Vocera Communications, Inc.
Q2 2015 Earnings Call Transcript

Published: 31 Jul 2015

[Operator:]

Good afternoon, ladies and gentlemen. And welcome to the Second Quarter 2015 Vocera Communications Conference Call. My name is Bethany and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. [Operator Instructions]. I would now like to turn the conference over to your host for today Mr. Jay Spitzen, General Counsel. Please proceed.

[Jay Spitzen:]

Welcome to Vocera second quarter investor call. A press release, detailing our quarterly results was distributed a little earlier this afternoon and is posted at www.vocera.com and it’s also available from usual news sources. This 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 call will contain forward-looking information, including statements regarding projected results and anticipated opportunities. All forward-looking information is subject to risks and uncertainties described in our 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. In the second quarter of 2015, we accelerated the strong momentum we have been building in the business over the last couple of years. I’m pleased to report that our revenue of $25.4 million and our profitability both exceeded our expectations. Bookings grew 10% over Q2 last year with particular strength in new commercial hospital facilities, expansions within current customers and key wins for some of our new products. As a result, backlog finished at a very healthy level for this time of year. Sales of our core voice communications products was solid as hospitals return their focus to patient safety and operational efficiency and distractions from icd-10 a meaningful use continue to diminish. In addition, improvements in sales execution continue to have a positive impact on sales productivity and overall business results. Our pipeline remains strong and we anticipate a typical seasonal increase in bookings in the second half of the year. Overall I’m pleased with the continued progress we are making in the business. We believe that both strategically and operationally we are on the right track and making good progress towards our vision of becoming the leading provider of care coordination solutions for the healthcare industry by delivering secure, intelligent and integrated communication solutions. Let me start with the macro level by touching on what we are seeing in the market. While hospital CEOs remain very concerned about their financial position it deals like the spending environment has stabilized and there is an increase focus on mobility and communication. Hospital sales cycle was continue to be elongated compare to a couple years ago, but the overall spending environments for our solutions is gradually improving as organizations recognize the impact of communication and care coordination on patient safety and operational efficiency. One specific example highlights this customer focus. In June we conducted a webnair featuring Texas Health Resources who commented that one of their key frustrations prior to implementing Vocera with the nurses were only able to spend an average of 2 hours with patients in an entire 12 hours shift. This spring we have completed research among our customers asking them about the specific challenges and prompted them to select the Vocera customer sided operational efficiencies, care team collaboration, patient safety, and patient satisfaction as their top motivators for choosing Vocera solutions. In just first six months, after deploying Vocera customers reported immediate impacts and workflow efficiency, response times, care team satisfaction, and patient safety. Current industry turns including consolidation amongst healthcare insurers, the increase role of government has the payout and increased consumer choices are likely to increase price pressure and competition among care provider. We believe this should further drive the desire for cost effective tools that improve efficiencies and patient satisfaction. I spoke with our top sales people after the quarter was completed two theme emerged, first the size of the else they are pursuing is growing in hospitals and health systems think more strategically about communication and care coordination across their enterprise. Second, the importance of an intergraded communications platform is arising as organizations recognize the importance of accessing and delivering important clinical data to the right person and enabling the appropriate the clinical workflow. In May, we held our spring meeting of the experience innovation network bringing together a 100 physician, nurse and administrative executives from 35 different healthcare organizations. During the quarter we added four new member organizations. These innovative leaders indicated that improving patient experience is an increasingly high priority but most of them are just getting start of implementing basic patient experience best practices and even few are implemented physician and staffing engagement best practices. This represents the significant market opportunity for our solutions. These industry trends and buying behaviors position us well in the market place as the leader in this space with over 1000 loyal healthcare customers and a broad communications platform that is deeply integrated into the clinical workflow.Our investments in new product development, technology acquisition and integration partnerships are starting to pay dividends for our business as we offer a broader communications platform both within and outside of the hospital. Now, let me turn to some highlights in the second quarter and customer wins growth and our new products in our international market expansion. We saw strong year-over-year growth among U.S. commercial hospitals for both new customer wins and expansion within our established customers resulting in good double digit bookings growth in this area. Highlights in the quarter for new hospital wins included St. Peters Hospital in Albany New York, the new PrairieCare Mental Health Hospital in Minnesota and house wide deployment at children specialized hospital in New Jersey. Several of these wins were the first hospital in their system and represent opportunities to earn our way into additional facilities in the future. Significant customers expansion is in quarter