Vocera Communications, Inc.
Q1 2015 Earnings Call Transcript

Published: 24 Apr 2015

[Operator:]

Good afternoon, ladies and gentlemen. Welcome to the First Quarter 2015 Vocera Communications Conference Call. My name is Chris, and I'll be your conference moderator for today. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session [Operator Instructions]. And now, I would turn the presentation over to your host for today Mr. Jay Spitzen, General Counsel. Sir, you may proceed.

[Jay Spitzen:]

Hello, everyone. Earlier this afternoon, Vocera distributed a press release, detailing our quarterly results. It is posted on our Web site at www.vocera.com and 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. 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. This conference call will contain forward-looking information, including statements regarding Vocera's projected operating results and anticipated market opportunities. This forward-looking information is subject to risks and uncertainties described in Vocera's filings with the Securities & Exchange Commission. Actual results or events may differ materially. Let me now introduce our President and CEO, Brent Lang. Brent?

[Brent Lang:]

Thanks Jay. Good afternoon, everyone. The first quarter of 2015 was another solid quarter for Vocera. I'm pleased to report, our revenue of $23.8 million and our profitability, both exceed our expectation and demonstrated continued momentum in our business. Based on hospital budget cycles, Q1 is typically a seasonally low quarter for bookings, and this year was consistent with that pattern. However, we continue to build on the momentum of the second-half of last year, and our bookings and backlog are both up compared with Q1 of 2014. I'm particularly pleased with the impact our strategic investments in international and new products are having on our business. In our international business, we saw strong growth in the Asia-Pacific region, and we're seeing increased traction in the Middle East. As we look forward to Q2, we expect continued acceleration in our international business. Bookings for our new products continue to grow. We were particularly excited about a $0.5 million, Alarm Management deal that booked in the quarter, the first of its kind. In addition, I'm encouraged by the customer response generated by our recent announcements of our Secure Texting offering, our new app for the Apple Watch and clinical integration work we're doing with Epic and other vendors. I'll be covering these in more detail later on this call. Overall, I'm pleased by the progress we're making in the business. The broader industry trends are becoming more favorable. Strategically and operationally, we are on the right track and are making good progress towards our vision of becoming the leading provider of care coordination solution for the healthcare industry by delivering secure, intelligent and integrated communication solutions. Let me start by providing some commentary onto what we're seeing in the market at a macro level. Based on our recent survey, hospital CEOs remain very concerned about their financial position. Worries over Medicare reimbursement, bad-debt and decreasing in-patient volume continue to drive high levels of scrutiny on spending. As a result of more centralized budget approvals, sales cycles continued to be elongated. Hospitals remain focused on reducing operating costs, but we are not seeing the kinds of extreme budget freezes that we saw in the first-half of last year. In fact, our solutions are well suited to help health systems achieve operational efficiencies and cost savings, and our sales approach have evolved significantly to emphasize those benefits and demonstrate the ROI of our solutions. We believe that the focus on other IT investment, such as meaningful use and icd-10, are declining, while investments in data security and mobility are on the rise. We're seeing hospitals focus more of their attention on clinical communication and mobility in order to improve quality, safety, data security and efficiency. The trends for population health and alternative payment models appear to be driving providers to look at improving care coordination and efficiency across their systems. Our vision and technology platforms are well matched with this market transition. Finally, market consolidation among healthcare providers continues at a rapid pace as health systems merge and vertically integrated with out-patients service lines. This is driving greater demand for turnkey end-to-end enterprise solutions and a desire from customers to reduce the number of vendors that they work with. This works to our advantage as we only communication provider with truly scalable and selectable enterprise class solutions. Overall, our core hospital markets still under enormous