the breadth and depth of our solution capability. And in that context, we started of that dialogue. This is going to be a very large opportunity for us. And one of the things that I think they were really excited about was the scalability and the capabilities of our platform relative to some of the other solutions in the marketplace and our willingness to work with the other existing solutions that they had in place in the hospital. And so kind of this open standards invested all of your mindset that we've taken into the marketplace I think it's well received by the consumers as well.

[Matthew Gillmor:]

Okay, that's helpful. One quick follow-up for Justin. When you're talking about guidance, you mentioned that the sales pipeline for bookings will be an important part of the revenue growth this year, if I heard you correctly. And I just wanted to get some sense, are you trying to signal that revenue is more dependent on bookings for the year which could be justified by some of the pipeline comments or is the way you're thinking about the revenue guidance the same as it relates to the bookings performance that you'll need?

[Justin Spencer:]

Yeah, now as we sit down and contemplate guidance each quarter you know the annual and the quarterly, we have a fairly robust framework that we use to evaluate what we're ultimately comfortable with. And it has a few different pieces. Firstly, it's about our differed revenues that we expect to convert in the period and then added to that is the expected supplies that are pretty predictable in terms of their cadence and that gives us what remains is the amount on new revenue that we need to go out and close and the period we call that book ship. All of those metrics are in line with where we feel comfortable in our guidance factors in all of those elements. But clearly as we look forward just like every quarter and even every year, there's always a portion of our revenue is that doesn't need to come new bookings. So we're continue to be really focused on great sales executing. We have a great and solid pipeline that we really encourage and but we need to go out and close those deals and bring those booking in. That's really what we were just highlighting.

[Matthew Gillmor:]

Okay, that's helpful. Thanks very much.

[Operator:]

Your next question comes from Matt Hewitt from Craig Hallum Capital. Your line is open.

[Charlie Eidson:]

Hi this is Charlie in for Matt. Congrats on the great start of the year and thanks for taking my question. Can you provide an update on the company's sales force in total, where does the headcount sit now and do you expect to add as you go through 2018? I'm just trying to get a sense of the leverage there?

[Brent Lang:]

Yeah, so sales accounted stayed relatively flat, I would say we're right around 75 quota carriers right now. We've moved some responsibilities around some of those additions in the strategic accounts, the selling efforts that I was talking about earlier, what we did is we took people who used to manage a specific geographic territory, who were some of our top closers and we moved them into those strategic count. Sales were also didn't require us adding a bunch of additional reps. And typically, once we start the year, we keep the size of sales force pretty consistent. Obviously it's harder to make changes in the middle of the year once you got comp plans and regions and territories set up. So we like to keep consistency there. Obviously there tend to be some turnover from time to time we have to replace. But we're feeling really good about the sales coverage that we have. One of the key focuses for us over the last couple years has been driving sales productivity to try to drive down sales and marketing as a percentage of our overall revenues. And we've made great progress there. And I think still have more rooms to go. One of the things that's really benefit is there has been size of the deals. And so as deal sizes increased, we're able to raise quarters and drive greater sales productivity rather than having to hire a bunch of additional sales resources. The other benefit obviously is when the reps have got more products to sell in their bag, for example adding Engage to their product portfolio that gives them more opportunities to go pursue. And so we're happy with the size of sales force, we've got great tenner and experience within our still. The team is really I think functioning very, very well, high levels of energy and very positive outlook on the marketplace. And we're trying to continue to drive that leverage and sales particularly in the quarter.

[Charlie Eidson:]

Okay, that's great. And then one more. Can you provide some color on the M&A environment, you know how active are you in terms of looking to strike a deal this year and then how the valuations look from your perspective?

[Brent Lang:]

Yeah, absolutely. You know as I've said before, we see M&A is definitely a part of our strategic plan moving forward as we try to build out the capabilities and continue to expand our offering that increase the size of our team. And we've used this idea as a real time health system is a bit of a framework to identifying technologies that we might be interested in. And there continues to be a number of different areas that we think makes sense for us to look at. At any given moment in time, we probably got two or three deals that we're looking at. On the other hand, we have been very selective and have said no a lot more than we've said yes either for a product fit or cultural fit or strategic fit reasons and valuations certainly plays a role in that. And I think that private company valuations right now are at very high levels relative to the public company valuations. And so that definitely gives us of course as we look at some of these deals, we want to make sure that there's a strong strategic fit there. But if we see something that makes sense for the business and we can bring inside of our organization and drive greater leverage by accelerating the sales and having it become a strategic aspect of our offering then we want to move forward about. And I think the success that we've had with the Extension Healthcare acquisition has involved in our efforts there. We're very happy with the results and the impact of that acquisition that had on our business and the success we had integrating the business into the company I think is really a great case study for how we like to see things moving forward. So we continue to be on the lookout for those areas that could argument our real time health system offering as long as they can pick these other strategic criteria that we are looking at.