included a rollout at the 500 bed Trinity Medical Center in Birmingham in Alabama. Baptist Medical Center in Florida where we completed the rollout to all four hospitals in the system and large expansion at Tufts medical center and North shore long island Jewish Southside hospital. The quarter also included growth outside traditional hospitals with wins at independent emergency departments, small critical access hospitals and surgery centers. Finally, we remain pleased with our very high software maintenance renewals in competitive win rate which demonstrate both strong differentiation and high levels of customer loyalty. Now let me give an update on the success of our new products. Although still a relatively small portion of the overall business, bookings for new products were up substantially in Q2 on a year-over-year basis. Our biggest success in new product where the large win at Franciscan health alliance were we will be deploying our care around solution across 13 hospitals in order better monitor and respond to patient experience issues and expertise service recovery. Another major new product achievement during the quarter was the announcement of the availability of our clinical work flow engine; it streamlines integration between the Vocera Communication system and clinical systems such as nurse call and electronic health record. By integrating with solutions, hospitals can automatically send alerts to the nurse assigned to a particular patient based on the intelligent workflow defined in our system. Thereby improving patients’ safety and reducing the noise and annoyance of broadcast alarm. Vocera’s clinical workflow engine can eliminate the need for third-party middleware and streamline clinical workflow that generate alerts and alarms from patients monitoring, nurse call, EHR, bed management, and other clinical system. The benefits of this solution to the customer are reducing cost, cutting the number of vendors required to support the clinical workflows, and simplifying care team collaboration. Even though the solution was just announced, we had several deals in the quarter that included the clinical workflow engine. As I discussed on the last call, another major initiative for us this year has been expanding beyond the walls of the traditional hospital to delivery care coordination across the entire care continum. Following our announcement in February, of our cloud based Vocera Secure Texting, we had more than a 100 accounts request the solution which is targeted predominately to hospital affiliated providers. Our beta travels have been very positive and on July 1, we went live with the general release and now we are getting to roll out to our customer. We believe this product has helped customers and perspective customers appreciate the value of the Vocera platform which is helping to create new sales conversation. The Vocera Secure Texting solution is free for Vocera customers who have Vocera system installed in their current on software maintenance. Its primary function is to enable physicians and other outside the hospital to communicate and coordinate with people working inside the hospital. While offering this functionality is part of communication’s platform we are increasing the power and differentiation of our solution. Next, I want to high light recent announcement of our partnership with Zebra to provide the MC40 smartphone bundled with our Vocera collaboration suite to provide a complete turnkey solution designed to withstand demanding healthcare environments; the rugged MC40 includes a barcode scanner for medical administration. The MC40 is ideal for voice applications like the Vocera Communication system because of its enterprise class, WiFi connectivity and ability to seemlessly integrate with EHR’s another clinical application. Our ability to offer this bundled solution, that can work along side the Vocera badge, its customers, the choise of devices to leverage our communication platform in a unified solution from a single vendor. Finally I want to highlight that we have been working closely with Apple to accelerate the deployment of Vocera’s offering to customers using IOS platform in healthcare settings. While discussing its trust in to the enterprise space on a recent earnings call, Apple announced that they working closely with leading business software and solution providers. One which is Vocera. Specifically we have been perusing a handful of development and marketing initiatives over the past few months to incorporate next generation IOS features and functionality into our Vocera cash experience and collaboration suite solution. And broaden our appeal to customers that have chosen the IOS platform. In addition, in April, we announced the Vocera app for Apple watch which extends key functionality of the Vocera collaboration suite brining powerful clinical communications to your wrist. We are excited to be working wht Apple, and look forward to delivering new functionality on the IOS platform. Switching gears, let me update your on our progress in our international markets. International bookings finished the quarter roughly even with Q2 last year. Our international deals are tipically larger especially in the Middle East in Asia Pacific and as a result, bookings tend to be a bit lumpy.But encouraged by the activity and the pipelines of opportunities continue to be very hard. International highlights in the quarter included our largest voice booking and the quarter from RFL Care in Australia, who purchased to expansion across 14 aged care facilities, other high lights include an expansion of Alberta Health in Canada. And a new hospital Healthpoint Medical in Abu Dhabi. I remain excited by the growth of the sales pipline in these internation markets, which are poised for sustantical growth in feature quarters. Overall, I was pleased with the continued progress we’ve made in Q2, delivering results above expectations and executing on the important strategic iniatives this designed to propel our feature growth. As the domestic hospital market continues to stabilize and our own execution towards our goals improves, I remain confident in our ability to drive growth in the business while improving profitability. Now let me give our CFO, Justin Spencer chance to provide some financial highlights. Justin?