change and pressure. But we believe this spending environment is improving and the demand for our solutions will continue to grow. Now, let me turn to some highlights from the first quarter, in customer ends, growth in new products and international market expansion. While the first quarter showed typical seasonality, bookings in the U.S. for our core voice products sold into new hospital and customer expansion, were up compared with Q1 of last year. In addition, our competitive win-rates and our software maintenance renewal rate remained high. During Q1, we started shipping the new B3000n badge which features several new key improvements, including the ability to operate on both the 2.4 and 5 gigahertz Wi-Fi bands, enhancing connectivity, voice quality and speech recognition. Even with all the discussion about smartphones in hospitals, hands-free is still really important to a significant portion of hospital-staff, who can’t stop what they're doing in order to pull the phone of out their pockets. The Vocera badge remains a significant part of our overall communication solutions and demand for the product remains high. Orders for the new badge in Q1 were above our forecasted levels, indicating strong initial interest in this new product. New customer highlights in the first quarter included Finley Hospital in Iowa, our eighth Unity Point hospital. We also had competitive wins at Chester Medical Center and Capital Regional Medical Center. Several new customers purchased a combination of Vocera badges and the Vocera Collaboration Suite to run on smartphones. Our integrations with Epic, Nurse Call and other clinical systems were an important part in our success. I also want to call out our win at Hamilton County, a 25 bed critical access hospital highlighting how our ability to help improve response times, the efficiency and safety is valuable for all sizes of hospitals. Significant customer expansions in the quarter included [Reign] Hospital, which ordered a house-wide badge replacement with the new B3000n, Wellington Hospital, which added collaborations to these licenses, Champlain Valley Hospital that expanded house-wide and Riverside Methodist, which increased the size and its deployment in support of an Epic rollout. Within our federal business, we sold badge upgrade to two Veterans Affairs Hospitals, Ralph H. Johnson in Charleston, Virginia and Chillicothe Medical Center in Ohio. Currently, we are in 32 of the 153 VA Hospitals and our federal pipeline continues to grow. Outside healthcare, we signed an expansion with the large the large vacation club and our second Four Seasons Hotel, adding a property in Denver. While it remains a small percentage of our business, we continue to pursue non-health care business in hospitality, power generation and public safety and believe there remains a growth opportunity in these markets. Now let me give you an update on the success of our new products. Bookings for new products were up substantially in Q1 on year-over-year basis and represent a small but growing portion of our overall business. A particular note, we booked two new Vocera Alarm management customers in the quarter, the hospital for sick children, a 370-bed pediatric research and teaching hospital in Toronto Canada is noteworthy, not only for its size but also because of our solution replaces SAT view pagers, which are now passed end of life. At the time of acquiring this technology and launching the product last July, we believe that there was a large installed-based of potentially hundreds of outdated unsupported GE SAT view systems still in use. I am happy to see that one of our first sales took advantage of this opportunity with our house-wide deployment that will include 1,000 nurses. Care experience booking grew year-over-year as well, highlights included mission help, a six hospital system that expanded to use of the good-to-go discharge module across additional locations. The University of Chicago Medical Center, which expanded its use of the care round module to capture patient feedback in out-patient radiology, lab and physical therapy, and Inglewood Hospital, a new customer who purchased our care called module. On our last call, we announced an initiative to expand beyond hospitals with the goal of delivering better care coordination for patients throughout their entire healthcare experience. This strategic initiative supports our mission to help customers deliver better quality care and is aligned with new reimbursement models associated with population heath. There is a lot of discussion about what population health is and how it will achieve, and Vocera has learned from our customers the communication is a critical building block for care coordination and population health. Patient data stored in electronic health record does not