[Charlie Eidson:]

Okay, that's some great color. Thank you.

[Operator:]

Your next question comes from Mohan Naidu with Oppenheimer. Your line is open.

[Mohan Naidu:]

Thanks for taking my questions. Justin, a quick one on the backlog member, did you give what the backlog was a year ago quarter Q1 2017?

[Justin Spencer:]

Hi Mohan. So as part of our adoption is 606 companies are now required to provide a quarterly backlog disclosure. As you may recall, we have not typically provided that quarterly level of disclosure, simply because our business is really not oriented to that. We are highly seasonal business from a booking standpoint and that can cause wide variations in movement in our backlog and even our deferred revenue. Our revenue is less seasonal because we can buffer that with our backlog and deferred revenue. Our business has changed a bit as well last couple of years, we're a little bit on a fairly faster cadence in terms of the large deal deployments, a bit more software orientation which is moving more of our backlog to different revenue. And of course 606 is also providing - starting to provide a little bit of tailwind for in terms of our conversion. We're still early in that but we clearly see benefit going forward over the long run and being able to convert our revenue bit more quickly. So for that reason, we're not currently disclosing our backlog. But we have factored all of that into our framework for guidance and our guidance always has certain rips and judgments that we have to make but we feel comfortable between the backlog, deferred revenue and supplies and the book ship that we have to go, we've properly factored that into our guidance.

[Mohan Naidu:]

Got it. On the book ship mix, can you give us a sense of what book ship was on average last year versus what you're expecting this year?

[Justin Spencer:]

So, our book ship percentage is always, it fluctuated a bit just based on the cadence of the large deals, but anything about 60% is generally where we want to be and where we're in that zone in terms of - this is just a quarterly commentary and we're in that zone for Q2 and that's where we kind of set our guidance range.

[Mohan Naidu:]

60% book ship versus 40% from backlog. Is that correct?

[Brent Lang:]

Right.

[Mohan Naidu:]

Okay. Thank you. Maybe one …

[Justin Spencer:]

Just to clarify, our visibility - sorry there are two different concepts and players, I just want to make sure I clarify. The visibility which is the combination of our backlog, deferred revenue and our supply as a percentage of the guidance range say at the high end is we generally like to see that north of 70% and that's kind of in line with where it is for Q2. The book ship percentage that I just shared with a percentage of our bookings specifically product booking that need to convert to revenue in the current period. So those are two different two different metrics.

[Mohan Naidu:]

Okay. Thank you. Brent, one quick one for you, you mentioned large portion of the deals, Justin you mentioned I think is including Engage and Mobile Solutions right now. So the combination seems to be working well. Along those lines I guess, are you seeing operations where you can add I guess to the earlier questions organically or inorganically just expand the new solutions that you can leverage on to your platform?

[Brent Lang:]

Yeah. Absolutely. I think there's a great opportunity. I think customers more and more looking for a single vendor that can come in and help them, really help to find their digital health strategy and that sort of even broader than just communication collaboration. Hence we think about both the internal roadmap for our own development efforts as well as any strategic M&As we would do, that's kind of the framework that we're using. And I think customers are looking to both areas the market leader here and really the trusted advisor that could come in and help them navigate that landscape. So we see an opportunity to really expand on that offering and continue to meet the needs for the customers.

[Mohan Naidu:]

All right, great. Thank you very much for taking my questions.

[Brent Lang:]

Yep.

[Operator:]

Your next question comes from Jamie Stockton with Wells Fargo. Your line is open.

[Jamie Stockton:]

Hey. Good afternoon and thanks for taking my question. I've just got one I guess maybe for Justin, on the software revenue just so we can level said it seems like you guys had a really strong quarter there maybe a little stronger than you expected. Is 606 maybe causing that line to be a little more lumpy, people shouldn't necessarily extrapolate more strength from there the rest of the year, just any color on that would be great?

