Vocera Communications, Inc.
Q3 2013 Earnings Call Transcript

Published: 12 Nov 2013

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Third Quarter 2013 Vocera Communications Results Conference Call. My name is Brianna and I'll be your coordinator for today. At this time, all participants are in listen-only mode. As a reminder, this conference is being recorded for replay purposes. And I would now like to turn the presentation over to your host for today's call, Mr. Jay Spitzen, General Counsel. Please proceed.

[Jay Spitzen:]

Good afternoon everyone. A press release detailing Vocera's quarterly results was distributed earlier this afternoon and is available on our website at www.vocera.com as well as through normal news sources. This conference call is being webcast live on the Investor Relations page of our website where it will be archived on the Events and Presentations page. On this conference call, we will be referencing both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in our earnings release, which as I mentioned is available on our website. This conference call will contain forward-looking information including statements regarding our company's operating results and market opportunities for our solutions. These forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from our current expectations. These risks and uncertainties are described in Vocera's filings with the Securities and Exchange Commission. And now, I would like to turn the call over to our President and Chief Executive Officer, Brent Lang. Brent?

[Brent Lang:]

Good afternoon everyone. Thanks for joining our third quarter call. I’m pleased to report another solid quarter of continued bookings growth and operational improvements as we met both our revenue and earnings guidance. Success in the quarter was driven by record level of new government bookings that resulted in the highest backlog we have ever had going into the fourth quarter. Total bookings were up sequentially from Q2, however, the year-over-year growth rate was not as high as the growth rate we saw in Q2. This is primarily a reflection of the positive impact of the badge [trade off] [ph] promotion in Q2. This quarter’s results, the progress we are making in developing our sales force, the new products we’re launching and the long-term healthcare industry outlook give us reasons to be cautiously optimistic about our prospects for 2014. As we have done previously, I will begin with some comments about the market and business trends and then review our growth drivers and strategic initiatives. After that Bill Zerella will provide some financial highlights and discuss guidance. And then we will open it up for questions. Consistent with what we saw in Q2, the hospital environment remained unsettled in Q3 and we continued to see slowed spending. In recent months, we have seen a number of announcements about hospitals making cost reductions. As a result, commercial hospital bookings remain soft in the quarter. However, we saw dramatic increase in our federal business where we experienced record bookings from VA hospital customers. Comments from the last two weeks from publicly traded hospital providers and some suppliers serving these markets suggest that ongoing uncertainty about the impact of healthcare reform and the new insurance exchanges will continue at least through the fourth quarter. While we think the elongated approval cycle experienced this year are likely to continue into 2014, hospitals are still choosing our solution at record levels. We remain the only complete integrated solution for communications in mission critical settings. The new products announced earlier this quarter further strengthened our market position and there is more to come on the innovation front. As we look towards 2014, hospitals will be resetting budgets and getting a better handle on the reimbursement mix and patient volumes. In the mean time, we are working hard to communicate the strong ROI our solutions can bring in this cost conscious environment. I want to point out a recent study that helps underscore Vocera’s value in this budget constrained environment. The October issue of Health Affairs reported on a new study highlighting that higher nurse staffing levels can help produce hospital readmissions. Today many hospitals are intent on cutting staff and cutting costs. Our proven ability to deliver better results in a cost effective manner through improved communication represents a great opportunity for us to demonstrate strong ROI. As I turn to our pillars of growth, let me remind you, that my comments in this section like last quarter are focused on bookings. Let me begin with new hospitals. New hospital growth for the year continues to expand at a trend line above the level for 2012. Q3 was marked by a particularly strong growth in our VA hospital business. For federal hospitals, our third quarter is their fiscal year-end and usually is our largest federal bookings quarter. In the third quarter, we added 8 new VA hospitals, this included an order from the new Orlando VA Hospital for over $1 million. Q3 was by far the largest quarter bookings we’ve achieved in our federal healthcare business driven by these new VA Hospitals. We expect to receive the FIPS 140-2 wireless security certification for the B3000 badge in the first half of next year. While the sequester has delayed some of the potential DOD hospital contracts, we continued to have a very positive dialog with various branches of the federal government about future deployments. We are hopeful these developments will lead to growth in our DOD business which is currently constrained by sequester cuts. Overall, I’m very proud of the persistence and market development work of our federal sales team for driving these results. Our second growth driver further penetrating our installed base moderated somewhat from the second quarter. Commercial customers continued to delay expansions as we have seen in prior quarters this year. However, expansions within our VA hospitals grew nicely and comprised a larger portion of the quarter’s mix. We received the second largest purchase order in the company’s history and our largest expansion order ever at just over $2 million from the Tampa VA hospital. Compared to Q2, the mixed narrowed between software expansion orders and badge orders from existing customers with relatively more software and less badge bookings. In any given quarter, we should expect to experience some variability in the composition of customer expansion. It’s more important that we continue to make progress on expansions overall. Any increased stability in the spending environment of our customers would represent the single biggest upside to our business. I remain confident in our hospital business. The communication challenges we hope to solve continue to be some of the biggest hurdles for hospitals trying to become more efficient as they transition to new service and payment model. Our third growth pillar is developing and acquiring new products to cross-sell into installed base of customers. These products are still in a very early stage and represent only about 5% of our business that has significant promise. On October 1, we announced the expansion of our Vocera Care Experience Suite a portfolio of subscription services to help hospital improve patients experience and safety. The Vocera Care Experience Suite which started with our Good to Go discharge planning solution has been expanded from three modules to six offerings and is already supporting more than 20 hospital customers. These services deliver a compelling ROI by reducing readmissions and improving patient satisfaction scores to drive reimbursement levels. In a market where patient satisfaction is linked to reimbursement, I also want to highlight last month experience innovation network CXO

