Vocera Communications, Inc.
Q3 2018 Earnings Call Transcript

Published: 26 Oct 2018

[Operator:]

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

[Sue Dooley:]

Thank you. Hello everyone. Welcome to Vocera's conference call to discuss our third quarter fiscal 2018 earnings. This is Sue Dooley. 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 to 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 the 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. On today's call, I'll start by summarizing the highlights from the quarter. Then, I'll provide some details on some key customer wins and strategic deployments that occurred in Q3. I'll conclude my prepared remarks with some commentary on the market environment and hospital priorities, before turning the call over to Justin for some more detail on the quarter. We had a great Q3. Third quarter revenue was $48 million and software revenue growth was particularly robust. Our success this quarter was broad-based with all market segments of our business performing well. The completeness of our solution remains a differentiator for us and customer interest in collaboration and data globalization drove continued momentum in our business this quarter. Several large customer wins validated our leadership position and our solution continues to succeed against competitors. Cross-selling is gaining traction, as customers seek a unified solution for their communication needs. And our Badge remains a key differentiator for us as hands free communication remains vital to care team members at the patient's bedside. Our market opportunity remains sizable and we are excited by our large deal pipeline as we enter Q4. Our bookings momentum was very strong in Q3 with big wins in both our commercial and federal business. This was the largest bookings quarter in the history of the company with robust growth in both software and devices. The highlights from the third quarter showcase our extensive market appeal, solid field execution, and highly-differentiated offerings. We were happy with big wins at the University of Virginia for $3 million, Fairview Health for $2 million, and PeaceHealth for $1.2 million. We also won several large deals with the VA, four of which were over $1 million. Let me tell you a little bit more about these exciting deals. On the commercial side, we booked a $3 million win at the University of Virginia. UVA is an existing Vocera customer who had a small installation used primarily in their preoperative services department, as part of a crucial enterprise imperative tied to the construction of a new care tower, UVA chose Vocera as their enterprise partner for unified clinical communications. The completeness of our solution and our compelling vision were paramount to this win. At Fairview Health we won $2 million bookings from Phase 1 of a multiphase system-wide technology rollout. We will be deploying our solution across six sites in this first phase with multiple integrations including their EHR. PeaceHealth another long time Vocera customer also decided to put our full platform to work across multiple sites. Our team conducted a clinical assessment and discovered PeaceHealth's top workflow challenges. They have ordered us a $1.2 million booking for the initial phase of this project based on the benefits our solution could have in addressing these top priorities. We also continue to show great strength in our federal business in Q3 including four large deals totaling almost $6 million in the VA. Combined with numerous other new and expansion wins we set another record bookings quarter in the Fed, surpassing our Q3 2017 high watermark. We are optimistic about the large opportunity for both new customer wins and expansions within existing hospitals in the federal space. We believe that improved communication and effective alarm management are initiatives with rising importance in the DoD and the VA. You can see from our success this quarter that we are actively taking our broader solution to existing customers. One notable cross-sell expansion was with Houston Methodist which is already up and running with our Engage software and will now begin to use Badges at the communications endpoints for clinical staff. It's gratifying to see Houston Methodist extend the value of our platform. In another significant cross-sell, Adventus Health Care in Maryland chose our expanded solution for a new hospital opening in 2019. They're an existing customer and we're looking for a unified communications and workflow further to grow with their needs. At the University of Chicago, our care experience solution is expanding across multiple new facilities. They continue to focus on and demonstrate measurable patient satisfaction improvements. But I'm proud of our partnership with them and our case history demonstrates the compelling value they've achieved. Through their commitment to patient satisfaction and use of our solutions, U Chicago Medicine has seen a 30 point increase in HCAP scores and they've experienced a 55 point increase in patients likely to recommend. They're reducing readmit rates and empowering their teams to deliver exceptional care. This data demonstrates how we are helping to bring human connections back into patient care. In addition, our international business is up significantly year-to-date reflecting our increased focus there. We had a strong quarter in the UK including a win at office in East Midlands our second special needs school. They will be using our solution for staff and