[Justin Spencer:]

Yeah. Hi, Jamie. That's probably a good way to think about. The software is arguably the fastest growing part of our business, so we continue to expect double digit growth in software for the full-year. And the quarter was unusually strong with the addition of the New York, Presbyterian, Brent highlighted, that had a large software component. And we did benefit from some additional software revenue recognition as a result now being under 606. The primary benefit of 606 with regard to software as it enables us to recognize revenue on shipment instead of having to defer or delay that recognition until we finish the project or the implementation. So we did get a little bit of benefit there. But I'd say that overall our software business continues to be really healthy and our growth rates should be quite robust for the full-year.

[Jamie Stockton:]

Alright, that's great. Thank you.

[Operator:]

Your next question comes from David Larsen with Leerink. Your line is open.

[David Larsen:]

Hi. Justin, can you talk a bit about the device revenue in the quarter and how that's trending and what's driving that? Thanks.

[Justin Spencer:]

Hi, David. The device revenue in a quarter was down year-over-year more primarily a function of timing. Our device bookings in the quarter this quarter were actually quite healthy as we mentioned in our prepared remarks. So at this point last year, I may recall that we began shipping a large volume of devices with the U.S. Army MEDCOM. We shipped a large tranche in Q1 as well as in Q2 of last year. And so that makes - compares a little bit different than what they kind of what a more normal pattern is. The device business continues to be extremely healthy. Our pipeline of device deals is very high. I have the very prominent place in the market environment and with our customers they love the device. So we're really encouraged by the pipeline that we're seeing, it's just more a function of timing, short term.

[David Larsen:]

Okay. Do you have any metrics on net promoter score, do you have any numbers that you can share in how that's trending?

[Justin Spencer:]

We do a net promoter survey on an annual basis with the customer satisfaction surveys in the fall. We don't disclose those numbers publicly, but they have been very high and have been trending upwards for the last several years. I think our customer loyalty is really a reflection of the relationships we've built with customers as well the value proposition of the products that we're selling to them. And things that they tend to highlight, they love our tech supports. The relationship that our tech support engineers have built is really a highlight for them. They love the uniqueness of our product offering. And so we take it very seriously, we definitely measure it but we don't disclose those numbers specifically on a public places.

[Operator:]

Your next question comes from Sean Wieland with Piper Jaffray. Your line is open.

[Sean Wieland:]

Hi. Thanks. Question on Collaboration Suite 3.3, have you installed that product anywhere or in any data yet and if so, how is that going? And specifically what's the feedback from providers and clinicians that are using it, because it's a markedly different kind of workflow there that you're proposing?

[Brent Lang:]

Hey, Sean. It's still really early days, so we definitely had some early customer deployments. I would say most of the feedback that we've gotten has been in the context of just promoting it and talking to both prospects and existing customers about functionality and showing them down the way with the product for them and showing in the spring charts. And I would it's been very, very positive in terms of the whole paradigm of making it much more patient centric and being able to get access to the care team and to the patient information. But in terms of a lots of live deployments there's going to be a time lag here before, it's up and running in large scale deployments, just take time for customers to do that upgrade on that deployment.

[Sean Wieland:]

Is the - as the pipeline look for it, is that the concept resonating to the point where you're building a pipeline for it yet?

[Brent Lang:]

Absolutely. Yeah, and I think a lot of the activity that I mentioned in the prepared remarks around HIMSS and the demos that we're taking place there, the vast majority of those demos aware of that Collaboration 3.3 and Engage running together in the new user interface. And we had people literally lined up at the demo stations in the booth to be able to see it and the response was overwhelmingly positive. I think people really appreciate the fact that by moving from more of a person centric mindset to a patient centered mind is going to make their job much easier. And so we just have to now convert that into actual sales. But I would say the pipeline growth is a direct function of that new product functionality.

[Sean Wieland:]

Great. And Justin, one for you. The earning guidance for Q2, you opened yourself up to possibility of sequentially down earnings Q1 to Q2. I think you may already answered this but is that just because of the very strong software mix in Q1 allowed you to be by such a degree, is there anything new there, because that's that seasonality that we typically haven't seen in the model?