[Bill Zerella:]

Thank you, Brent, and good afternoon everyone. Third quarter results represent a good progress on our year, meeting guidance and most importantly setting out for a stronger 2014. The quarter demonstrated the positive impact of our multi-pillar growth strategy as a result we are carrying the biggest Q3 backlog in the company’s history heading into Q4, which historically is our strongest quarter in terms of building further backlog heading into the New Year. Q3 was the strongest government bookings quarter on our history driven by both securing new VA hospitals as well as a number of large VA expansions. Our strong showing on the government side offset some softness and expansion from our commercial installed base following our strong Q2. Quarter-end backlog is up strongly compared to a year ago and up sequentially as well. Let’s talk about revenue next. Third quarter revenue was $26.1 million was in our guidance range and was about even with the year ago. But sequentially revenue was up 3% that’s better than it sounds with additional bookings going to backlog this quarter combined with 3% sequential growth in deferred revenue to $30 million. For the quarter product revenue decreased 7% year-over-year reflecting the slower customer shipment environment of this year although it was up 2% sequentially. Again, I view this positively in light of this year’s market conditions. Device revenue was down due to some pull forward to Q2 of badge orders as a result of the B3000 upgrade promotion and last time by the B2000 badges ahead of the June 30, end of life. We had a tough year-over-year comp in software revenue. Q3 of 2012 was the company’s all time record in software revenue and we were down 13% compared to Q3 of last year. But more importantly for this year, we were up 37% sequentially from Q2 and as a percent of revenue we were back to more normal levels reflecting the higher software content associated with new customer acquisition. Services revenue was up 14% year-over-year and 4% sequentially. We continue to see strong customer loyalty which is reflected in our high software maintenance renewals rates. As I switch to margins and other income statement line items, please remember that I’m going to focus on non-GAAP figures which have been adjusted for stock-based compensation and amortization of acquired intangibles. I believe these non-GAAP numbers are more representative of the actual performance of the business and our press release includes a reconciliation to report GAAP numbers. Third quarter gross margin was 63.8% representing a slight improvement from Q2 but still trailing last year’s third quarter. Product gross margin which includes both device hardware and software was 65% slightly below Q2 and trailing last year’s third quarter of 69.7%. Software margin was up 90 basis points sequentially driven by a higher mix of enterprise licenses shipped which also drove higher average selling price. Device margins were down due to a slight uptick in our warranty costs, higher internal operations costs and lower overhead absorption. This drove a 510 basis point decline in device margin offsetting the favorable impact of both software mix and higher software margins. We expect our hardware margins to return to historical norms next quarter. While these device margins prevented us from reaching the 100 plus basis point sequential margin I suggested on last quarter’s call, I remain confident about our ability to achieve our long-term margin target of 70%. Services gross margin was 62% up from 59.7% in Q2 and from 60.2% in the year ago quarter. The improvements were due primarily to expense and staffing control. And now looking at operating expenses R&D was up roughly $400,000 sequentially and sales and marketing expenses were up $1 million as we continue to invest in innovating new products as reflected in our recent announcement of the Vocera collaboration and Care Experience Suite while we continue to ramp our sales and marketing efforts. General and administrative expenses in the quarter were up approximately $200,000 consisting primarily of some one time supplemental audit fees and employee costs. I should also mention we were live with SAP in Q3, the combination of over a year of efforts to upgrade our internal systems. This was a significant accomplishment and I’m very proud of our team who work long hours to ensure smooth transition. This platform positions us well so cost effectively scale our business for years to come. GAAP net loss for the quarter was $3.1 million or $0.13 per share. Non-GAAP net loss for the quarter was $528,000 