eliminate the need for communication between clinician. In fact, people are finding that as care becomes increasingly disjointed, communication between people is necessary to provide critical context for the EHR data. We are creating a communication's layer to support this data exchange. As part of our overall clinical communication solution, our cloud-based Secured Texting product combines the convenience physicians need with the security and patient privacy health system to acquire. It connects seamlessly with the Vocera Communication Systems installed at our customers, leveraging the existing Vocera directory. It will enable physicians to securely text teams and improve care coordination, operational efficiency and patient experience. This project remains on track for a mid-year launch and we demonstrated that to customers last week at HIMSS. We also received very positive feedback at HIMSS on the announcement of our new app for the Apple Watch. The Vocera app for the Apple Watch is an extension to our collaborations suite and will allow users to view and respond to priority calls, alerts and messages from other care team members and clinical systems, including critical lab guys and stat orders without having to remove their iPhone from their pocket. In addition, users will be able to manage key communication functions by setting their availability, enabling proper message routing and escalation. The Vocera app also allows users to initiative panic call from the watch and manned-down emergency situation, thus improving staff safety. While our watch app will be free, it will help drive additional sales of the Collaboration Suite running on iPhones and the sale of additional platform licenses. In the quarter, we also introduced additional clinical integration capabilities, including enhanced functionality that enables two-way interactive communication between our solutions and electronic health records. This is the first that several two-way clinical integrations with the EHRs and furthers our commitment to increasing level of connectivity between the company’s communication system and other clinical systems. Working with Epic this initial two-way integration for environmental services makes it easier for housekeepers to provide real-time updates for bed cleaning status and availability and improve patients flow. Housekeepers can use voice commands on their Vocera device to respond to messages from the EHR in order to update their work status, while also providing the time-based data needed for ongoing staff efficiency and work-flow performance measurement. Recently, we also highlighted our integration with Meditech at Stillwater Medical Center where connectivity between the Vocera and other physicians’ CPOE systems streamline communications of physician orders to staff. We believe that real-time communication and collaboration requires robust two-way integration between EHRs, clinical systems and our communication platform. We are working on a variety of integrations between EHRs and Vocera solutions in order to accelerate our customer's ability to deliver better care. Switching gears let me update you on the progress in the international market. Q1 was a solid quarter for international. Australia had a particularly strong quarter, including a large expansion at Princess Alexandra Hospital with 800 D3000n badges and a number of Collaboration Suite licenses. Our team also continues to penetrate the country’s elder care market, adding two new long-term care facilities. During the quarter, the Cleveland Clinic in Abu Dhabi opened with our communication solutions deployed house-wide, providing a great regional show-cage for our products. Another large hospital opening soon into the region is Sidra Hospital in Qatar, which placed the large order in Q1 and is planning further expansion in the future. In order to grow our Middle East business even faster, we’ve recently signed two new reseller agreements with local partners. In Saudi Arabia, we signed a reseller agreement with Care HDH, a leading technology supplier to the Saudi healthcare market. We also signed Imatek as a reseller to invite coverage in large portions of the Middle East. I'm really excited by the growth of the sales pipeline in these international markets, which are poised for substantial growth in future quarters. Overall, I'm pleased for the progress we've made in Q1, delivering results above expectations and executing on the important strategic initiatives that will propel our future growth. As the domestic hospital market continues to stabilize and our own execution towards our goal to improve, I remain confident in our ability to return growth to our business, while improving profitability. Now, let me give our CFO, Justin Spencer, a chance to provide some financial highlights. Justin?

