Vocera Communications, Inc.
Q4 2017 Earnings Call Transcript

Published: 9 Feb 2018

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to Vocera Communications' Conference Call. My name is Shantel and I'll be your coordinator for today. [Operator Instructions] 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:]

Thank you. Hello, everyone. Welcome to Vocera's Conference Call to discuss our fourth quarter and full year fiscal 2017 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 Web site 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 Web site 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. So with that, let me turn the call over to Brent.

[Brent Lang:]

Thanks, Sue. Good afternoon everyone. Thank you for joining us. Our fourth quarter was full of accomplishments, closing out a truly great year for Vocera and one I am really proud of. Fourth quarter revenue was $45.5 million, up 26% over the same period last year, bringing revenue for the year to $162.5 million, up 27% over 2016. Bookings for 2017 were $166.2 million, up 16% over last year. We finished off a strong year of adjusted EBITDA profitability growth and in an important milestone we achieved GAAP profitability in Q4. We hit many milestones in serving each of our major stakeholders, employees, customers, investors and our community and I will talk about these later in the call but first I would like to review some of the highlights, showcase some major wins and customers expansions, and discuss the market environment before giving Justin an opportunity to review our financials with you in more detail. Highlights of the year include record revenue and profitability, the successful integration of the Extension Healthcare acquisition, a banner year in the federal space, and continued progress in adding large enterprise scale accounts. We added a record number of new facilities during 2017 which is a great leading indicator of future growth. We also made meaningful progress with our large customer deployments, booked several sizable customer expansions, maintained very high customer satisfaction and grew our supplies business. The addition of Engage Software to our platform has changed the tone of the conversation and secured us a meaningful seat at the table with customers as they set their IT spending priorities. We believe that our success in the market is confirmation that the Vocera software platform is resonating with customers. In a market landscape driving hospitals to become more competitive and patient focused, the demand for our products is expanding. Both new and existing customers are seeking unified solutions to solve communications and clinical workflow challenges in order to achieve greater efficiency and to address the crisis of caregiver burnout. We believe this is a long term trend that will eventually transform healthcare and is resulting in a large and expanding market opportunity. Our mission is to improve cost, quality, patient experience and staff resiliency and we refer to these aspirations as the quadruple aim. A term which is receiving increased attention across the industry. Our vision to deliver a workflow solution to resolve friction points along the patients journey has been validated by published Gartner reports and recent class reports which gave a very positive assessment of our platform. The fourth quarter included some strategic wins in the federal market, exciting new hospital deals, successful cross-selling activity and robust expansions and supplies orders from existing customers. One highlight of the quarter was a $2.8 million booking from the Department of Defense. This deal which included two expansions and a new hospital addition was another follow on procurement awarded to Vocera by the U.S. Army Medical command, known as MEDCOM. Because of our official authority to operate the completeness of our solutions and the demonstrated ROI of our installed customer footprint, our hands free communication system is effectively the main standard for MEDCOM medical treatment facilities. In another $2.8 million booking, Sutter Health selected Vocera for two new California Pacific Medical Center hospitals being constructed in San Francisco. Sutter described their goal as seeking the best in care for patients and families when they move into these two facilities scheduled to open this summer. The initial deployment will include our voice, messaging and alarm management solutions with epic integrations to follow. While this largely represents two new facilities for Vocera, it's an expansion of our existing relationship with Sutter and comes on the heels of a great experience Sutter has had with Vocera in other facilities including Mills-Peninsula. We also had a landmark system wide at BayCare Health System in Tampa, Florida. This $1.4 million project will deploy our communications platform in the operating rooms of all 11 BayCare hospitals with the potential to expand to other department and add clinical integrations over time. This success validates our platform as an important last mile solution enhancing the existing IT and clinical systems. Meanwhile a new customer win at the Neuro-Diagnostic Institute in Indianapolis showcased our strength outside of the traditional acute care market. The leadership team was seeking clinical communications excellence for the new 159 bed facility they are building. They will deploy our hands free solutions to address important safety measures and they view our platform as a robust foundation for future clinical integration and Smartphone utilization. Our business with existing customers was particularly healthy this quarters with expansions in suppliers delivering robust results and software maintenance and support services continuing to produce a very high renewal rate. Land and expand remains a key element of our growth initiative. During the quarter we also successfully sold Engage into existing Vocera customers who are in general, North Shore, Wake Forest, Baptist Health and Tandem Hospital Partners, demonstrating the opportunity to cross sell our solutions into existing customers. Our international business also had some solid wins in Q4. We had a great $1 million expansion at Sidra Medical Center in Qatar, which has been a valuable source of expansions. We saw good initial results from our efforts to focus on our international markets which remains a top priority for us in 2018. Now I would like to provide some context about how we are looking at 2018, what we are seeing on the horizon and how this is impacting our strategic priorities. First, the hospital spending environment continues to be a big topic. While we weathered a chaotic 2017 well, we continue to listen carefully to our industry sources as well as our customers about budget priorities and spending plans. We are hearing that IT spending in hospitals is expected to be up around 5% to 7% and will be focused squarely on initiatives that create efficiency, improve the patient experience and address widespread caregiver burnout. If you attended these sessions from the big hospital systems during the JPMorgan conference last month, you heard these back to basics goals echoed time and again. While hospital spending is rarely robust, we address these goals directly that have the most complete solution to achieve them. On a technology side, several conventional competitive concerns continue to play out in our favor. BYOD or bring your own device continues to have very limited application for hospital based clinical workers, and hospitals are increasingly choosing to provide workers with devices based on their needs so they can maintain control of the device for security and the data. Regarding secure text messaging, the market has essentially decided this is a feature but it does not deliver a complete communications solution in a time sensitive life-critical environment. 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 the communications and workflow channels. This is leading to demand from the marketplace for a unified platform that delivers functionality across the patient journey and throughout the health system. There has also been some noise from the larger healthcare IT vendors around providing security texting to their hospital customers. We watched competition carefully and remain convinced that our complete platform combined with our customer footprint and unparalleled experience in implementing communications solutions is unmatched in the industry. We are becoming increasingly essential to the clinical decision-making delivering care and patient information to the right caregiver in the right place at the right time. We call this real time situational awareness and you will be hearing more from us about this in the future. Our ability to seamlessly integrate into clinical data further differentiates us from our competitors and cements our credibility with hospital systems as they set IT spending priorities. Our expanded platform is key to enabling the real time health system described in Gartner's report. We believe hospitals will increasingly recognize that in their quest to address the main friction points in the patient journey, they need a trusted partner to impact patient experience and caregiver resiliency. We have the expertise and the solutions to address these pain points within the acute care environment and beyond. Now I would like to highlight a couple of our key priorities for the coming year. In 2018, one of our top priorities will be to continue to win new hospital systems and drive system wide expansions in our existing customers. We will pursue cross-selling opportunities within our installed base and will increase focus on pursuing growth from our international markets. On the product side, we will continue to invest in our solutions to extend our clinical relevance both within and outside the four walls of the hospitals. We have a big year plan for new product introductions as we expand our solutions to help our customers. It's an exciting time for Vocera as we strive to grow the business and accelerate towards our profitability goals. I am proud of the work we have done to move closer to our target model and I am excited about our future. Now, I would like to give our CFO, Justin Spencer, a chance to cover the financial details around our Q4 results and our guidance for Q1 and 2018. Justin?