or $0.02 per share. Our non-GAAP net loss excludes $2.4 million of stock-based compensation costs and $181,000 of intangible amortization. Third quarter adjusted EBITDA loss of $202,000 was within our guidance range and reflected the quarter’s higher investments in R&D and sales and marketing. Turning to the balance sheet our, cash, cash equivalents and short-term investments, remained at $125 million unchanged from the second quarter. We remain debt free and well-positioned to pursue strategic opportunities. Third quarter deferred revenue declines $1 million to $30 million from Q2 a new record. Before I get to guidance, I think it’s worth highlighting how we think about backlog and deferred revenue on a more consolidated basis. As I noted last quarter, the portion of bookings that go to backlog or deferred revenue has and is likely to continue to increase. Several factors drive that. For example, the fixed care experience products about which Brent spoke are all subscription products that have ratable revenue treatment. Roughly 50% of the transaction value of leasing deals and deferred and our new customer acquisition is driving higher than historical percentages of deferred revenue backlog. We have three major components that comprise what might broadly be called backlog or more descriptively consolidated backlog and deferred revenue. First is true order backlog which represents the actual value of orders that have not been shipped or invoiced. The second bucket is deferred revenue which can include several items. First, it includes shipped invoice orders which are recurring in nature like subscription products or software maintenance which are recognized on a ratable basis over the service period. We may also have an order with terms that could defer recognition of the revenue to a later period. For example, a shipment made during a quarter but with FOB destination terms might not be recognized as revenue until the subsequent quarter. Finally, we include in our definition of deferred revenue deferrals on customer leasing deals which are [indiscernible] on our balance sheet as deferred lease liability. These deferrals are higher as a percentage of the transaction value and straight purchase deals. At the end of the third quarter that consolidated backlog and deferred number is 6% sequentially and is up 27% year-over-year which we believe will put us in a stronger position heading into 2014 than last year at this time. Our guidance reflects our anticipated recogniztion of these items. As was true last quarter, our guidance include the cost [indiscernible] hospital spending until there is more clarity on the impact of sequestration custom Medicare care rate. And the composition of reimbursement rates driven by the addition of public and private insurance exchange patients and the impact this will have on hospital spending. For the full year 2013, we now expect revenue between $101.8 million and $102.8 million non-GAAP EPS between a loss of $0.08 and $0.05 and adjusted EBITDA between a loss of $100,000 and a profit of $600,000. We expect GAAP EPS to be between loss of $0.46 and $0.43. Our full year 2013 non-GAAP guidance exclude the stock-based compensation expense of approximately $9 million and intangible amortization of approximately $700,000. Non-GAAP earnings per share guidance is based on a fully diluted share count for the full year 2013 of $24.6 million. Income tax for the year is expected to be immaterial. For the fourth quarter 2013, we expect revenue between $28 million and $29 million, non-GAAP EPS between breakeven and a profit of $0.03 and adjusted EBITDA between $700,000 and $1.4 million. We anticipate GAAP EPS between a loss of $0.11 and $0.08. Our fourth quarter 2013 non-GAAP guidance excludes stock-based compensation expense of approximately $2.7 million and intangible amortization of approximately $200,000. Non-GAAP earnings per share guidance is based on a fully diluted share count for the quarter up $24.9 million and income tax for the fourth quarter is expected to be immaterial. On the whole, I think third quarter result demonstrates continued good progress in a difficult environment while commercial hospital revenue continue to lag, other growth drivers made up the difference. While we retain a conscious stands on the short-term, we remain optimistic in our expanding growth colors, the advancing performance of our sales force, our loyal installed base and the long-term growth opportunities for our business. That concludes my portion of the call and with that I will turn it back over to Brent for some closing remarks. Brent?