[Justin Spencer:]

Thanks Brent. Hello everyone. We’re very pleased with our second quarter results beating both our top and bottom line expectations and setting us up for a solid second half of the year. Second quarter revenue was $25.4 million up 11% versus Q2, last year. Product revenue increased 12% to $13.3 million with notable strength in our U.S. voice business as a result of several new facility deployments and strong expansion and recurring sufficed purchases from existing customers. Services revenue was $12.1 million up 9% from last year. We benefited from a growing number 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 8% from last year is recurrent and was approximately 78% 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. To complete the revenue picture our ending backlog and deferred revenue are the highest we have previously seen in any second quarter, giving us a basis for optimism for the second half. Non-GAAP gross margin increased to 63.8% better than we expected and up from 62.7% last year. The gross margin improvement was driven by higher revenue, increased software in our product mix and a continued focus on operational efficiency. We expect these drivers to contribute to healthy gross margin in the second half as well. As Brent mentioned, we recently began selling the Zebra MC40 smartphone with our Collaboration Suite software that provide a turnkey solution for our customers. This device gives us the opportunity to connect and even larger number of healthcare users to our voice and secure messaging software solutions by a smartphone, while our sale of the MC40 has lower growth margin than our corporate average, we are bundling this device with our high margin software, given that we just began selling the MC40 we do not expect material revenue or margin impact in 2015 and I do not anticipate that it will materially impact our plan profitability trajectory in 2016. Non-GAAP operating expenses were $18.4 million, as expected our operating expenses increased from Q1 as a result of tradeshow expenses and incentive compensation cost associated with higher revenue. For the first half, our operating expenses were down 6% from last year reflecting the benefit of our actions to improve operational efficiency. We are on track to achieve a 4% to 6% year-over-year reduction in OpEx for all of 2015 better than we had committed previously. We continue to maintain 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 revenue and gross margin as well as lower operating expenses, our adjusted EBITDA loss in the second quarter improved to $1.6 million compared to $3.5 million last year. We are still on track to achieve our goal of adjusted EBITDA breakeven in the fourth quarter. Our non-GAAP loss per share also improved meaningfully to $0.09 compared to $0.16 last year. We have strong leverage in our business model with the capacity to achieve high incremental profit as our revenue grows. Recently we had demonstrated an ability to drive higher revenue and improve profitability with the more efficient workforce and infrastructure. Our increasing sales productivity and G&A leverage gives us the opportunity to grow revenue in the near term without adding a large amount of fixed cost of our business. Now, I would like to make a few comments on our balance sheet. Our balance sheet remains 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 effective management of our working capital. We expect our cash to decrease approximately $5 million in Q3 due to a planned inventory increase as we ramp volumes of the B3000n badge, the timing of payment of certain expense items and an increase in accounts receivable as a result of returning to a more historical collection pattern. However, we expect to increase cash again in Q4 in conjunction with our goal to achieve break even adjusted EBITDA. We continued to be very focused on capital allocation and cash management. Now let me turn to guidance. As we look back at the first half we’re pleased with the company’s execution and momentum. We think that sets up versus second half of the year. Although we continue our face some headwinds and remains some of cautious with the overall spending environment. Our strong backlog in deferred revenue position provides a basis for optimism regarding near term revenue. As a result we are raising our full year 2015 revenue guidance to a range of $97 to $101 million, for the third quarter of 2015 the company expects revenue between $23.5 and $25.5 million. The rest of the guidance details and reconsolidation of GAAP to non-GAAP measures are included in the financial statements linked to the press release. In summary, I am pleased with the solid financial results with good sales momentum and a linear cost structure. We are later focused on executing well across the company and we continued to have a strong balance sheet in platform for growth. I will turn it back to Brent.