[Justin Spencer:]

Thanks, Brent. Hello, everyone. Vocera's fourth quarter capped a great year of financial results, highlighted by strong revenue growth and higher profitability and cash flow. Total revenue in Q4 grew 26% to $45.5 million, reflecting the expanding success and momentum of our broadened platform strategy. For the full year, total revenue was $162.5 million, an increase of 27% compared to 2016. Product revenue in the quarter increased 26% to $24.9 million with double digit growth at both devices and software. Our device revenue grew 17% in Q4 and was driven by expansions in supplies within our installed base and shipments to new customers. Our wearable badge continues to play a vital role in enhancing clinical communication and is a key differentiator for us as the adoption of voice enabled services accelerates. Software revenue grew 44% in Q4 and represented roughly 20% of our total revenue. We were very pleased with the trajectory of Engage during the year and it is now an integral part of our software platform. Most of our R&D spending is focused on our software platform and we will continue to invest aggressively to further distance our solution from our competitors. Services revenue in the quarter was $20.6 million, up 27% from last year. Our professional services revenue grew 39% to $6.2 million as a result of a strong demand for our implementation services. We have a robust professional services backlog tied to a much broader software offering and we believe that we will see another strong year of growth for professional services in 2018. The other large portion of our services portfolio is software maintenance and support. With the sizable increase in our customer base this year and a renewal rate well above 95%, our software maintenance and support revenue growth accelerated to 23% in Q4. This revenue is all recurring and was approximately 32% of our total revenue. This also led to a healthy increase in our deferred revenue which was nearly $64 million at year end. As we look forward, we expect growth in software maintenance and support to be robust again in 2018. With bookings continuing to exceed our revenue in 2017, we added to our total backlog in deferred revenue position ending at $128.1 million. While the backlog decreased slightly to $64.4 million, deferred revenue which is very predictable, is up substantially and reflects our ongoing transition to a more software driven model. And with the improved utilization of our professional services organization, particularly in the second half of 2017, we have improved our revenue conversion cycle which we expect to continue in 2018. On the profitability side, we were pleased to deliver significantly higher adjusted EBITDA of $9.3 million or 21% of revenue in Q4. This was higher than expected as we benefited from a favorable revenue mix and expense management. As a result, we achieved $2.7 million of GAAP net income this quarter, reaching this milestone much sooner than we expected. With the full year, our adjusted EBITDA was $13.1 million illustrating the strong operating leverage we have in our financial model at revenue growth. Now let me get into some more detail on our non-GAAP margins and operating expenses. Non-GAAP gross margin in Q4 was 68%, driven by a favorable revenue mix that enabled us to leverage our fixed cost. Product margin increased to 76% on the strength of both our device and software revenue. In our service business, you may remember that in Q4 2016, we brought over roughly 55 people in professional services and technical support from the acquired business, and we said that we would see meaningful margin improvement as 2017 progressed. As expected, our services gross margin improved from 47% in Q1 to 58% in Q4, reflecting the higher utilization and record services revenue that our technical support and professional services teams delivered in 2017. As we now look forward to 2018, we expect our overall non-GAAP gross margin to be between 63% and 65% with a similar product margin and slightly higher services margin compared to 2017. Given the normal revenue seasonality of our business, we expect the gross margin percentage to again be in the low 60s in the first half and then at our above 65% in the second half. Non-GAAP operating expenses were $22.3 million in Q4, similar to last year as we continued to manage our expenses. For the full year, operating expenses were $93.6 million or 58% of revenue. As reminder, 2017 included a full year of expenses from the acquired business as compared to only two months in 2016. We have been very focused on becoming more efficient throughout our entire business as we scale. In the last four years, our operating expense to revenue ratio has declined from 77% in 2014 to 58% in 2017, and we expect this positive trend to continue in 2018 as our revenue growth rate outpaces our expense growth. For 2018 we expect our operating expenses to grow between 6% and 8%, with roughly 49% of our expenses in the first half of the year and the remainder in the second half. Now I would like to make a few comments about our cash flow and balance sheet. We had very strong cash flow of $13 million in Q4 on the strength of our profitability and the timing of collections as we alluded to last quarter. For the full year we added $7 million of cash to the balance sheet. Even after roughly $4 million of acquisition related payments. Looking forward into 2018, we expect to again be cash flow positive for the full year. Cash flow will likely be negative in Q1 and then improve sequentially during the year, consistent with our normal revenue and profitability pattern. Our CapEx is expected to be around $5 million in 2018. With over $81 million of cash, no debt and expanding cash flow generation, our balance sheet is very strong. Now before I turn to guidance, I would like to talk about the new revenue standard, ASC 606, as it is really important to properly understand our 2018 guidance. Beginning in Q1 '18, we will adopt the new revenue recognition accounting standard called ASC 606, on a fully retrospective basis. As a reminder, this standard primarily effects the timing of revenue recognitions but does not change any of the economics of our customer engagement. While significant parts of our revenue model are not affected by the new standard, the time frame in which we recognize some of our perpetual software and the associated maintenance and professional services revenue, will change. Historically, a growing portion of our perpetual software revenue including Engage, has been recognized based on complex software revenue rules, often delaying revenue recognition until an entire customer implementation is complete. In the long-run ASC 606 will simplify our software revenue recognition and we expect it will enable us to recognize revenue from many of our customers faster. However, as part of the transition to ASC 606, a portion of our opening deferred revenue balance that we believe could have been recognized in 2018 under the previous standard, will be reduced by $8 million and recast to prior periods, thus increasing revenue in 2016 and 2017 compared to what we have reported. Much of this recast revenue is related to software licenses so we expect our software growth rate in 2018 to moderate a bit as a result of this accounting change. The inherent drives of our software business are as strong as ever and we expect to see our software growth comparisons improve as we get through these initial few quarters under the new standard. As we have said previously, overall revenue growth in the short-term will be a bit lower as a result of this deferred revenue loss while we build back over overall base of deferred revenue. But in the long run, we believe ASC 606 is a positive for our revenue model as we seek to continue to aggressively grow our software business. Since we will be required to provide recast financials under ASC 606 in our upcoming 10-K, we have provided preliminary estimates as an additional disclosure with today's earnings release so that you have all of that information now. With that, let me turn to guidance. There is good momentum in our business and we are optimistic about the future. We continue to see a large market opportunity in front of us which combined with our strong competitive position, it's with confidence that we can deliver healthy mid-teens organic growth over the next few years. Our 2018 guidance reflects the $8 million reduction in revenue that we believe could have been recognized in 2018 and has been moved into prior period as a result of adopting the new revenue recognition standard. For 2018, we expect revenue to be between $175 million and $183 million, following a similar seasonal pattern as last year, we expect roughly 46% of our revenue to occur in the first half and 54% to occur in the second half. With this annual revenue growth, we also expect to improve profitability and continue towards our target model. We expect adjusted EBITDA to be between $14 million and $20 million in 2018, improving each quarter as the year progresses. For the first quarter, we expect revenue to be between $37 million and $40 million, reflecting the impact of the accounting change. Adjusted EBITDA is expected to be negative $2 million, to be between negative $2 million and positive $300,000. In summary, we are very pleased with the financial results in the fourth quarter and 2017 and the momentum we carry into 2018. We have a robust sales pipeline along with a meaningful base of backlog and deferred revenue to fuel our revenue growth. As we execute on our plan for this year, we expect that we will continuing on a great progress towards our target model. I will now turn it back to Brent.