[Brent Lang:]

Thanks Bill. Overall, I’m pleased with Vocera’s continued financial and operational progress in the quarter. And our diversified strategy is helping us continue to grow through some challenging market conditions. And our solutions continued to lever both meek and compelling benefits in the market. We strive to delight our customers and make a lasting impact on their operation and it’s gratifying to be recognized for this contribution. A little more than a week ago, a Forbes article by Michael Salmon highlighting seven ways to improve patients’ satisfaction and experience specifically cited Vocera technology as a great example of delivering service on the patients schedule rather than on the schedule of the hospital. This acknowledgement reflects an understanding of Vocera’s higher mission. Really appreciate your time today. We are ready to open it up for your questions. So Brianna, if you can open it up for questions, I would appreciate it. Thank you.

[Operator:]

(Operator Instructions) And your first question comes from the line of Sean Wieland with Piper Jaffray.

[Sean Wieland:]

Hi. Thanks a lot. So first question is along the lines of the backlog to revenue conversion rate that my sense is you didn’t say it. But it’s lengthening due primarily to mix of revenue. So my question is how does the 27% growth in backlog year-over-year translate into expected revenue growth?

[Bill Zerella:]

Hi, Sean. It’s Bill. So I think one way to I think to look at this is, the current portion of our backlog and by that I mean the portion of our backlog that’s shippable within 12 months, okay, and if we just isolate that portion of it that number is up a little over 50% on a year-over-year basis. That says that basically within the next 12 months, we have got that much more backlog to ship. Certainly this is impacted by the government business, all these deals that we’re signing, they will turn to revenue in the future quarters. That kind of depends upon the deployment schedule that’s I think that’s one way to try to better quantify and to help you understand that the dynamics there.

[Sean Wieland:]

Okay. The Paul Johnson, sounds like he has got a great resume, is there anything on his to-do list out of the gate that you think is notable. What are some of the changes that he wants to make?

[Brent Lang:]

Yes. I don’t think he has got to the point of articulating a lot of changes, right now he is getting up to speed on the business. I think the things that I like about Paul, he is culturally going to be a great fit for Vocera. He is a very high integrity, high results oriented person. He has got a very strong background in enterprise software and complex, selling in complex environments. So he is taking a look at our sales organization right now. And the first thing really on the plate is defining our strategy and our targets for 2014 assessing the talent pool and making sure that we are making the right investments. There is actually a lot of parallels between the business that he came out of and our business in terms of the way that sales are made. And I’ve been very impressed with the speed with which he has been able to ramp up and get to know people in the business.

[Sean Wieland:]

All right. Super. And just one other quick one, why the uptick in the warranty cost?

[Bill Zerella:]

Hi, Sean. So, we did see a slightly higher RMA rate in the quarter that I mean RMAs ebb and flow over time. We have been pretty fortunate in terms of trend that we’ve seen up to now in that every quarter we saw pretty good performance in terms of declining RMA rate. So our RMA rate for the B3000 is still substantially below the B2000. But there was a slight up tick so as a result we reassess warranty reserves every quarter. We had to reflect that that slightest uptick in our calculation for the reserve that we reported as a result.

[Sean Wieland:]

And just to be explicit, is there anything that you have identified with the B3000 badge that is going wrong?

[Brent Lang:]

I think our customers continue to be very excited about the B3000. We have basically converted over the non-federal customer base to the B3000 at this point. And as Bill said the return rates are lower on it. The performance seems to be better. The speech recognition is working better as a result of the echo cancellation that kind of thing. So I think – more than anything it’s a matter of getting the warranty reserves at the right pace as we get – give more history of what it is going to take for these products that have been on the market for a while.

[Sean Wieland:]

Okay, super. Thanks so much.

[Operator:]

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

[Ryan Daniels:]

Hi, guys. Thanks for taking my question. Brent maybe a big picture one for you to start. I am curious regarding your commentary about all the clinical integration activity you’ve underway with some of the other HIT Vendors and other TLS and a variety of other areas. Number one, are you able to show a stronger ROI or I guess number two use that as an additional sales vehicle once you have that integration and customers have a lot of that technology, how’s that is going to manifest in for you?