student safety. International remains a big opportunity and a top priority for us and we are pleased with our growing overseas pipeline. And finally, our non-healthcare business is also having a good year. We have had several small but strategic wins in the hospitality space. This quarter we signed a deal with the Four Seasons Chicago, our 10th Four Seasons property. They tested and selected Vocera to satisfy a new city mandated rule to include a panic call button for all employees who might find themselves alone with the guests. Our Badges reputation in the hospitality space combined with the location accuracy and communication capabilities made us the clear winner. As we continue to book these meaningful wins, our professional services expertise remains a meaningful differentiator in helping our customers choose a partner. Expertise and efficiency of our professional services organization continues to grow and deployment of our solution are numerous and remain on schedule. To highlight a recent example, we completed Phase 1 of our deployment at Sutter Health CPMC, a complex new hospital construction project in San Francisco. Sutter went live with our full platform and integrated it with their EHR. In this example, our team utilized a new Vocera analytics package to identifying trouble spots and fix training issues in real time, resulting in a timely and successful deployment. Phase 2 will include a broad user base and additional EHR integration. The robustness and completeness of our solution is clearly a key differentiator for Vocera. We continue to extend our solution integrating with the best of breed enablers of the smart hospital. During the quarter, we continue to aggressively pursue partnership initiatives that advance our vision around providing an enterprise solution with a real time health system. Recall that last quarter we signed a referral agreement with Qventus, a leading provider of predictive analytics software for hospitals. This quarter, we signed a reseller agreement with QGenda, a leading provider of automated physician scheduling software. Vocera will be the exclusive reseller of QGenda solutions in the Federal market, where Vocera already has a significant presence. QGenda's scheduling automation solution replaces the labor intensive manual processes the department has and administrators endure in trying to distribute shifts fairly and in accordance with rules. In addition to creating and maintaining these schedules, the QGenda solution gives providers real time access to schedule changes. Through the integration, we completed with QGenda earlier this year, care teams can easily communicate with the right on-call provider in real time and physicians could focus more of their time on caring for patients. Moving forward we will continue to look for ways to expand our offering across the care continuum by building buying or partnering to enable the real time health system. Now I'd like to talk for a moment about the market for our solution and share what we are hearing in our conversations with customers. This quarter my time with customers further reinforce my confidence that hospital leadership is seeking a complete solution to mobilize their data and demand for communication and collaboration services is robust. Voice services are highly-topical to this audience and once again this quarter we had another all-time high for Badge units booked in the quarter validating the relevance of our time tested solution. Last month we held our annual Large Customer Advisory Board meeting in San Francisco with some of Vocera's best and most engaged customers. Known as our LCAB this event convenes Vocera leaders with customers for a meeting of the minds to help us understand the market, its future needs, and how we can continually optimize our solutions. Attendance was strong and these healthcare industry IT leaders weighed in on the importance of patient experience as well as a unified workflow within hospitals. Also notable regarding our market, Gartner recently issued a report describing the toil care teams suffer daily as a major problem further validating our mission to advance the quadruple aim. Our vision to deliver workforce solutions to eliminate friction points along the patient journey is resonating in the market because it is helping solve some of the most pressing challenges. Our teams are busy putting our new ROI tools to work in customer proposals. One of the key metrics in this tool is the rate of left without being seen. This metric is an important one for hospitals who never want to see a patient into the EHR and then walk back out the door because of extended wait times. The promise of reducing this rate and recapturing lost revenue is being recognized and recently Hardin Memorial in Kentucky reported a 39% reduction in patients who left without being seen again thanks in part to efficiencies brought about by our solution. The marketplace is demanding a partner that understands these challenges and takes the clinical approach to solving the workflow bottlenecks. Our unified solution that combines real time voice, secured texting, and deep clinical integration wrapped into a single solution is succeeding because it delivers on these challenges. Overall I'm excited by our large market opportunity, our strong competitive position, and our momentum as we enter Q4 and look to conclude a successful 2018. Now I'd like to give our CFO, Justin, a chance to cover the financial details around our Q3 results and our guidance. Justin?