[Brent Lang:]

Thanks, Justin. Before wrapping up, I want to take moment during this year end call to talk about our four major stakeholders. Employees, customers, investors and our community. At Vocera, our culture is focused on making a positive impact as well as creating long-term value among all of the stakeholders. Let me go into a little more detail around that. First employees. In 2017, we successfully integrated the Extension Healthcare business into a unified company. In November, I also have the opportunity to visit our newly renovated office in Bangalore, India. It was the highlight of the year for me to experience the passion, the pride, and the teamwork this group demonstrates working in unity with the rest of the company. Our employee loyalty and engagement reflect the amazing team of people that we have assembled to achieve our shared goals. Next customers. Our mission of enabling the quadrupling is resonating and 2017 was a record year for adding new customer facilities to our business. We continue to maintain extremely high customer loyalty as measured by our maintenance renewal rates and customer net promoter scores and our customers view us as a trusted partner. For our investors, we have made tremendous progress in the business and we value the relationships we have built with the investment community. We believe our market opportunity, unique product sets and financial profile make Vocera a compelling investment. We have set a high bar for ourselves but we have the capabilities and opportunities to continue our momentum. Finally, our community. In addition to the commitments we make to our customers, investors and employees, we give back to the communities we live in. I am proud of the work we have done this year to share our success with the broader community. 2017 was a tough year for many parts of the world but our commitment to our communities continued with record levels of volunteering and assistance to local and international communities in need. To conclude, 2017 was a year of great accomplishments for Vocera. Demand for our products is on the rise as profitability is expanding as we transition to be an increasingly software [venture] [ph]. We have added more functionality and scalability to our highly differentiated software which is unmatched in the market place today. And as a result we have elevated our solution to be a must have for hospitals of all sizes. Thank you for your time today. Before opening up the call for questions, I would like to personally invite all of your to our investor breakfast at HIMSS on Wednesday, March 7. Feel free to contact Sue if you have any questions about this event. With that, operator, I would like to turn the call back over to your for questions. Thank you, very much.