[Brent Lang:]

Yes. We really can. The more integration we are able to do in the clinical environment the stickier the solution becomes and higher the ROI for the solution. I will give you one example that I think really illustrates this. We have doing some work with University of Arkansas Medical Center which was historically having an issue with patient related falls which can be a huge cost driver inside of a hospital, if patients fall and hurt themselves. And one of the integrations we did was an integration between a bed monitoring system and the Vocera system such that when a patient would start to get out of bed, it would actually send an alarm to that nurse’s badge, and the nurse was able to get into the room before the patient got out of bed and potentially fell and potentially hurt themselves. And as a result of this integration the hospitals saw a huge improvement in patient related falls and fall related injuries. They’ve estimated that savings alone is about $1.3 million a year. Not to mention just the improved patient satisfaction, patient safety elements of it. So it becomes, it continues to be a major focus for us. We have a team within our business development organization that’s focused on not only just creating this integration but identifying specific used cases that can drive more value for customers, and lot of our customers have already done the simple nurse call integration, which has got a very good ROI associated with this as well and they are now expanding out into some of these other areas. A big focus for us going into 2014 is around tighter integration with EMR, and as I think I have mentioned to you in the past we have got dialogs going on with several of the leading EMR companies to have a much tighter integration so that we can not only receive alerts and alarms from the EMR but also create more of a two-way data interaction where we are actually populating relationship data between patients and care providers back into the EMR system.

[Ryan Daniels:]

Okay, perfect, very helpful color. And then you highlighted some of your success outside of the healthcare market with power plants in particular. And I’m curious, if you can speak in a little bit detail at the smaller market, but how penetrated you are there. And them I am curious with the average size that a power plant would be related to a hospital.

[Brent Lang:]

Yes. So in the script I think that we’ve mentioned that there are 71 nuclear power facilities here in North America, today, we are in nine of those. Most of the deployments we have gotten so far have been just the initial deployment and the expectation is that these could grow pretty substantially. A fully deployed nuclear power facility could represent anywhere from $0.5 million to $1 million, and most of the dealers who have gone so far has just been in certain parts of the facility. The interesting thing about the Duke power deal was that they have already identified the fact that the Vocera system can be used not just during this specific maintenance renewal but also [indiscernible] day-to-day operations for all of the people who work at the facility. So I think that there obviously its a limited market, more interestingly as we start to look at any of these environments that are mission critical that are potentially hazardous or require wearing of the hazard waste suits and maybe difficult environment to use a traditional communication device really represented a higher ROI and so we see this is kind of opening a door to a new market segment for us.

[Ryan Daniels:]

Okay, perfect. And then two quick ones for Will, really just a follow ups, on the higher warranty cost during the period. Did you have to approve a catch up there from all of B3000 shipped year-to-date and if so can you give us a little bit of color on to how much that had a one time impact on margins, so we can think about the margins going forward? And then, number two, I just want to clarify that you said the backlog to be shipped within 12 months is up 50%, not 15%. Thanks.

[Bill Zerella:]

Yes. Okay. Let me take you second question first. Ryan, yes -- that the backlog shippable within 12 months is up over 50%, up over 50%.

[Ryan Daniels:]

Okay.

[Brent Lang:]

Pretty substantial uptick there. So that was your second question. Going back to warranty, so yes, when we look at the data in terms of return rates; we do have to make a cumulative adjustment based on the total population of badges that had been shipped. So in total for the quarter and if you look at all of these costs, they impacted our P&L by about $0.5 million or so and a little less than half of that was attributable just for the warranty piece.

[Ryan Daniels:]

Okay, perfect. Thank you so much.

[Bill Zerella:]

Okay.

[Operator:]

Your next question comes from the line of David Larsen with Leerink.

[David Larsen:]

Hi, guys. Congratulations on a good quarter. Can you give an update on the sales force, how many quota carrying sales reps do you have at the end of this quarter versus last quarter? And if you can typically bringing like a new class each year, is that process underway and you need to tell how many are in that class for 2014? Thanks.