[Justin Spencer:]

Thanks, Brent. Hello everyone. We were very pleased to deliver solid Q3 financial results across the board. Total revenue in Q3 was $47.8 million, up 5% compared to last year. Keep in mind, and as previously disclosed, the recapping of our historical financials under ASC 606 raised Q3 2017 the most of all affected quarters, thereby lowering our Q3 year-over-year growth rate. Despite this, our product revenue increased year-over-year to $27.3 million. Device revenue rose to $17 million reflecting the booking strength that Brent alluded to earlier. And software revenue increased to $10.3 million exceeding our expectations. Our software revenue was driven by both new customer shipments and the cross-selling success we are seeing within our installed base as they broaden their use of our platform. We believe our cross-selling efforts and momentum from large new customer deals will continue to be important drivers of our software platform sales. Services revenue in the quarter increased to $20.5 million. Our professional services revenue was $4.5 million down from last year. As we have seen in past quarters, our professional services revenue fluctuates with the timing of deployment and milestones. We continue to have a healthy professional services backlog with scheduled deployment in the future across the broad base of customers. The other large portion of our services portfolio is software maintenance and support, we have growing customer base using our expanded software platform and a consistently hybrid renewal rate well above 95%. Our software maintenance and support revenue grew 16% to $16 million. As a reminder, this revenue is recurring and was approximately 34% of our total revenue. Our software business in aggregate including both the revenue from software and software maintenance was 55% of our total revenue in Q3. To complete the revenue picture, our combined backlog and deferred revenue balance increased by roughly $8 million to just over $117 million which followed our normal and expected seasonal pattern. I'd like to now turn to profitability another bright spot for the quarter. Specifically adjusted EBITDA was $8.4 million or roughly 18% of total revenue, demonstrating the operating leverage in our business model. We also achieved positive non-GAAP net income once again and we're very close to break-even on a GAAP basis. Here is some more details on our non-GAAP gross margins and operating expenses. Non-GAAP gross margin in Q3 was over 68% driven primarily by a favorable revenue mix particularly in software and software maintenance and support. Product margin increased year-over-year to 78% due to a higher software revenue mix and increased absorption of the fixed cost related to our device business. Our services gross margin was 56% buoyed by the strength of our growing base of software maintenance and support revenue. Non-GAAP operating expenses were $25 million in Q3, up 9% from last year. We continue to invest strategically to drive growth particularly in areas such as new product development, enterprise selling, and our international market. Even with this increased investment, we advanced towards our target model as our non-GAAP operating expense dropped to 52% of revenue in Q3. We continue to focus on scalability as we grow and we are becoming more efficient throughout our entire business. Now I'd like to make a brief comment about our balance sheet. Our profitability results enabled us to add nearly $9 million of cash to our balance sheet in the quarter ending at $215 million. Our balance sheet was bolstered with a capital raise in Q2 and we continue to seek strategic investment opportunities to accelerate our growth. With that, let me turn to guidance. As I mentioned earlier, we were able to increase our backlog in deferred revenue balance in Q3 and believe we had a healthy sales pipeline. As we look to finish 2018 strong with one quarter remaining, we have narrowed our annual revenue guidance to a range of $177 million to $182 million. On the strength of our profitability so far this year which we expect to continue in Q4, we are raising our profitability guidance significantly, with adjusted EBITDA now expected to be between $19 million and $23 million. We continue to make good progress toward our target model with seasonally higher profitability in the second half of the year. The implied revenue guidance for Q4 is $46.3 million to $51.3 million. The rest of the guidance details along with a full reconciliation of GAAP to non-GAAP guidance can be found in the guidance table of our press release. In summary, we were very pleased with our Q3 results and the momentum we have seen so far in the back half of this year. We are now focused on achieving a solid Q4 certainly can carry strong momentum into 2019. I will now turn it back to Brent.

[Brent Lang:]

Thanks, Justin. I'm really pleased with our execution in Q3 and the solid momentum we have built in 2018. I believe our continued success underscores the strategic importance customers are seeing in our products. Our solutions and ROI-based approach were resonating with an underserved market that is primed for growth. I want to take a moment to recognize the Vocera team who is making this happen. We are well-positioned to drive continued bookings and revenue growth in the business and deliver increasing profitability. I'm pleased to thanks to our comprehensive offerings, great execution, and receptive market so we're one step closer delivering on our 2018 financial and strategic initiatives. Thank you for listening today. Operator, we are ready to open up the call for questions. Thank you.

[Operator:]

[Operator Instructions]. Sean Dodge with Jefferies. Your line is open.

[Sean Dodge:]

Hi, good afternoon. Thanks for taking the questions. Maybe starting on the federal business, Brent you mentioned strong contribution of bookings from that in the quarter; I mean you have been having some success there with Engage, too. Can you give us a sense of what proportion of your federal footprint currently also using Engage and then when you talk about success with the cross-selling, is that an area you also continue to see some opportunity in?