[Operator:]

[Operator Instructions] Your first question comes from the line of Matthew Gillmor with Robert Baird. Your line is open.

[Matthew Gillmor:]

Commentary -- the $8 million in deferred revenue that essentially is showing up, is that fair to assume that that also essentially would have dropped down to the EBITDA line. Or as we are thinking about, sort of the apples to apples comparison of EBITDA versus the Street, is there some other cost to consider.

[Justin Spencer:]

Hi, Matt. Yes, that is a good presumption. The majority of the revenue that gets re-cast, reduced from deferred revenue gets re-cast into previous periods, is software. There are a few other pieces of it but it's largely software and so therefore has high margins. And so you can see and you will be able to see in the additional disclosures at the tables where we provide the 606 information that the flow down to EBITDA and net income etcetera is pretty close to what the revenue is.

[Matthew Gillmor:]

Okay. Great. That’s really helpful. And then one sort of environmental question I wanted to ask to see if have any had views on the budget compromise is making its way through Congress. I am sure you saw but it includes some language, it eliminates the requirements that [MV] [ph] standards increase over time. And I just wanted to know if your clients are still spending significant amounts on meaningfully its upgrade so maybe those dollars become available to Vocera, or are those investments pretty much made and so it doesn’t matter that much anymore.

[Brent Lang:]

Yes. I think for the most part, most of the major investments have already been made. Most organizations have already selected their electronic health record and have made those investments. Obviously there is ongoing maintenance payments and those kinds of things but I think the market has moved on beyond that. What we are hearing really from customers is a desire to try to optimize the EHR capability that they have already got. And whether it's defining meaningful use or whether it's just defined in the context of them trying to improve efficiency and patient experience, well I think their main focus is right now is trying to make use of the data that they captured in electronic health records. Make it more accessible to the care providers at the point of care and I think that’s where we can really step in and help by delivering that out and filtering the most appropriate data to those care providers.

[Operator:]

Your next question comes from the line of Nicholas Jansen with Raymond James. Your line is open.

[Nicholas Jansen:]

Thanks for all the detailed color. My first question would be just thinking about the Engage platform and the number of contracts today that are including that relative to where you were to start 2017. Just your progress on the integration there and the level of satisfaction that you have seen with your sales force of bringing more of those into the fold in terms of the combined business. Thanks.

[Brent Lang:]

Yes. Hi, Nick. Yes, we are really excited about it. Actually I think we are making great traction there in the number of deals that are including Engage. Both new deals as well as the installed base deals is definitely starting to ramp. I think as I mentioned before, it's really changed the tone of the conversation with customers that has brought us higher up into the C suite and increased the clinical relevance that we are bringing to the marketplace. It's truly a case of one plus one equals three here and as the products become more and more integrated together, this idea of bringing real time situational awareness which is essentially patient specific data, as well as care team data, right into the communication flow, is really changing the dynamic of what it even means to have clinical communication going on. And so I think that’s really captured the attention and the excitement of our customer base. At this point our sales force is becoming more and more comfortable selling the full solution complete, both sides of it regardless of their particular background. And we started to see, starting in Q3 and then really accelerating into Q4, more cross-sell opportunities coming in as well as complete platform. We were at our sales kick off meeting last week and really one of the core themes. Lot of excitement there across the combined teams and one of the core themes was the capability and the excitement around selling the combined platform. So I think we are making great progress on that front.

[Nicholas Jansen:]

Thanks for the color there. And then I guess my follow up question would be just in terms of your appetite for M&A. You have digested extension. You have done probably a much better job integrating then what most folks would have thought. So how do you think about your platform and your solutions stack today. We have seen some of your competitors make some dabbles into the space. I think it was secure messaging. So just trying to get your thoughts on rounding out their portfolio, anything that your customers are really asking for that you might have an eye out on as you think about adding capabilities to the solution. Thanks.

[Brent Lang:]

Yes. I think that M&A will certainly be part of our gross strategies as we move forward. I have said before that in terms of our core platform for communication collaboration, I don’t feel like we have got big gaps there. We are not loosing deals as a result of missing functionality. But I do think there is an opportunity to expand our offering into the market place in the context of the smart hospital or the real time health system and continue to eliminate these friction points around the patient's journey. So things like on-call scheduling, some of the predictive analytics. And then taking the voice user interface of our system to the next level in the context of a voice assistance, broader connectivity into the Internet of Things. These are all areas that we think are nice additional supplements to our core offering. They will actually increase the size of our total available market and allow us to expand the value proposition we are delivering to marketplace. So it's not an urgent must do, it's not like we feel like we have got a burning hole in the platform today that we need to fill. But we do see an opportunity to expand the value proposition and so we continue to look at M&A opportunities very selectively. As you mentioned, we are very happy with the progress that we have made over the last year integrating the extension healthcare business and that’s given us confidence that we will be ready to tackle another acquisition here in future. As long as the price is right and the financial model meets our standards and that it is a right cultural fit and obviously the product and strategic fit of where we are trying to drive the business. So you will see us continuing to explore opportunities in that space.

[Operator:]

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

[Mohan Naidu:]

Brent, just looking at the guidance and the backlog and the deferred revenues, it looks like you guys are coming again with lower coverage than the last couple of years. Just shows more confidence in booking and converting within the year. Can you talk about the drivers of that confidence and perhaps maybe a pipeline of what you are seeing there?