[Brent Lang:]

Thanks Justin. I think the second quarter and first half numbers are strong evidence of the progress are making and returning the business to sustained growth. Interest in our voice products as returning and the new product offerings are starting to get more attraction. Our improving sales and operational execution are enabling the business to grow again and we remain on a path of profitability. I appreciate the dedication of our employees and the continued support of our customers and look forward to continuing our strong momentum in the second half. Thank you for listening today, operator we are ready to open it up for question.

[Operator:]

[Operator Instructions]. Our first question comes from the line Mohan Naidu of Oppenheimer. Please proceed.

[Mohan Naidu:]

Thanks for taking my question and congrats on the great quarter Brent, Justin. Just maybe starting of with - if you look at your core communication product versus the new products that you have launched where are you seeing most strength of this Brent.

[Brent Lang:]

Hey Mohan, thanks for the question, I think that for Q2 we have saw pretty good strength on both sides. I think the piece that was more encouraging for me was the strength that we on our core products, over the last couple of year that’s what we have been more concerned and feel the strengths come back in those core voice products both in software and devices was particularly encouraging for me. The new products continue to make good attraction, but they are relatively small percentage of the overall business and so I guess I was going to priorities I would put more climate around the return to growth on the core products.

[Mohan Naidu:]

Okay, and maybe on the care coordination product you have talked about Brent on for the out patients side and I am very exited about that, can you help us understand on how that would work differently from your existing platform by thought that Vocera’s communication system in general could connect you in outside mobile services if you need to already.

[Brent Lang:]

Yes, you are correct. The key distinction here is that the - secure testing offering which we really are targeting towards that care coordination outside the hospital is a cloud based offering that we’re really targeting towards the affiliated decisions who tend to workout outside of the hospital it is integrated into our core platform that runs inside the hospital but this is really design for that incremental set of users that may not spend a lot of their timings inside the hospital. And the fact that it’s kind of extension in this case a pre-extension off of our core platform and we really helping to build out of much larger director of users and greater ecosystem by in cooperating those guys in. And I guess just you know to comment from a company perspective it was substantial milestone for us to be able to launch that cloud based offering without all the deve ups and cloud operation is associated with it right on schedule based on what our original format and timeline were.

[Mohan Naidu:]

That’s great; maybe one last question Q3 is usually your strong federal business core any updates on that as you go into the core.

[Brent Lang:]

Yes, I’ll think two things in general we are still quite bullish on our federal business overall although I would highlight that there is quite a bit of uncertainties in VA part of the business right now. You may have seen some of the articles that have been written some of the discussion and the news over the last month or so about the VA part of our business in particular and some of the budget over runs that are occurring in the VA business. We were purposely conservative in our outlook on Q3 as it related specifically to the VA portion of our business. There is some chance that, that some additional funding would be able to going into the VA business this quarter. But it’s looking unlikely, the good news is that the DOD portion of our FED business is still looking quite strong and we’re expecting a good quarter out of that portion of the business. But probably the biggest source of uncertainty for us in the quarter is on the VA side.

[Mohan Naidu:]

All right. Thanks a lot.

[Justin Spencer:]

Yes.

[Brent Lang:]

Thank you.

[Operator:]

Your next question comes from the line of David Larsen. Please proceed.

[David Larsen:]

Okay. Congratulations on a very good quarter, guys. So, Justin, can you give a little more color around the backlog, I think you mentioned that, it’s a good figure, give us any more color on that that you can give be very helpful. Thanks.