[Brent Lang:]

Hey, Sean, yes. Thanks for the question. So we're really excited about the opportunity that’s still in front of us with the federal government, it's a relatively small percentage of the overall base of business that's currently using Engage. Several of the newer deals that we've closed there have included both components. But we feel -- we still see a large meaningful opportunity for that Engage product offering to be cross-sold into the federal space.

[Sean Dodge:]

Okay, great. And then on International, you mentioned nice momentum there, to be successful in those markets; I know you've said in the past it'll take some investments and sales capabilities and support in those regions. Maybe can you give us a sense of where you're at now making those investments and I guess it's Canada, UK, Middle East and then Australia, New Zealand that you're targeting are most of those investments still ahead of us needed to be made or those done now?

[Brent Lang:]

Yes, I think what you're referring to is the realization that we may have -- that we need to have the full cross-selling team in place that we have here in the U.S. in order to be successful. Our selling approach involves both salespersons themselves as well as clinical executives and technical expertise that bring together the professional services and all the various aspects of our products. And I would say over the last year we've made most of those investments into those geographic areas to make sure that there's a full complement of clinical, technical, and selling resources there. There is some incremental spending that we will continue to roll out and we continue to make some tweaks in the international markets but I would say for the most part, fairly large portion of that international investment has already been made.

[Operator:]

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

[Ryan Daniels:]

Yes guys, good evening. Thanks for taking the questions, congrats on the strong performance. In covering the company, I'm not sure I've seen you discuss so many large deals that are also just initial phases of a multipart rollout. So I guess a multipart question to that. Number one, are there any major hurdles to moving to Phase 2 or other phases other than the completion of the first phase? And then second why more of this kind of an initial rollout with potential future phases versus just an all-out purchase and then third if I could how could you characterize the overall sales potential relative to the revenue generated, which you discussed in kind of the first phase of these rollouts? Thanks.

[Brent Lang:]

Yes, good question, Ryan. So I think what we're seeing is on the part of customers the decision that they want to start to standardize on technologies and that's what's causing consolidating decision making into more of a central decision making body as opposed to decisions being made at the Departmental level. So to answer the first part of your question, I think the biggest hurdles towards the rollout of the follow-on phases is really primarily driven around their budget cycles, in many cases what they've done is they've budgeted for an initial phase or initial set of facilities and then as they roll that out or put budget dollars into subsequent years for the following phases. I think that the likelihood of us winning the following business is really high based on our track record and our success with customers' to-date. So I don't think that they're looking at it as a pilot or some sort of trial to prove that it works effectively, I think it's really more driven by their own budget capacity as well the capacity of their IT organizations to be able to manage these projects. And I think that sort of bleeds into the second part of your question which is why not the entire systems. Bear in mind that these large health systems are made up of multiple hospitals and I think in many cases they're putting together a calendar of how they want to deploy the technology across those different facilities. This already represents a pretty dramatic shift for us where they're buying multiple hospitals at the same time and then the upside opportunity into the full health system remains. We haven't quantified the follow-on business for the multiple phases beyond this initial phase that we talked about but I can tell you that it's substantial and we continue to see a large Greenfield opportunity with those already existing customer base of adding more facilities to those flags as well as with new customers that we might add in the future. And one of things I think I was really struck by this quarter in particular was the number of customers that may have had a very small Vocera deployments from years ago and they're taking another look at Vocera and looking at how it might deliver on their communication collaboration needs on a broader basis. And so, some of our biggest wins were actually technically expansions off of deals that may have been in place for some years in the past and now taking another look at the capabilities of what we have to offer.

[Ryan Daniels:]

Okay. And a quick follow-up there, I just assume that those two dynamics are probably increasing your revenue visibility above and beyond the kind of mix shift you are seeing more recurring revenue base is that fair to say as well?

[Brent Lang:]

I think it will be fair to say that our pipeline is continuing to grow and the number of large deals that we're tracking in the pipeline is on the increase and that obviously gives us better confidence in our long-term business. We always have to deal with the dynamics of particular deal and the timing of a particular deal closing. And as we talk about in the past that can have an effect of creating lumpiness from a bookings perspective. But I would say that we're feeling really good about the number of large deals that remain in the pipeline. And as you mentioned some of these deals that we announced this quarter have a lot of additional potential tied to them, assuming we're able to be successful with the initial phase of the project.