[Brent Lang:]

Hi, Mohan. Yes. So we actually feel really good about our revenue target and the guidance that we have put out there, here today, we have seen and I mentioned in my prepared remarks that we are seeing a higher revenue conversion cycle. So what we expect to be able to continue is to be able to convert our backlog and our deferred revenue. We have invested in a lot of capability and process improvement here over the last year that has enabled us to convert our backlog and our deferred revenue at a faster pace. So that’s clearly one of the benefits that we expect to continue to realize as we head into 2018. The other things is our bookings targets overall are going up. We see a large market opportunity. Our competitive position continues to be really strong and so we expect to be able to continue to penetrate the market even more deeply and expand the breadth of our solution and the east of our solution in our installed base. And all those things point to a strong bookings year for us in 2018. So as our bookings target increases, so does our opportunity to convert those bookings to [book ship] [ph] in the year.

[Mohan Naidu:]

I got to ask, any bookings growth targets that you can disclose or share with us?

[Brent Lang:]

No. We don’t typically guide or, kind of providing a feedback on that, other than to say we expect just as we continue to expect to drive organic revenue growth of mid-teens, our expectations for bookings growth would be in that range. And our goal is always to continue to build backlog and deferred revenue and that will be another goal for us in 2018.

[Mohan Naidu:]

Okay. One quick accounting change question here. With this change, do you get any benefit of perhaps recognizing some of the revenues that you not have had before this change in 2018, in the software side as you complete implementations.

[Brent Lang:]

Well, there is certainly -- in the long run there is certainly going to be a benefit from being able to convert our software revenue a little bit more quickly. Although it's going to take us a few quarters to kind of get into that group. The backdrop of that is that historically for a portion of our software business and it's been increasing because of the success of Engage. We have historically been required to defer some of our software revenue recognition and even though we have shipped the software to the customer until the very end of the project completion. One of the benefits of the moving to the new standard is that it will enable us to recognize that software at the time of shipment. So conceivably here over the next several quarters we will begin to benefit from being able to recognize that software revenue a bit more quickly.

[Operator:]

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

[Ryan Daniels:]

I apologize if you have mentioned this and I believe it was the case, but in the past you have provided some color on the number of facilities in which Vocera is deployed both U.S. and international. And I am curious if you have that year-end number for us.

[Justin Spencer:]

Hi, Ryan. Our typical pattern is to update those numbers in our 10-K. So we will come out with updated numbers. But just to orient you, we had over 1100 hospitals in the United States, 1400 customers facilities globally. We added, Brent mentioned in his prepared remarks that we added over a record number of facilities. I think we can safely say that it was in excess of 100 which is our goal. So that hopefully provides a little bit of framing for you.

[Ryan Daniels:]

Okay. That’s helpful. And then a housekeeping question for you. When you talk about operating expense growth, did you say that would be up 6% year-over-year or 9% year-over-year.

[Justin Spencer:]

6% to 8% was the growth range that we expect there in 2018.

[Ryan Daniels:]

Okay. Great. And then a couple of more accounting questions. 606, is that impact kind of prorated through the year, meaning that it's roughly a $2 million revenue reduction in each quarter. Or what it's skewed towards the attribution that you gave for revenue as a full year, kind of 46%, 54%.

[Justin Spencer:]

That $8 million would be spread not exactly evenly but there is probably not a large variance between the quarter. So it does account for some of the difference in terms of the guidance for Q1 in particular. But it is really -- that $8 million could have recognized really over the course of the full year.

[Ryan Daniels:]

Okay. And then maybe two big picture questions, and I will direct this toward Brent. You talked about JPMorgan conference and the conversation of the hospitals. And there's a few interesting data points both there and from the earnings transcripts. One of which was HCA, which indicated that they have a big focus on improving kind of work flow and there is workforce productivity. As part of that they are launching 100,000 iPhones to their nurses. And I am curious more broadly if you guys are seeing productivity become a bigger concern among the larger change at some of the for profits. And if so, is that a market where you think there could be an opportunity for a corporate level agreement for your software platform and how are you pursuing that.

[Brent Lang:]

Yes. Great question on multiple fronts. First of all, I think you are absolutely right that the focus on efficiency and reducing cost is the core theme. Somebody mentioned to me that the buzzwords and the experiments out there, concepts had gone away and it was really this back to basics concept around driving operation throughput, reducing cost, improving patient turnover. Really some of the back to basic concepts. And we feel like that plays very strongly into our hand because that’s really the value proposition that Vocera delivers the most directly. And so we do see an opportunity to sell our solutions into these larger changes. In fact, some of the changes we are making towards sales organizations as we head into 2018 are designed to put an increased focus on these large strategic accounts. We experimented with that a little bit last year and we had good success and so we are actually increasing our focus with these strategic account selling efforts. Selling more at the corporate headquarters levels and making some investments on bringing in some of our best closures to really focus in on those larger opportunities. It's our sense that decision making is becoming more centralized and we think the timing is right for those folks to consider Vocera's application and obviously we will be a great solution to help drive some of that operating efficiency.

[Ryan Daniels:]

Okay. Very helpful color. And then last one, you didn't mentioned this in your prepared remarks but I know you had a press release about St. Vincent's over in Australia. And I am curious if you could give a little bit more color on that given that that’s more of a senior living facility or age facility, I guess as they refer to it in Australia. Seems to be another novel market you are cracking into. And I think you mentioned you have got 35 age care facilities that you signed in Australia alone. So it seems like you are getting great traction there. So is there anything unique about that market where your products are being adopted in senior housing versus the U.S., regarding the U.S. which is a much much larger market for that. Do you see an opportunity for growth there as well? Thanks.