[Justin Spencer:]

Hi, Sean. So our guidance range reflects a number of things, we try to be with our guidance. The first thing is we try to be conservative so that we can be in a position to deliver strong results in the quarter. So that's kind of overall the frame of mind that we have. Our Q2 guidance really can reflects the normal seasonality if - with the Q1 results and the Q2 guidance that we put out there it adds up to the neighborhood of 46% of our revenue which when we in it that set our guidance for the year this time last quarter. We mentioned that that was kind of a seasonal pattern that we see a 46%, 54% split somewhere there about. So we don't expect to be year-over-year down but we guide and provide a range just to properly accommodate the rest and the best judgment that we have and we do expect growth.

[Sean Wieland:]

I'm sorry, I was looking at earnings not revenue.

[Justin Spencer:]

In terms of being sequentially down, yeah, so we had - our Q1 was a little stronger than we had expected and so that's the primary driver and that was driven by the mix of software.

[Sean Wieland:]

Okay. Great. Okay, thank you very much.

[Operator:]

Your next question comes from Stephanie [indiscernible]. Your line is open.

[Unidentified Analyst:]

Hey, guys. Thank you for taking my questions.

[Brent Lang:]

Hey, Stephanie.

[Unidentified Analyst:]

Can you give us an update on the federal business? So - and just as a follow-up to that, you did mention further win that is being in prepared remark. Are you seeing any impact in the recent push out in modernization contract or could you see that in the coming quarters?

[Brent Lang:]

Yeah, so our federal business is continues to progress really, really nicely both on the DoD side and on the VA side. For better for worse, I think for better right now, the decision making process the VA is at the business level, the regional level or the individual hospital level as opposed to the centralized level across the entire VA. So the headlines, head of the VA and some of the more centralized decision making around the contract are really outside the scope of the relationship that we have with the VA. Most of the budgets and most of the decision makers that are driving those VA positions are within the 22 different regions around the country. And those conversations continue to go really well, those deployment continue to really well and we're not really seeing any impact at all from the changes at the head of the VA. And on the DoD side, we're really encouraged by the continued momentum. Several of the large deal that I mentioned in the pipeline earlier in the prepared remarks are in the DoD side of things as we expand beyond just the army side and some of the other branches of government. So we had a great fed business last year, it's going to be a tough comparison but momentum continues to be very strong in that marketplace and we're encouraged by the progress that we're making them.

[Unidentified Analyst:]

Good. Sounds like you're in a safest spot. Thank you for taking my question.

[Brent Lang:]

All right. Thanks.

[Operator:]

Your last question comes from Gene Mannheimer with Dougherty & Company. Yours line is open.

[Gene Mannheimer:]

Hey, thanks, guys. Congrats on a good start to 2018. I wanted to just build on some of the previous questions regarding software. As you approach your long term model, 20% EBITDA margins on a $200 million revenue run rate are thereabouts, what's the implied level of software in there as a percent of revenue?

[Justin Spencer:]

Hi, Gene. Clearly a software is an important driver of our business of our growth and our profitability. And with the expanded software platform, I think we well under way to drive that business even higher. In the modeling that we've done, we want to see our software business represents 20%, 25% plus of our revenue over time. And just this quarter for example, our software revenue was around 21%. We've had quarters, individual quarter that have been fairly high. But that goal is getting to 25% software revenue would be more an annual goal. We're making really steady and solid progress each and every quarter. And if we do that it will have a margin impact. Which also comes with the software revenue is the professional services stream, so those two things go hand-in-hand. And our preferred professional services stream, professional services margins are a little bit lower of on a blended basis, it's a very attractive business for us. So that's the thing that we're always managing but clearly the software is going to be an important driver of our profitability going forward.

[Gene Mannheimer:]

Great. Thanks for that. And also I guess my other follow-up would be, I don't want to create confusion here. But my impression was that book ship, your book ship requirement would be a little bit higher this year than it was say a year ago given the faster conversion of a backlog, is that the case and are you able to quantify that what the differences for us?

[Justin Spencer:]

Yeah, it is higher on an absolute dollars basis, but relative as a ratio to our overall booking that's right in line with where it historically been. And that's just clearly a function of the growth in the business. As our revenue increases so do our bookings and therefore the absolute dollars increase, but as a ratio, they are pretty consistent with where we've wanted to be or we've been over the last few years.

[Gene Mannheimer:]

Okay. That's helps. Thanks a lot. Congrats.

[Justin Spencer:]

Thanks.

[Operator:]

There are no further questions at the time. I'll turn the call back to the presenters.

[Brent Lang:]

Great. Thank you very much for dialing in for the call today. And we look forward to following up with you guys. Have a great evening.

[Operator:]

This concludes today's conference call. You may now disconnect.