[Justin Spencer:]

Thanks Brent. Hello everyone. Vocera's first quarter results represent a solid beginning to our fiscal year, exceeding both our top and bottom-line expectations. First quarter revenue was $23.8 million. Product revenue was $12.5 million, down from last year. But our product backlog is up year-over-year and we are seeing continued momentum with our new products. New product revenue is still a relatively small percentage of our total revenue, and is expected to be lumpy as it ramps. Services revenue was $11.4 million up 8% from last year. We benefitted from a growing base of customers, utilizing our software maintenance and support services and continue to see a strong healthcare customer renewal rate. Software maintenance and support revenue up 9% from last year is all recurring, and was approximately 80% of our total services revenue. Our services offerings are a key differentiator for Vocera, and we expect them to continue to grow as our installed base expands. As our new perpetual software products increase, such as Collaboration Suite and Alarm Management, this will add to our maintenance and support revenue mix. To complete the revenue picture, we continue to maintain strong backlog in deferred revenue, which contribute to good revenue visibility in the near-term. As mentioned previously, our backlog in deferred revenue tend to follow as a typical seasonal pattern as we see with our sales activity, usually declining in the first-half for the year and increasing in the second-half. Non-GAAP gross margin was 62.7%, better than we expected and up from 61.8% in Q1 last year. Our gross margin reflected a good product mix with higher than expected software revenue, solid services margins and a continued focus on operational efficiency in our manufacturing operations. We also have lower operating expenses, reflecting the benefit of our cost reduction actions. In Q1, our non-GAAP operating expenses were $16.5 million, down 12% from last year. While our OpEx spending was lower than we expected in Q1, we continue to hire in our key growth areas and we still expect to achieve a 3% to 5% year-over-year reduction in OpEx for all of 2015 as we committed previously. We have a strong investment posture in R&D focused on our new products, have shifted sales resources to high growth regions, both in the U.S. and abroad and have reduced our G&A and discretionary expenses. With the higher gross margin and lower operating expenses in the quarter, our adjusted EBITDA loss improved to $1 million, our best result in several quarters and we are still targeting break-even by year end. Our non-GAAP loss per share also improved meaningfully to $0.7 compared to $0.14 last year. We have strong leverage in our business model with the capacity to achieve high incremental profit as our revenue grows. Now, I'd like to make a few comments on our balance sheet. Our balance sheet is very strong with just over $115 million in cash and short-term investments and no debt. Our cash flow performance exceeded our expectations again as we benefited from improved profitability, lower inventories and solid management of our working capital. We expect our cash to decrease in Q2 due to a planned inventory increase as we ramp volumes in the B3000n badge and an increase of accounts receivable as a result of a more normal collection pattern. We continue to be very focused on effective capital allocation and management. Now, let me turn to guidance. Overall, we feel like we’re off to a solid start with backlog in deferred revenue balances at record Q1 levels, providing good near-term visibility to revenue. Although, we continue to face some headwinds and remain somewhat cautious with the overall hospital spending environment, we are focused on building momentum with our new products and international expansion. Our full year revenue and profitability guidance remains unchanged. For the second quarter of 2015, the Company expects revenue between $22 million and $24 million and a GAAP loss per share between $0.28 and $0.23. The Company expects a non-GAAP loss per share of $0.15 to $0.09. And non-GAAP adjusted EBITDA loss to be between $3.3 million and $1.8 million. A reconciliation of GAAP to non-GAAP measures and second quarter guidance are included in the financial statements accompanying the press release. In summary, I'm pleased with the solid start to our year with good sales momentum and a linear cost structure. We are laser focused on executing well across the Company. And we continue to have a strong balance sheet and platform for growth. I'll now turn it back to Brent.

[Brent Lang:]

Thanks, Justin. Before I close, I want to thank those of you who attended our investor lunch at HIMSS. I found the dialog informative and helpful, and hope you thought the same way. We received particularly positive feedback on how we have transformed the Company to provide a complete clinical communication solution. The discussion around the app for Apple Watch and how it's different from other apps was also mentioned as a highlight. My management team and I enjoyed the opportunity to interact with you and hear your perspective. In the future, we’ll look to continue for ways to demonstrate our product and evolving value propositions, so that you can gain a better understanding of our business. Let me wrap up my sayings and I'm encouraged by the progress our team has made. The market demand for our solution is increasing. We have significantly expanded the addressable market we serve by adding new products that are gaining traction in the market and by our expansion into new geographic regions that are growing rapidly. The high volume of customer meetings at HIMSS demonstrated strong interest in our solutions and reinforce that our value proposition is addressing pressing needs within the healthcare industry. We believe that the business is well positioned for growth and improved profitability. Thanks for listening today. And operator, we're ready to back open it up for questions. Thank you.

[Operator:]

Thank you [Operator Instructions]. And our first question comes from the line of Gavin Weiss. You may proceed.

[Gavin Weiss:]

If I look at the revenue guidance and sort of the midpoint of 2Q and what that implies for the back-half of the year, is it just sort of the seasonality that we should think that that’s what’s leading revenues to the back-half for the year? Is there is something else that you are looking at that you think will drive revenue growth later in the year? And sort of what's your confident level in that guidance?