[Operator:]

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

[Matthew Gillmor:]

I joined a couple of minutes late, so this was addressed in the prepared remarks. You can go ahead and tell me to read the transcript. I didn't want to follow-up on the federal business, you-all were added to the SATOC contract this year and budgets, I think we're up in both the VA and the DoD. I was -- I was hoping you just kind of characterize the activity levels on the federal side and whether that was above last year, about the same or little bit lower?

[Brent Lang:]

Hey, Matt, yes, so some of it was addressed, but I'll expand based on the depth of your question. So we did mention in the script that Q3 was a record bookings quarter for us in the central space overall surpassing the high watermark that we set last Q3. But specific to the SATOC piece it's important to point out that while we did win the SATOC contract as part of this quarter, it didn't have a big impact on bookings in the quarter. Most of the success in our federal business in Q3 was actually on the VA side of the business. We did book couple of million dollars of business within the DoD which obviously was able to leverage the SATOC, but the acceleration and the tailwinds associated with the SATOCcontract I think remains and we expect that to have a positive influence on the business on a go-forward basis.

[Matthew Gillmor:]

And just as a point of clarification I think last year I thought you all had disclosed that the VA bookings in the third quarter last year were $15 million ZIP code; is that roughly accurate?

[Brent Lang:]

Yes.

[Matthew Gillmor:]

Okay. And then a question on the M&A outlook and to point some of the capital and cash on the balance sheet and I think last quarter after the convert offering you had mentioned that part of the call was to sort of get more deal flow. So I was just curious if that occurred and if you can give us some sense for whether you're closer to anything, any sort of active engagement or sort of still early processes in assessing opportunities.

[Brent Lang:]

I'd characterize the deal flow as being really strong. We're getting to take a lot of looks at different opportunities. And so we've got a lot of bites of the apple so to speak. We have been really selective and we've looked at in past on a number of different opportunities that have come our way. But I would say at any given moment we're probably looking at two or three potential deals and running them through the process of matches our strategic priorities and cultural fit in the financials and the price points and that kind of thing. So I think that the convert deal did help us improve our deal flow and we're feeling like we're definitely in the flow as these opportunities come forward, but we want to remain very disciplined as we look at them in part of our business.

[Operator:]

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

[Jonathan McGraw Bentley:]

Hi, this is Jonathan McGraw Bentley on for Dave. I was wondering, given the strong backlog in deferred revenue you had this quarter, how did that look sort of on a year-over-year basis?

[Justin Spencer:]

Hi, we feel really good about the trajectory of our combined backlog and deferred revenue. We're not yet in a situation where we're providing a historical compare, but it -- what we can say is that it's up year-over-year and I'm really pleased with the bookings performance as Brent alluded to in his prepared remarks that drove, sequential increases in our deferred revenue and backlog and provide a strong basis of visibility, not just into Q4, but also setting us -- starting to set us up for a strong start to 2019. So we're in a good place there. Our goal as we head into Q4 is to continue to build out that backlog in deferred revenue. That's the normal seasonal pattern for us and we expect that to recur again this year.

[Jonathan McGraw Bentley:]

Okay, that's great. Thank you. And if I could ask one more, given the good commentary on the pipeline growth in some of these larger deals, last quarter we talked about the strategic account group you had set up. I was wondering if that's grown at all and how that group is sort of performing, is that helping with all the success you're reporting?

[Brent Lang:]

Yes, the strategic accounts organization continues to build pipeline. They've done a really good job of uncovering these deals and navigate them through the process. We have not added -- actually though I think that we did add one other additional person in the quarter to that team. So we've increased that count by one. And we're looking forward to continue to build momentum there based on some of the larger changes across the country.

[Operator:]

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

[Charlie Eidson:]

Hi, this is Charlie Eidson on for Matt. Thanks for taking my question. I'll try to stick to the one. I just wanted to follow-up on the ROI-based tool set that was announced last quarter. Is it fully rolled out at this point and acknowledging that it's still early days, what sort of impact does it have -- it having on the sales process?