[Justin Spencer:]

Yes. Hi, David. Our backlog is that really strong position now ending Q2 in fact the highest backlog position we’ve seen of any previous second quarter in the company’s history and we have different elements to our backlog, notably our product backlog and service backlog and both of those components are really solid levels and so when combined with the differed revenue that we have in our balance sheet, we feel like we’ve got pretty good visibility to near term revenue, which was one of the drivers behind raising our annual guidance. So the nice thing is that we have really been focused on increasing our backlog, the mean driver of that of course is higher books, and so with the growth in bookings over the last few quarters, we’ve seen the backlog increasing as well.

[David Larsen:]

Okay. That’s great. And then, can you just comment on sort of your incremental sales operations, infrastructure that I think maybe has been put in place and is that now bearing fruit.

[Justin Spencer:]

Yes. Very much so. Over the last 12 months, we’ve really focused on becoming more efficient in leveraging the resources in the infrastructure that we’ve had, we’ve made investment over the last few years and world class systems including SAP and sales force and feel like those systems are starting to reap really the benefits of having those systems in place and implementing more regress processes. Our sales force is becoming more productive over time and that will continue to be an emphasis for us. And that’s made the comment earlier that we don’t feel like we have quite a bit of operating leverage in our business models such that we don’t have to add a lot of incremental resources to growth the topline.

[David Larsen:]

Okay. And then just one last one, with the core product sales, what percentage just roughly speaking would you say how to combine sale of the new coordination types of solutions along with your core communication products, was it like 10%, 15%, 80%, thanks.

[Justin Spencer:]

It would still be less than 50% but we’re seeing more and more of our deals include more of the product elements. So we’re really excited about that. The second thing that we’re excited about is the, I think Brent mentioned this earlier as of the size of the deals that we are quoting on in our part of our pipeline are bigger because they include more product elements than we’ve had in the past.

[Brent Lang:]

So I think, David, just to add to what Justin said, part of the shift here is the approach that the sales force is using when they are going out and talking to customers, rather than going in and pitching a voice communication solution, they are really going in and talking about the power of the platform then drive the conversation around specific problems that our customers looking have solved and specific used cases and solutions that we can use to address that and then we can apply various elements of the platform to address the different solutions. And so more and more of the bits that are being put out to a customer will include multiple product elements because we’re trying to address more of an integrated solution to really address clinical communications across the facility. So it’s starting the front end of that sales process with a different message in a different approach, but then as leading towards a different mix of products on the back half.

[David Larsen:]

Great. Thanks a lot and congratulations again on a very good quarter.

[Justin Spencer:]

Thank you, David.

[Brent Lang:]

Thank you.

[Operator:]

Your next question comes from the line of Jamie Stockton with Wells Fargo. Please proceed.

[Jamie Stockton:]

Hi good evening guys. Thanks for taking my questions. I guess maybe the first one Brent the 100 organizations that I think you asked for messaging solution for the affiliated provider, can you give us a sense of how many of those are guys who are not using the core voice solutions base is really a good as far as relationships are concerned and also maybe how many of those that wants originally voice customers that comfortable and actually signed a deal for core voice solution?

[Brent Lang:]

Yes so just to clarify the approach that we are using here Jamie is that for this first wave, we limited it to two existing customers, we have basically went out to our installed base and said that if you are an existing voice customer, you are eligible to have the Vocera secured texting offering as an add on to that core voice platform that was already in existence. So it would be fair to say that 100% of those customers that have signed up for the secured texting offering were existing voice customers. Now in some cases, with new customers because we now have this program in place when we are going out talking to customers, new voice customers we will talk about the fact that the secured testing offering is part of the bundle that comes with the platform and that has certainly changed the dynamic of some of the sales conversations but the vast majority of those are existing customers.

[Jamie Stockton:]

Is there a plan to use it as a lead generation tool at some point of future, I guess that when you originally trade [indiscernible] service line you are going to try to spot some conversations by giving this out there is something that people were interested in addition to voice?

[Brent Lang:]

Absolutely, yes that would be kind of Phase II of the program, we wanted to focus on the installed base initially but once we start to build this master directory of providers have that access to all of those resources, we think that it creates sort of a critical mass element that we can then use to leverage non-customers as well.

[Jamie Stockton:]

Okay. And then I feel like I should ask but not sure you can disclose it but the non-voice part of the business, can you tie that for us and then maybe talk about what the year-over-year growth looks like?