[Brent Lang:]

You are exactly right. We mentioned this when we provided our annual guidance last quarter that we do expect second-half to be stronger than the first-half and that follows the normal seasonal pattern for us. In particular Fed, the federal business, is stronger in the second-half, particularly in Q3. And so, we do expect the second-half revenue to be up over the first half.

[Gavin Weiss:]

And then on the Alarm Management deal, was that from an existing customer, and will that really will Alarm Management, the reporting revenues going forward?

[Brent Lang:]

I'll answer the first part. So, it's from an existing customer. So, sick kids or Hospital for Sick Children is an existing voice customer that we're able to expand to the new solutions. And I think I know the answer to the second question, which is with the software revenue. So that would be reported under product revenue as a software component.

[Operator:]

Our next question comes from the line of Matt Hewitt with Craig Hallum Capital Group. You may proceed.

[Matt Hewitt:]

First question, there’s 3% to 5%, obviously there is -- as far as reduction in operating expenses for the year, obviously there is a big delta versus that in Q1. So, that’s implying a more normalized growth in that over the course of the year. Will that to be back-end weighted or will we see a little bit of deep here in profitability in Q2? And then I guess bounce back-up towards profitability in Q3 and Q4?

[Brent Lang:]

So the reason for the 12% decline year-over-year on the main driver is that we've been more focused on managing our operating expenses. We have been very focused on that over the last couple of quarters, and we saw some benefit of that in Q4 and that carried over in Q1. There is also bit of a timing difference in Q1 '14 operating expenses. This time last year the HIMSS conference was in Q1. This time it's in Q2. So, we expect our operating expenses to increase slightly in the second quarter, and then be relatively flat up and down just a little bit, but nothing significant through the end of the year.

[Matt Hewitt:]

Another question regarding the customer mix, it sounds like you had a pretty descent between existing customers and cross-selling and new opportunities there, as well as some Greenfield opportunities. Could you provide a breakdown? When you look at your product sales in particular the breakdown between existing customers and Greenfield are new competitive conversions.

[Brent Lang:]

We don’t typically provide that breakdown. I think the color that we would provide was that we saw, on a quarterly basis, an uptick from year-ago Q1, in both new as well as expansions into existing customers.

[Matt Hewitt:]

And then one last one, as we look -- you mentioned that the nice wins in Alarm Management. As we look at 2015 and quarter-in already. Where do you see the regulatory drivers potentially having the biggest impact? We've talked about Alarm Management in the past with Jaco they're supporting a start clamping down on the Secured Texting. At what point do you think that that will become a more material driver for those products?

[Brent Lang:]

Just the contrary I provide there that if you spend time in our booth at HIMSS, you would have seen a pretty steady stream of customers coming into the booth asking for specific solutions around the Alarm Management and around Secured Texting. It feels like the market is starting to come towards us. And the demand for those solutions is definitely increasing. I think the sense of urgency around getting some of these solutions in place with these independent regulations coming is driving people towards action. And whereas parts of last year, it was more educating and building awareness around the solutions in building -- frankly awareness around the problem, what we're seeing so far this year is much more proactive stance on the part of the customers coming to us looking for answer for those questions.

[Operator:]

The next question comes from the line of Sean Wieland with Piper Jaffray. You may proceed.

[Sean Wieland:]

My question is on sales and marketing, first-off on the expense side. It was a descent downtick, both year-over-year and sequentially. So, what's the reason behind that? And then also related to sales and marketing, how's your integration with Epic affect your sales and marketing strategy now that you've got that tied together?

[Brent Lang:]

In terms of sales and marketing, the expenses that we saw in the quarter really reflect the adjustments that we've been making to our distribution model. Paul has been really focused on improving the productivity of our sales forces. And we saw that really materialize in Q1. And then secondly, we do see the variable portion of our sales competition fluctuate with revenue. So when revenue is a little bit lower, the expense is therefore lower. And so, for example, in the second half, if that revenue expands, the increases are -- variable sales competition will increase accordingly.