[Brent Lang:]

Yes. So we have had good success in the Australian market for age care for several years. It was really adopting solution earlier there than it was here. I think it was a combination of sales execution on the ground where we have made some good initial contacts there and demonstrated the value proposition very clearly. There is also, it's fair to say more money in those age care facilities, senior living facilities in Australia. More government subsidization in those environments than we see here in the U.S. where many of those organizations are not well funded. But we are starting to see some traction here in the U.S. and it's one of the exciting new growth opportunities that we are driving teens towards in 2018. You may have remembered in Q4 we did the announcement around the [indiscernible] care chain that we landed here in San Francisco Bay area which is another age care senior living kind of environment. And we think the value proposition that we are delivering translates really nicely to that environments and the sales team is excited about it. The other thing that’s working to our advantage in that space is that more and more of those organizations are becoming more closely aligned with the integrated delivery networks and health systems. And so we can leverage the relationships that we have with the integrated delivery network systems for the sales process. So I think you will hear more from us in that category on a go forward basis. It's certainly one we are excited about.

[Operator:]

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

[Jamie Stockton:]

I guess, maybe just a couple. Justin, the sales and marketing expense during the quarter ticked down, I think, is there some noise in that number? Is it a new kind of base line that we should think about that’s helping to contain OpEx in 2018. Anything you can tell there that would be great.

[Justin Spencer:]

Yes. Nothing unusual. From time to time, particularly in Q4, which is the last quarter of our fiscal year, there can be fluctuations in sales commission expense. That was the largest driver. That was more of a function of just the mix. We have different commission rates based on different variables in our plan. So commission expense was a little bit lower. I think the base line for Q1 and heading into next year would probably look at kind of a rough Q2, Q3 number. That would give you a good reference for where to pick that in 2018.

[Jamie Stockton:]

Okay. That’s great. And then, Brent, it seems like there are a number of the electronic health record companies that are looking at voice assistance or virtual assistance, whatever you want to call them. Rolling them out in some time in 2018. As you and I have talked about, it seems like your badge, or your communication platform is a very, kind of logical front-end for those. Can you give us any color about level of work that’s going on right now to make sure that integration can happen and you know is there anything kind of else out there that we should be thinking about that would be a rally logical enabler of your badges to drive that kind of technology deeper into healthcare and maybe especially deeper into sites that are not the hospital.

[Brent Lang:]

Yes. I think we are excited about the fact that voice as a user interface is gaining more traction and becoming more mainstream. And we are also excited about the fact that there seems to be an opening up, I mean the announcements that Apple is making, the announcements that Amazon is making, the announcements, the work that Google is doing. These are great examples of larger companies who are putting pressure on this industry to become more open and more transparent. And also we are investing heavily in speed recognition technology that we can then leverage as part of our platform. So I am really excited about the possibility of adding that, as additional value add on to the core functionality that we offer. And as you mentioned, we have got a tremendous footprint in the marketplace with existing users already wearing a Vocera badge or carrying a Smartphone, running a Vocera app that could tap into that functionality. And I see this as core to some of the work I was talking around real time situational awareness. Both the ability to deliver that information out to the care provider and also over time to potentially update more information back the other direction. And the more attention that this gets the better it is for us because there is more inertia around opening up those APIs and interfaces and also improving the speed recognition that we end a being a consumer of.

[Operator:]

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

[Matt Hewitt:]

Congratulations on the success in '17. I want to follow up a little bit on the international opportunity. You mentioned Qatar in the prepared remarks. You had a press release out here recently talking about the united kingdom. Where is that as a percentage of sales today and what markets in particular do you see that the greatest near-term opportunity? Is that Europe, the Middle East, if you could provide a little color there that would be helpful?

[Justin Spencer:]

Yes. Matt, so international for 2017 was right around 10% of revenue. And it's really across four different areas. So Canada is probably the largest and actually has got a strong second half to the year. The Australia and New Zealand markets which we talked about earlier with the age care, we are really just getting started in the hospital market there. The Middle East which up until now has been primarily focused around the UAE in Dubai and Abu Dhabi and a little bit in Qatar. A big opportunity there is in the Saudi market which is starting to build its momentum. And then in the U.K., in the U.K. we sort of had the business slowing a little bit over the last couple of years but we feel like we have an opportunity to really reenergize that. We have made some changes there. We brought in a new country manager, a guy who moves down from the U.S. who is leading that effort. And made some other changes over the course of the summer that are already starting to pay dividends in the growth there. So you are going to see international growth for us faster than our business overall this year. And we are going to be on a steady path towards driving that to be a higher percentage of the overall business. I don’t know that I would pick out any one geography although I think the biggest opportunity for really accelerated growth was going to be in the Middle East, depending on the new hospital construction that’s going on there. But the regions, Canada and Australia and U.K. also represent really exciting growth opportunities for us. One of the things we realized and we have made some changes accordingly is that we really needed to mirror a team based selling approach that we use here in the U.S., In some of these international markets it's not effective just to drop a sales person and wish them the best. The way we are able to be successful in enterprise selling here in the U.S. is a combination of a selling effort as well technical expertise from a systems engineer, as well as clinical expertise from a clinical executive. And then obviously the support of the services and support organizations. And we have now made those investments in the regions that we are currently serving and I hope that that will deliver a faster acceleration of bookings and revenue in that market.

[Matt Hewitt:]

Great. Thanks. And maybe one additional question. A couple of years ago when you signed [Francisca] [ph] and a couple of your first large enterprise type wins. The expectations at that time was that they were going to take 16, 18, maybe a little bit longer months to get you to their hospitals up and running. Maybe an update on where those are today? What you have learned from those experiences and how going forward with a large enterprise type win, has that time to implementation, has that shrunk? Any color along those lines. Thank you.