[Brent Lang:]

Yes Jamie the non-growth part of our - I should say the non-voice part of our business are what we characterize more as the growth elements are less than 10% of our revenue and lumpy from one quarter to next but we are really bullish on the growth prospects of that for those products.

[Jamie Stockton:]

Okay, and then maybe one last question, Brent it felt like last year there were [talking] (Ph) that was going on by hospitals about whether or not they want it to proceed with kind of smartphone model or do they want to stick with the badge model and I know you guys could facilitate either which makes unique but that felt like it was - some deal last year, was it accurate to say that that overhang on the market is gone and a lot of facilities has guaranteed how they are going to move forward at this point?

[Brent Lang:]

I am not sure I would go to say it is gone but I think it is certainly reduced, I think that in many cases customers who experimented with various endpoint client devices have now got more data to base their decision upon and they thought about it in a more holistic way where they realize that depending on the functional role the person within the organization, there may be more of a push towards one device or another, they may have had more realization at some of the limitations of some of the consumer devices. And frankly I think some of it has to do with the fact that now that we have educated the market on the breadth of solutions and client devices that we offer, it actually makes them appreciate the power of the platform a little bit more than maybe they would have historically if they just viewed as the badge company and all those factors together I think are leading towards somewhat of a resurgence in the popularity of the badge as people recognize both the economic benefits as well as the use case benefits of the badge, I think that is driving some of the resurgence, we’re excited about the some of the deals we’re driving on some of smart phone platforms most of them have a batch component through them as well. And so the power of that diversity of client devices is really differentiating us in the market place but I think for a lot of customer, when they go and do some of the trials they realize the significance of hands free, they realize that frankly to create a fully equipped smart phone solution in the hospital by the time you look at either extended batteries or protective sleds and MDM capabilities or the smart phone. The overall solution frankly mix the bad solution look very cost effective and in some cases I think that’s driven them back towards higher concentration of that is but I think more than anything it helped us really communicate the value and the uniqueness of the software platform and that’s creating a whole level of conversations with customers about being more of a strategic partner when it comes to their clinical communications.

[Jamie Stockton:]

Alright, that’s great. Thank you.

[Operator:]

Your next question comes from the line of Sean Wieland with Piper Jaffray. Please proceed.

[Sean Wieland:]

Thank you very much. My question is on the new clinical workflow engine. Can you give us maybe some discrete examples of how this is helping integrate Vocera into the clinical workflow and it sounds like today this is one way maybe from the EHR to Vocera, what are the possibilities to expand this by directional?

[Justin Spencer:]

Yes, Hi Sean thanks for the question so, just to provide a little more clarity in detail on the clinical workflow engine. This is actually technology that was derived from the [indiscernible] acquisition that we have made in early last year and the original manifestation of that was some of a alaram management products that we introduced last year and you know the big win we had at that SickKids hospital in Toronto in Q1, what we realized over time was that there was much more to that platform and much more flexibility to that technology. And we’ve now expanded it to being more of middleware platform that can be used to interface to not just to feel our management piece, but also nurse call systems and other clinical systems in both one way and two way integrations. And so, what’s happened is that in situations where a customer historically might at had to go at third party to purchase some middleware application for connectivity to for example nurse call we can now offer that end-to-end solutions part of the platform. And so it’s two pieces there was a connectivity piece, a connector if you will that connects to the various clinical system and then there is the engine itself the clinical workflow engine which is essentially the routing engine that’s keeping track and utilizing the roles and responsibilities of various users and routing those alerts to the appropriate user and also allowing for a transmission back as you and as you talked about the two way examples that we covered in more detail on last call. And so for us this is an entry into a new part of the market, there we did not historically that had significant play we’re more traditionally partnering with other third parties to deliver this. I frankly have been surprised the agreed to which customers have really embrace that and appreciate the ability to work with as the single vendor for end-to-end solution.

[Sean Wieland:]

So very strong software revenue growth in the quarter was, this a key part of that or what was the long pole in this strong software revenue growth.

[Brent Lang:]

The majority of the growth Sean came from the core voice software offering.

[Sean Wieland:]

Okay and then - sorry keep going.