[Brent Lang:]

Yes, hey, it's definitely been rolled out. The sales team has been trained on it and I would say that we're getting really positive reception from both our sales force as well as from customers that we've introduced the tool to. I've been notified of a couple of different customer accounts that they have installed or may have been sort of lagging in terms of making progress towards an end sale and bringing the tool in and sitting out with the customer and using their data and applying it to our tool which was really helpful in getting the buy-in from the senior management of the health system. In many cases these are very complex sales where we might have a champion that's coming from the clinical side of the house and then in order to really win the deal, we need to get buy-in from the other stakeholders. And in many cases the ROI tools can help get the CFO and some of the other C-suite members of the team to really buy-in to the value and benefits. And I referenced the left without being seen metric in the script in my prepared remarks and I think that's just an example of one of the many metrics that we can demonstrate real value that the solution can have in these hospitals.

[Operator:]

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

[Mohan Naidu:]

Brent on the market side on -- in the hospitals, any comments you can share on the discussions you're having with your prospects regarding regulatory mandates, it sounds like there's going to be reimbursement changes or at least mandates to do this risk-based models. Is there a push from hospitals to do, was there before that or, would that change their priorities or what are you hearing from the hospitals?

[Brent Lang:]

You know to be honest with you, Mohan, we're not hearing that come up in conversations with customers. I'm not sure if that's because they view the benefit of the Vocera solution as sort of being independent of that or whether it's just being factored amongst all of the other spending and monitoring priorities that they're trying to put in place. What we are hearing is that there's a strong need for a unified communications platform. They are really needing to move away from these point product solutions and they're trying to standardize on a system that they can use across the entire health system. One of the big benefits there is not having to retrain users as they might move from one part of the health system to another, but also having connectivity across all the various users in the health system. So I think that the category, if you will, as a whole has really risen up within the priorities of the overall decision making and they all know that they need to save cost. They need to improve efficiency, they need to improve patient satisfaction, they need to improve staff resiliency, and to some extent it's independent of particular policy changes, they just need to move forward, not worrying about the specific changes that may come.

[Mohan Naidu:]

And that's great. And maybe a quick follow-up on the pipeline. Any comments on the mix of the deals in the pipeline between enterprise and small deals and if enterprise deals are great and in the couple of orders have been good, but at the same time it can be very lumpy. What are you seeing on the small deal side, are they still in your pipeline or how are they shifting?

[Brent Lang:]

Yes, we have -- we sort of think of it as three different tiers, really small deals and sort of supplies and maintenance kinds of business, and then sort of medium-sized deals, and then the really large deals. And the two buckets where we're seeing particular strength right now is within the installed base of, kind of a -- the -- smaller deals that continue to just recur on a day-to-day basis and then the larger deals. I think more and more business is moving towards consolidated large purchases and so if you were to characterize the pipeline, I think you'd see that the average deal size in the pipeline is increasing over time.

[Operator:]

Your next question comes from Nina Deka with Piper Jaffray. Your line is open.

[Nina Deka:]

Hi, congrats on the quarter.

[Brent Lang:]

Thank you.

[Nina Deka:]

So you called out EHR integrations as part of your wins at Fairview and also at Sutter Health. Can you provide more detail around what exactly these EHR integrations mean perhaps the depth of which and what type of efforts required to establish that integration and then also is this something that you can productize and replicate across other users?

[Brent Lang:]

Yes, Nina, it’s really pretty straightforward primarily what they're focused on are things like staff orders and critical lab values or pharmacy updates. So these are things that are being populated into the EHR and we can create a trigger within the EHR that generates the message it gets delivered and routed through the Vocera system to the appropriate caregiver, to the nurse responsible for that particular patient. It's fairly standardized, it doesn't require any kind of proprietary interface into the EHR, we're able to use their published messaging output and as a result it's easier to replicate from one customer to the next. And as a result we plan to rollout almost all of our customers.

[Nina Deka:]

Okay, great, that's helpful. And then just one more, you've mentioned patient satisfaction for several years now as a key component to your success, are you looking to further expand into patient engagement as hospitals look to expand their outreach initiatives?

[Brent Lang:]

Well, I think patient engagement is a big part of what we're doing now. Our focus is really on delivering a better patient experience inside the hospital and large part of that is improving the caregiver experience as well. I think in the near-term our focus is primarily going to be within the care continuum of acute care hospitals and clinics and outpatient facilities. There is a lot of start-ups that they're trying to go after the patient in the home and I don't think that's necessarily a great fit with our model today. But I think there's a tremendous opportunity for Vocera to continue to drive better patient engagement within the acute care environments. One of the things that is sort of synonymous with patient engagement is responsiveness and the studies that we've seen show that if you can be responsive to a patient's needs or quickly remain more engaged in their own care and if when they get disgruntled or they feel like don't pay attention to them that they actually drop up with their own level of engagement. And so things like integration with the nurse call or integration with physiological monitors where the patients have a sense that the caregivers are paying attention to them and are responding their needs rapidly can be one of the biggest drivers of patient engagement.