[Brent Lang:]

Hi, Matt. Yes, we just really kind of began in earnest back in 2015 and has really continued to be an important theme and driver of our business. And we see that continuing as we head into 2018 and beyond. And I think we are really proud of the effort that we have made to really transform the company, not just from a selling standpoint but also from a deployment standpoint to be able to support that sell and support these large deployments. There is still several of these larger projects, [Francisca] [ph] and UNC are still ongoing. So there is a little bit more revenue to be able to recognize there from those projects. But they have by and large gone really well. Our focus now is really on the VA facilities that we closed in Q3 and making sure that those implementations go really well and are successful. We are really proud of our professional services team and the work that they have done to implement these solutions. They have really evolved their expertise from not just kind of a voice implementation to a broader kind of workflow and collaboration platform including the addition of Engage. And that’s added a lot more complexity to the implementation. And our professional services team has done a great job of working with the customer to make sure that the projects are properly scoped, timed and implemented in a timely basis. So this is an ongoing effort for us and we are really proud of the fact that when we put a project plan in front of our customer and a proposal to go live across multiple facilities, we have an ability really to support that in a great way.

[Operator:]

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

[Sean Wieland:]

So another 606 question, believe it or not. So presumably you will be able to recognize some revenue under the new accounting terms in '18 that would have been recognized in maybe '19 or '20. So is the $8 million you are talking about, was that net of revenue that you would be able recognize earlier in '18 or am I not thinking about that right.

[Justin Spencer:]

Sean, our guidance does incorporate some benefit from being able to [temper] [ph] revenue a bit more quickly. But it's really hard to estimate that because there is a significant portion of our revenue which comes from future bookings. So our main purposes was really to highlight that $8 million as the true revenue reduction. I guess re-cast into prior period. And we are hopeful that as we continue to deliver on our bookings growth in 2018, we will be able to pick up some additional revenue from being able to benefit under the new standard.

[Sean Wieland:]

Okay. So how much is of the faster backlog to revenue conversion cycle that you are seeing? How much of that is related to 606 and how much of that is just related to your ability to deliver products to customers.

[Justin Spencer:]

The maturity is really attributable to being able to deliver revenue faster. We really focused on that in 2017 and expect that to continue as we head into 2018. There is very little that we have specifically earmarked or allocated to the faster revenue conversion from 606.

[Sean Wieland:]

Okay. Great. And one more for you, which is how much runway do you think you got left within this government business, MEDCOM and VA and DoD.

[Brent Lang:]

Quite a bit. You know if you look at across the various branches including the VA, we are only about half penetrated into those marketplaces. It's obviously more penetrated in certain regions, in certain branches with the Army being probably the highest penetrated but very little penetration so far in the navy and the air force and a large number of VA facilities that are still opportunities for us to rollout. And then also a large amount of cross-sell opportunity remaining to come there as well. So we expect the fed business to continue to be a substantial portion of our business moving forward for the next several years.

[Operator:]

Your next question comes from the line of Steven Wardell with Chardan Capital Markets. Your line is open.

[Steven Wardell:]

Congrats on the quarter. Can you tell us more about what you are hearing in 2018 from your international customers and prospects? What are some of the issues that are going on for them and how may that translate into demand for your solutions.

[Brent Lang:]

Yes. I think in general terms, I would classify the international market as being just a few years behind the U.S. market in technology adoption. They are a little bit earlier on in their deployment of the electronic health records that has eliminated more distraction or interference from those deployments that we see here in the U.S. If you are looking at say the U.K. or the Australia market, there is a consistent theme around operational efficiency and cost reduction, particularly in the U.K. markets where they are under tighter budget constraints. The Middle East market is really characterized largely around new hospital construction and that really favors our products to do very very well in new Greenfield environment. Similarly in Canada. Some of our acceleration in the Canadian market is a result of new hospital construction and that is good news for the most part. It's bad news in the sense that sometimes those deals take longer to get deployed because we have to actually wait for the hospital to be completed from a construction standpoint. But it does drive strong momentum and typically ends up unlocking budget dollars that otherwise would be harder to come by. So I think that overall, international represents a nice growth opportunity. We are excited about it moving into '18.

[Operator:]

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

[Dave Larsen:]

Congratulations on the good quarter. So if we were to exclude the impact of 606. I mean it looks like you posted about a 21% adjusted EBITDA mortgage in the quarter. Like what are you expect your sort of go forward EBITDA margin to be if we didn’t have this whole accounting rule change. Like I am thinking about 2019 and beyond. Any color there would be really helpful. Thanks.

[Justin Spencer:]

Hi, Dave. You know we have been on this important journey to not only grow our revenue but also improve profitability and we feel really good about the trajectory that we are on. Our current commitment, and this is something that we, Brent and I and the team really feel very very committed to and it's important point of emphasis internally, is really deliver on our target model. We did deliver 20% plus EBITDA margins in Q4. We did benefit from some really positive mix variable there and a little bit lower OpEx than we had anticipated. So Q4 isn't necessarily on kind of an educator of kind of near term trajectory but it is illustrative of the tremendous leverage that we have in our business as we ramp revenue and as our revenue outpaces our overall operating expense growth. You know as we look to 2018, our guidance does reflect pretty significant leverage. And then heading into 2019, kind of back to the envelope, a rule of thumb, kind of 40% incremental margin is what we are currently targeting and we feel like we can continue to deliver that on an organic basis. Certainly inorganic growth tends to change that temporarily but on an organic basis, if we continue to drive higher levels of talks where we get more leverage and productivity out of our sales force which we have been doing a good job of being able to accomplish that over the last few years, there is much more capacity to drive incremental margins and we feel like that potential is anywhere in the neighborhood of roughly $0.40 on every incremental dollar. So if you kind of think about 2019 or the trajectory heading out of '18 and the '19, that’s the kind of leverage that we believe we can continue to level on.