[Brent Lang:]

I just going to add Sean that we did have several deal bookings that we have closed in the second quarter as clinical workflow engines so we’re pretty excited about the prospects of that product line.

[Sean Wieland:]

Okay, great. And then you e mentioned more of your contracts are multiple product elements, which creates some challenges around revenue recognition when one product is a license fee and another one is the subscription. Are you running or into any of that or do you proceed any of that those challenges.

[Brent Lang:]

Not really because most of the new software offerings are a part of same convention that we historically had with our voice software. From time-to-time if there is some differences in a particular deal will account for those accordingly, but in general we don’t anticipate any major changes in our approach.

[Sean Wieland:]

So because I mean, assuming you can establish VSOV for a lot of these new products, that doesn’t mean you will ever have to amortize the revenue recognition of the badges over the course of the estimated life of the rest of the products.

[Justin Spencer:]

No. We don’t currently anticipate that.

[Sean Wieland:]

Okay. And then, let me slide one more in here. You answered Jamie’s question about what percentage of revenue is coming from badge versus - or voice versus non voice, can you tell us what percentage are your users are on the badge versus the smartphone.

[Justin Spencer:]

I don’t think we’ve got great data on that at this point. I think it’s a relatively small number. You’ve got years of installed base that’s been building up o the badge device, the smartphone offerings are relatively small portion of the new business and then you got the compounding effect of the legacy business. So clearly less than 10%.

[Sean Wieland:]

Sure. Okay. Thanks so much.

[Justin Spencer:]

Yup.

[Operator:]

Your next question comes from the line of Jeff Garro with William Blair & Company. Please proceed.

[Jeff Garro:]

Good afternoon, guys. Congrats on a great quarter and thanks for taking the question. Want to start off with one just point of clarification, we are talking about the strong books growth from new products, what exactly sits within that new product definitions that’s simply everything that isn’t the core voice solution or little more nuance?

[Justin Spencer:]

It basically includes the sale of the Vocera Care experience, the collaboration suite and the clinical workflow engine most of the free predominate product line.

[Jeff Garro:]

And that’s not something like the alarm management when it’s a standalone sale.

[Justin Spencer:]

The clinical workflow engine is however framed to what was formally deal our management product.

[Jeff Garro:]

Got it. That helps and moving on to cover sales operation question, can you give us an update on where you are with reps and any change from the last quarter. And also looking the CAP of any update on potential new channel partnerships.

[Brent Lang:]

Yes. Yes, Justin. So the sales headcount has remained roughly flat declare was in prior quarters. As Justin mentioned, we are seeing quite a bit of leverage in the model right now and the primary focus has been on driving improved productivity on a per sales person basis. And in fact, Paul, Johnson is our SVP of sales feels like thers is additional room for growth there so. We don’t have plans to add substantial numbers of sales field particularly here in the US. We will continue to add some folks internationally as we grow that business and we made add some folks on the front end of the process for in terms of lead generation. But we feel like the individual reps can continue to grow their productivity in the marketplace. So you won’t see that increasing dramatically. On the reseller side as we’ve said, the goal is here is to add a potential handful of partners that would basically augment our fundamentally direct sales model. We did make some good progress during the quarter with a couple of those discussions, nothing to announce on today’s call but still remains a focus for us on a go forward basis.

[Jeff Garro:]

Great. And then, one last question if I could. You’ve talked about some of the progress you’ve made so far this year with integration and care coordination sounds like its benefiting booking but just still more curious on kind of what’s next on those two big themes of integration and care coordination, the product development road map.

[Brent Lang:]

Well, probably don’t want to get into a lot of forward-looking product roadmap stuff today. But I guess the story that thought that I would leave you with on that is that the power of the platform as we think about clinical coordination from across the entire hospital both going deeper as well as wider in those, in that offering is really allowing us to raise the level of the strategic conversation we’re having with our hospital customers. Historically, we would often times start at the depermanent level talking about solving a very and fairly narrow solution for departmental communication and more and more the conversations we’re having now are with the sea suite of a hospital or in some cases the sea suite of a health system about strategic priorities around clinical communication across their system and obviously with the large number of mergers that are going on in the health system, having those health system relationships is the future where this business is going, so we are encouraged and as I mentioned in my prepared remarks, it is resulting in a fairly substantial increase in the size of the deals we are looking at which obviously is another positive for our business.