[Justin Spencer:]

And in terms of the question around Epic, the relationship there is more on the product side. So we're not doing anything specifically on the sales and marketing elements, and it doesn’t have a direct impact, either on the costs and sales and marketing or the passive markets. It really something that's been customer driven. The way it typically is happening is that we're being approached by joint customers, folks who are using our systems and they’re also using Epic systems and they're coming to us with specific features and functionality and integrations that they're seeking. We're using that to drive the integrations, and then we're promoting those duly get self integrations out to prospects and potential expansion opportunities to drive the sale of new installations, as well as the expansion into new groups of users within existing customers. But if there is no direct tie to the sales and marketing expenses as a result of that relationship.

[Sean Wieland:]

And then can you give us -- regarding integration points with Epic and others. Maybe a sneak preview on some other integration points, beyond housekeeping workforce that you're working on?

[Brent Lang:]

So, I can provide some broad level color sure. There is two areas in particular which I think are natural extensions, one that we talked about at HIMSS was around the ability to acknowledge the receipt of orders. So when their stat order gets delivered from the HR, we could actually acknowledge that and update the HR with a response. The other one which is fairly similar to the environmental services one is around transport, where transport requests come out and they’re delivered through transport tech. And the same for the workflow, you want to be able to acknowledge that that particular work order has been accepted by a transport tech and than once it's completed they can update the system and essentially return sales into the pool. But there is a whole bunch of others. I’d rather not get into the specifics of them, but those are two that we talked about publicly in the past.

[Operator:]

Our next question comes from the line of Steve Harper with FBR. You may proceed.

[Steve Harper:]

Could you just give us the exact cash flow from operations number, as well as the CapEx?

[Justin Spencer:]

So our cash flow from operations in the first quarter was -- and cash used in operations was $700,000, and our CapEx was $217,000.

[Steve Harper:]

Is there any capitalized R&D in that?

[Justin Spencer:]

No.

[Steve Harper:]

And just sort of go-through some of the reasons for the increased use of cash in the second quarter?

[Justin Spencer:]

There are two things, first we are going through a product transaction with our badge shifting from the B3000 to the B3000n. So as we aligned over-time the B3000 inventory, we’ll come down. But we're ramping up production of the B3000n, and during that transition we’re wanting to make sure that we have enough inventory on-hand to meet our demand. The second things is our -- you may know it from our balance sheet that our accounts receivable is at a low point, largely because we've been collecting at a good cliff. And we do expect that to return to a more normal level.

[Steve Harper:]

And one last question, so as you look at the activity in the channel, you still have confidence that the second-half of the year will be better than the first-half of the year, similar to what happened in 2014 or is it less per announced than what happened in 2014?

[Justin Spencer:]

So, I think the seasonal pattern of having second-half of the years to be stronger than the first half is one, we've seen pretty consistently for several years and we have the high level of confidence that that will be the case again this year. Typically, we are increasing backlog during the second portion of the year as well. So from a bookings perspective, this is even more pronounced. But at this point, we've got a very high level of visibility into the near-term quarters, and we feel like the seasonality that we’ve seen in the past will continue. I haven't done the comparison, exact comparisons to what we saw in ’14. But directionally, I would say, it’s about the same.

[Operator:]

Our next question comes from the line of David Larsen with Leerink. You may proceed.

[David Larsen:]

Can you talk a little bit more about the sales force? And I know guys had resellers back in 2009 and you shifted to direct, and now you are creating more of the hybrid model. Can you give any more color around who exactly your partners are, are they -- is it like center, and Epic, and the core EMI vendors and maybe how many you have back in ’09 and how many you have today? Just some more details around that would be very helpful.