[Operator:]

Your next question comes from the line of Steve Halper with Cantor Fitzgerald. Your line is open.

[Steve Halper:]

So when you look at the midpoint of the guidance range for revenue it's $180 million, and you compare that to your re-cast 2017 numbers, I think it was $165 million. So that’s 9% growth and you said that you are still looking for mid-teens growth. So can you just sort of bridge me through the delta there between the 9% growth and the mid-teens? And I am sure I am missing something relative to the accounting adjustment.

[Justin Spencer:]

Yes. Hi, Steve. So couple of thoughts. First, when we provide our guidance, we have traditionally tried to be pretty conservative with our guidance and so we don’t target the midpoint. We think about internal targets towards the high end of the range and that’s all, with our goal is to certainly beat the consensus and it's not exceeded the top end of the range. So just think about, that’s important consideration as you kind of contemplate how we are thinking about our overall guidance. As we think about 2018, I do go back to 606 and the impact of that. We have roughly $8 million of deferred revenue that we lose off of our balance sheet that does get re-cast in the prior period. Someone might ask, well the compared to the re-cast numbers for '17 and '16 looks a little bit different now. But I would just say that we were operating the business under previous rules. Had those rules been in effect we might have had a different cadence to our overall business. So the historical comparison are not, in our view, as relevant as more kind of accounting related changes than anything. As we think about our business going forward, we delivered in 2017, 16% bookings growth. Our bookings exceeded our revenue which enabled us to continue to build backlog and deferred revenue. We believe we will continue to benefit from slightly faster revenue conversion cycles. So all of that point to a level of visibility and achievement in terms of the overall revenue guidance for 2018. And as we head towards the backend of the year, we will start to move away from this 606, the impact to this 606 transition, and get back to more kind of normalized growth rate for our business.

[Operator:]

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

[Stephanie Davis:]

Continuing on Sean's line of questioning, could you talk a little bit the dynamics of your federal contracts. For example, for a sizable opportunities like the VA and DoD, are there larger [grouping] [ph] of systems or a tipping point for adoption where they could be more of a mass decision towards the end.

[Brent Lang:]

Hi, Stephanie. So typically what we have seen in the VA is decision making that’s either were made at the individual hospital level or has been made at the [vision] [ph] level. The vision is a regional designation. There are 23 visions across the United States for organization the various VA facilities. And typically the budget dollars are controlled within each of those visions or they are controlled at individual hospital level. We have not seen -- the VA has in the past with other technology decisions made a decision across the entire VA system. We have not seen that yet within the communication collaboration space that we play in. Most of the budget dollars and the decision making has been driven at the vision level. Now having said that, I will tell you that we have a tremendous amount of momentum within the VA. We are, as I mentioned in the prepared remarks, we are essentially the de facto standard and based on not only the capabilities of the products that we have and the success we have had in deploying those products across the various VA facilities, but also because of the security requirements and the certifications that we have passed through, it creates for a very favorable environment for us. It really comes down to budget availability and obviously budget environments that we are discussing now where we are talking about funding, potentially funding the VA, more further in advance give them the opportunity to think further in advance of about their budget priorities and could be a potential tailwind for us. I don’t think this will move to an environment where we wake up one day and the VA will just suddenly say to us, we award you our purchase order for the remaining facilities in one fell swoop. I think we still have to do active selling to drive those sales. And I do think that our momentum in that space is going to continue to be an advantage for us.

[Operator:]

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

[Gene Mannheimer:]

Congrats on a strong finish. There is a lot of discussion around the federal bookings, and do you or the federal business, do you think you can grow the federal bookings above that which you did in 2017 this year.

[Brent Lang:]

I think it's too early to know Gene, honestly. You know the success in the federal bookings is typically something we get much better visibility into by the time we get to Q3. 2017 was a phenomenal year for us on the federal side surpassing even what we did in 2016 with MEDCOM. And so I don’t think I necessarily want to back myself into a corner in saying that we think it will be greater than 2017. Just because it was such an exceptional year for us but there is a lot of business left to be had in the federal space. And we are building pipeline and the team is working to unlock those budget dollar and we will certainly know more as we progress throughout the year. Having said that, I don’t think that that’s necessary a requirement for growth. We have a lot of other great growth drivers in the business. The cross-sell opportunity, both in the fed space as well as in our commercial space, represents a large growth opportunity for us. We have talked a lot about international on the call. And more fundamentally, the opportunity to sell more of these large integrated delivery networks in health systems. We are really just getting started here. There are a very large number of these large healthy systems that are just now getting serious about communication collaboration and they represent large, multimillion dollar opportunities for us that we are extremely well positioned to win and could represent a new wave of bookings that would frankly the dwarf the federal piece. You know fed tends to be somewhere between 10% and 15% of our business and so really the success of our overall business is going to come from all these multiple growth drivers. Each one varies from quarter-to-quarter but the nice thing about our business is that we have got a balanced portfolio that allows us to tap into the various growth drivers.

[Operator:]

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

[Brent Lang:]

Okay. I really appreciate everyone's time today. Lots of great questions and details and we look forward to following up with you. And again if you have any interest in participating in the investor breakfast at HIMSS, please feel free to reach out to Sue and we will get you the details so that we can see you there. Thanks a lot.

[Operator:]

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