[Operator:]

Your next question comes from Stephanie Demko with Citi. Your line is open.

[Stephanie Demko:]

Hi guys, thank you for taking my question. Could you talk a little bit about the process of your expansion at Intermountain from more of a fragmented approach to support enterprise contract and is anyone thing did push up over the edge for this expansion which can make it kind of replicable at other large health business partners?

[Brent Lang:]

Yes, hey Stephanie, we have been working with Intermountain for probably eight or nine years at this point. They have been a great partner for us even from the early days where we were still defining the capabilities of the solution and they bought historically a little bit of the time and gradually expanded to more and more facilities and it really came down to the fact that their users were extremely positive about the use of the product and when they internally did a survey of their users, the feedback came back very positive in favor of Vocera, strong demand for them to want to rollout across the rest of the facilities and to standardize it as their unified communications platform. So I’m not sure that there is any one thing that I could point to other than just really high customer satisfaction and basically proven capabilities. This is not something that they were taking a huge risk on because they had many years of experience of using the product and they've invested in the wireless network to make sure that it's got really solid coverage and the users have seen the benefit of what Vocera can do in an environment.

[Stephanie Demko:]

Got it. And then one quick follow-up just on the recent government wins. How should we think about your mix of federal business going forward and how could this impact margins if any?

[Brent Lang:]

So I think the mix will continue to be a balance between the VA and DoD. In Q3 this year around we had a higher concentration on the VA. While we still got a very large Greenfield opportunity in both the DoD side as well as in the VA side. And so I think you should expect to see ongoing wins in both of those. The DoD deals tend to be a little bit bigger than the VA deals just because the facilities are slightly larger but there is enough Greenfield opportunity in both sides of that business that I think you'll see growth in both. Clearly the SATOC contract should help us accelerate the DoD side of the business even more than it has been historically. But I wouldn't underestimate the ongoing potential within the VA as well. So I’d say we are excited about both pieces of it.

[Operator:]

[Operator Instructions]. Your next question comes from Gene Mannheimer with Dougherty & Company. Your line is open.

[Gene Mannheimer:]

Thanks, good afternoon and congrats on a good quarter. I wanted to dig in a little to the software trends you're seeing. You said, Justin that I think north of $10 million of software revenue in the quarter and that was due to combination in new shipments and cross-selling? So are you able to break that out for us say how much of the growth is net new shipments versus cross-sell into the base?

[Justin Spencer:]

No, it's really a combination of both, Gene, both new and existing customers and the cross-selling effort that we alluded to are really taking hold and that's driving a lot of the software sales. We're also seeing strong sales across the different license category, voice, messaging, Engage and other aspects of our platform. So it’s really broad-based and I think it's indicative of how the expanded platform that we now have has become really a truly complete solution and is being adopted at the enterprise level. And so as we look forward, we still have a lot of cross-selling opportunity, it's really nice to see cross-selling going in both directions where existing customers who were just using Engage added our voice and/or messaging and the opposite. So we had nice kind of cross-selling momentum across both of those dimensions and that will continue to be a driver of growth for us.

[Gene Mannheimer:]

That's great. Thanks for that Justin. And just a question around your revenue guidance for Q4, pretty wide range there $46 million to $51 million, so I'm just trying to think about what the X factor is there, are there any international deals contemplated in there that may or may not drop, any more granularity around that would be great?

[Justin Spencer:]

Yes, two primary factors there. One is the larger base of revenue that we have is you as everyone think is observed over time that as our revenue base has expanded, we have typically been also expanding our guidance range, that’s the biggest driver. We look at our guidance in the same way for this quarter in Q4, the exact same way that we have the last several quarters with our traditional framework of looking at our backlog and deferred revenue in our supply in the amount of book shipped. We do like we have had in prior quarters, we have some large deals that we expect to commercial revenue in the quarter and so we contemplate our best judgment around that and factor that into our guidance.

[Operator:]

There are no further questions at this time. I will now turn the call back over to Brent Lang.

[Brent Lang:]

Thanks everyone. I really appreciate the questions and we look forward to working with you moving forward. Have a great day.

[Operator:]

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