[Operator:]

Your next question comes from the line of Matt Hewitt with Craig-Hallum. Please proceed.

[Jeff Garro:]

Hi good afternoon guys. It’s actually Bill on for Matt, congrats on the good quarter. Just two really quick ones for me on call, to previous calls you guys talked about the second half of the year being strong not only for booking backlog but also revenue, I think the mid-point of your updated guidance it looks like it is a 50

[Justin Spencer:]

Hey Bill in terms of the guidance question, generally what we are trying to do with our guidance is to be fairly conservative and so our annual guidance and Q3 guidance reflects that I think, Brent has touched on earlier the circumstances around the VA spending and so our Q3 guidance reflects that. But if you take at high end of our guidance range that would reflect year-over-year growth in the second half closer to 10%. So we are still expecting to have a stronger second half than the first half with growth in the second half and we feel we can do that with very strong backlog in deferred revenue position that we have. In terms of customer counts, we were somewhere around 1000 or so customers in globally.

[Brent Lang:]

And we will update the total customer count on an annual basis, we don’t have the break out today but typically what we would do is update the street on the total counts and the breakout between healthcare and non-healthcare on annual basis.

[Jeff Garro:]

Okay, that is all I had thanks for taking the question.

[Justin Spencer:]

All right.

[Operator:]

[Operator Instructions] Your next question comes from the line of Gene Mannheimer with Topeka. Please proceed.

[Gene Mannheimer:]

Thanks good afternoon and congrats on a nice report, I want to go back to an earlier question on the backlog, the backlog plus deferred revenue as you mentioned are record for the second quarter which is encouraging but I want to play devil’s advocate here, I mean you all entered 2014 with the strong backlog and deferred revenue which was the year that ended up being a disappointment, so I guess my question is how reliable and indicator or more specifically how much visibility does that June 30 metric give you into the back half?

[Justin Spencer:]

It is a very, hey Gene it is a very important metric for us, we over the last three to four quarters we have shifted more and more to the backlog oriented business, so we really focus on increasing our bookings which then increases the backlog as well our product backlog, only that has improved as well along with the total backlog at the product backlog which is the portion of the hardware and software that we ship and recognize revenue upfront on that and that hit front as well. So there is no doubt that as we look at the visibility that we have into the second half strong backlog position really helps a lot.

[Gene Mannheimer:]

So if you were to quantify would you say 75%, 80% visibility?

[Brent Lang:]

It is in that zone.

[Gene Mannheimer:]

Okay, okay fair enough and then my other question relates to your comment on deal sizes increasing as you offer more integrated solution, so is that sort of a mix blessing in a way, I mean its great that these deals are larger and encompas multiple products, but does that make the implementation or for that matter the decision cycle more complex such that it could create more lumpiness? Thanks.

[Brent Lang:]

Yes Gene great question, I think that you are absolutely right that there is definitely an increase in complexity associated with the deployment of the solution and in fact we are ramping up our professional services team in order to try to address some of the more involved implementation cycles on it and the deal size could result in a lumpiness on the booking side but one of the things that Justing and I are really committed to is driving the business more from a backlog basis. And so while we might end up with increased lumpiness on the booking side I think improved visibility actually gets better because lot of these we have fairly longcycle between booking and conversion to revenue and we can actually then factor that into our guidance. Particularly on the new customers there istypically a couple of quarters between the time when we get bookings and when we see the impact of that on the revenue side and so we have the ability to forecast both sort of proofessional services side and also have visibility into what the business is going to look like.

[Gene Mannheimer:]

Makes sense. Thank you.

[Brent Lang:]

Yes. Thank you Gene. End of Q&A

[Operator:]

There are no further questions in queue.

[Brent Lang:]

Okay well I want to thank everyone for their time today. I appreciate your insightful questions and we look forward to following up with you in the future. Thanks again, have a great day.

[Operator:]

Ladies and gentlemen that concludes today’s conference. Thank you for your particapation. You may now disconnect. Have a great day.