[Brent Lang:]

It’s still interpretation. You are correct, back in 2009. We had roughly 30 resellers who were selling our products. Today, the resellers that we’re using are international. And the ones I mentioned that were new in the quarter and in fact in care, were both primarily focused in the Middle East region. For the U.S. market, the strategy is not to go back to model where we would have 30 or 35 resellers, but to have a small number of strategic partners that would be augmenting our direct sales force. So the model would still fundamentally be backed but in some cases for some of our products there would be strategic partnerships that would help augment the sales. And in some cases, it would be more of a referral or a co-marketing activity as opposed to traditional reseller model. And at this point, there is a very small number of resellers here in the U.S. that are augmenting the business. We’re in discussions with some additional ones that would add on top of that. But I would not say that the expectation it will be back at the kind of 30 resellers that we have back in the ’09 time-frame.

[David Larsen:]

So it sounds like there is some effort there, but at a much lighter level back in ’09, okay.

[Brent Lang:]

And then specifically you mentioned Epic. Just to be clear, Epic is not a reseller of ours, they’re a product partner that were doing work with on development the integration. As I think we talked about in the past today we have over a 60 different integration partners that are technology partners that have integrated into our platform. And as Vocera becomes that the fact though communications platform in some of these hospital, we’ll get more and more companies coming to us because they want to be integrated into the Vocera platform. They see Vocera as a way to reach the nurses and the other clinical staff with data and other clinical information. And in many cases, they don’t have to have a reselling relationship with us because they're out promoting our solutions in support of the sale of their own technologies. So, our direct sales force would still be responsible of closing that business but the referral and the ecosystems benefit of having them talking about Vocera has being an uplifting effect on the business.

[David Larsen:]

And then can you talk about the differences between the B3000n and B3000? And then just sort of at a very high level, broad level. How's your basis go on a B2000 badge and just any color around what the in-sale opportunity might be for the B3000n?

[Brent Lang:]

So the biggest difference with the B3000n is that we have upgraded the radio module inside the badge, so that it now supports 802.11 and essentially which is why it’s called the B3000n. Just in case if you’re wondering why we named it the way we did. The 802.11 and standard supports both 2.4 Gigahertz and 5 Gigahertz. And in a lot of hospital environments the over 2.4 Gigahertz band has become very crowded with other applications and devices. And so, a lot of hospital organizations are wanting to move real-time traffic, like voice, onto the 5 Gigahertz band. 5 Gigahertz has a lot more bandwidth and it has better ability to deal with quality service and deal within appearance that might exist in the environment. And so the upshot why that's important is because it actually delivers better voice quality and as a result also better speech recognition. So, when our users are issuing command into the badge, the quality of that voice being delivered back to the nuance recognition engine is higher, which results in higher speech recognition and better overall performance. And then while the conversations are live, it’s also going to result in better voice quality within the environment. So it’s an important technology transition for us. The outside of the badge looks very similar to the B3000 and in fact it's forum fit function, essentially equivalent, meaning that batteries and chargers that our customers have purchased for the B3000 will continue to work for the B3000n, and the attachments are compatible. So it's a very easy migration for customers. It basically just adds the traditional functionality. We've made some other changes to make it more durable and to continue to improve the performance. One other feature that’s kind of fun is we’ve added a light halo around the call button that gives an indication of call status. So, depending on whether you’re on a call or whether you’re in do-not-disturb, or whether you’re just passive, the halo around the outside the call button changes colors, and it gives a visual indicator to other users when they walk up to you, whether you're on a call or doing something else. But fundamentally, this represents the continued evolution of our product as the natural transition should be pretty straight forward for our customers. To answer the second part of your question around the install base of B2000, there is still a fairly large number of B2000s out there. The B2000 life on average we think of in terms of a three-year life, we continue to sale B2000 up until about two years ago. Many of our customers have been able to extend the life for the B2000s beyond that initial three-year term. And so it's kind of a rolling piece. I guess the way I would encourage you to think about it is that customers in our installed base are continually upgrading their products as the products rolls out and as the technology advances. So, I think where you see it in our business is as we've talked about, both the supplies piece of our business as well as the customer expansions and swap outs that occur within these customer environments. I don't have a specific number for you in terms of the remaining B2000 inventory. But I can tell you that in the past when we have run promotions with the B2000 as a trade-up program, where we give some credit for the return of the B2000 towards the purchase of B3000, we do see pretty good uptick in that. And we've run those promotions, even late last yearend and saw interesting results from that. So there is still a pretty large number of B2000s out there. And over-time, given the high level of maintenance renewals and high levels of customer loyalty that we have, our belief is that those will all eventually be upgraded, essentially now to the B3000n as the sort of standard product moving forward.

[David Larsen:]

I just want to ask one more, is it -- would you say at least like 20% or maybe 30% in your base on B2000s, is that a reasonable range? And if you don't want to say or no, that’s totally fine. And then just who else you’re seeing in the market, who you competing with? Is it Cisco phones, Ascom phones? Just any comments on competitors would be very helpful. Thanks.

[Brent Lang:]

I think probably 20% to 30% is a reasonable number. Like I said we haven't tried to calculate it. But just juristically, I think that's probably accurate. On the competitive front, I think, what's happening in the competitive front is there is slow migration. I would say that the number one thing we still run into, particularly in Greenfield customers just replacing the status quote of overhead paging and pagers. There is still tremendous number of hospitals that are using legacy paging systems. We continue to see the Cisco and Ascom phones in the marketplace, the in-building wireless phones. And then, as we've talked about in the past, the customers who are using ruggedized smartphones, or ruggedized Wi-Fi devices inside the hospitals and then running software apps on top of that, whether that’s a BYOD device or whether that's a hospital owned device, it's potentially an android or iOS based device. Typically, those are more around the texting piece of the overall functionality. And one of the things we saw at HIMSS was folks who were interested in the ruggedized smartphones for access to the EMR that gives us a great opportunity to then layer in our Collaboration Suite on top of those smartphone devices that are owned by the hospitals.

[Operator:]

[Operator Instructions] Our next question comes from the line of Gene Mannheimer with Topeka Capital. You may proceed.

[Gene Mannheimer:]

Brent and Justin, congrats on a good start to 2015. I wanted to ask you about your software revenue. Just looking at that, it's been pretty steady at about 14.5% of revenue, the last few quarters. I would expect that as you’ve rolled out these new offerings, care experience, collaboration suite, et cetera, we might start to see that tick-up. Can you talk about the timeframe for conversion to revenue from software and as most of it being offered as -- on a SaaS basis, is that what we're seeing? Thanks.

[Brent Lang:]

We do expect that as the new products take hold, in particular, the Collaboration Suite, any of our management that that will add to our software revenue, which map to our product, and then in terms of a couple of public disclosure. We do sell Collaboration Suite in both the perpetual and a subscription mode for adoption. But the -- today the majority of that has come in the form perpetual. And Alarm Management is sold in a perpetual model. So actually right now what our expectation is that there is -- as those products ramp, the majority of the software should be perpetual in nature and that will then also drive additional software maintenance that is sold in conjunction with that.

[Gene Mannheimer:]

And then we’ve talked a bit about international this afternoon. In terms of the growth you're forecasting this year, call it 5% or so. How much of that is stemming from international business which you say?

[Brent Lang:]

We have high expectations for international growth. So, in terms of without sharing a specific number, we expect our international growth to grow faster than our [indiscernible] growth this year. So, definitely, we're targeting double-digit growth in the international arena, or in those markets, in particular coming from Asia-Pacific and the Middle East. And keep in mind there the revenue base there is smaller than it is here in the United States. We definitely have high expectations for growth there.

[Gene Mannheimer:]

And I know you're using some partners overseas. What is the profitability profile look like of the international business relative to domestic? And that’s it from me.

[Brent Lang:]

It's actually about the same -- it’s about the same so no fundamental difference in the margin structure between the U.S. and international.

[Operator:]

And we have no further questions as this time.

[Brent Lang:]

Well, I just want to thank everyone for taking the time today. I know you're busy this afternoon lot’s of calls going, and appreciate the follow-up. Have a good evening.

[Operator:]

Ladies and gentlemen, that concludes today's conference. Thank you so much for your participation. You may now disconnect. Have a very great day.