[Brent Lang:]

Hey, David. Thanks for dialing in. So the quota carrying sales force is basically flat quarter-to-quarter, end of Q3 was right on par with where we’re at the end of Q2. We’ve had a couple of replacements or upgrade but its pretty stable. And I think one of the themes that I feel is really important is to increase the level of stability that we have within the sales force. One of the things that was a real challenge for us, early on this year was not only the growth but also the upgrading of some of the elements of sales force created a lot of churn. And we talked about that early on in the year of the challenges associated with bringing all those folks on board. One of my goals as we head into 2014 is to minimize some of that change. So the sales force is certainly stabilized. In terms of the growth for next year, we haven’t finalized the growth plans for next year, but directionally one thing I can share with you, is that we are going to be putting a greater emphasize on international. So higher proportion of the sales head count growth will go into driving growth in places like the Middle East and Asia Pacific, where we are seeing a strong increase in investments in hospital spending as they try to capture some of the medical tourism dollars and hospitals that are being built there and move out there had a real strong demand for kind of the latest and greatest technology best in class technology. And as a result we are getting a lot of in bound enquiries from folks who want participate or have Vocera participate in that roll out. So I can’t give you a specific answer on the size of class, the direction it will be more internationally focused and much less churn than we experienced coming into 2013.

[David Larsen:]

Yes, I think last year there was churn of like nearly around 15 or so reps and its improved dramatically from that this year?

[Brent Lang:]

Correct.

[David Larsen:]

Okay. And then did I hear correctly that B3000 badges is largely penetrated for your commercial customers, can I hear that correctly?

[Brent Lang:]

No. What I was implying was that for new customers, the new purchases for the commercial customers are largely on the B3000 badge. The upgrade opportunity amongst the installed base is still very, very large. We still see that its being a big driver of growth in the future. We didn’t actually make huge progress on that in Q3 is one of the disappointments in terms of the existing customer business. But by no means is it saturated in terms of that upgrade opportunity.

[David Larsen:]

It’s only 70% of your base can still upgrade to the B3000 badges, is that reasonable?

[Brent Lang:]

Yes. I would say 70% to 80% is still got upgrade opportunity.

[David Larsen:]

Okay. And then just one last question for the [indiscernible] and Cleveland relationships any update there? Thanks.

[Brent Lang:]

Yes. I’ve been disappointed with the rate of penetration within those large systems. We have got the contracts in place. They are certainly enabling us to grow expansion with an existing customers there and our supplies and expansion orders from the existing clients that we have in those environment has been positive. But we have not added as many new facilities amongst those systems as I would have liked. And but I think overall that portion of our business is growing faster than our base as a whole. But we need to do a better job of using those relationships to land new facilities.

[David Larsen:]

Great, thanks, thanks very much.

[Operator:]

The next question comes from the line of Gavin Weiss with JPMorgan.

[Gavin Weiss:]

Hi, thanks for taking my question. First, in terms of the Duke Energy deal, can you give us some more color on the sales process for that? Was that one where they came to you or did your sales force pick it out? And where does the sales force stand in terms of picking up customers in the non-hospital phase?

[Brent Lang:]

So within the nuclear space, we have become pretty well-known based on the other deployments we have done. It’s a pretty small community as you can imagine and they all know each other. We have been working through reseller who serves the nuclear facility space and they have been able to make introductions to a lot of these facilities, but many of the nuclear facilities are actually contacting us based on having talked to other people in the industry. Our non-healthcare team right now is made up of 5 sales people that are focused on both hospitality as well as nuclear and then some activity in any other markets retail and libraries and some of the other once that are more opportunistic. So right now in hospitality and nuclear we are doing both, we are reaching out to specific customers and we are also receiving inbound. I don’t know the specifics in the Duke case whether they called us first, or we called them first, but I think it was largely a function of the success we had with some of the other facilities.

[Gavin Weiss:]

Okay. Would you say that the sales force is having more traction than they had earlier in the year in terms of a non-hospital phase or is it still ramping up slowly?

[Brent Lang:]

No. I definitely think they are having more traction. Q3 was a very positive quarter for us, as I have mentioned on the script. This quarter was our second highest bookings quarter for a non-healthcare in the company’s history. So I was very pleased with the performance. And it does look like the team really for the most part came on board in Q1 is now got their feet on the ground and is developing a strong relationships and I am quite positive on the outlook for that group moving forward.

[Gavin Weiss:]

Okay, that’s helpful. And then [indiscernible] giving guidance for 2014, but this is sort of thinking about the quarterly progression, obviously your guidance for 4Q 2013 implies the sequential uptick in revenues. I know 1Q tends to maybe come down a little bit, but given sort of how the new business is rolling on should we think of 1Q and going into 2014 is sequentially increasing?

[Bill Zerella:]

Hey, Gavin. It’s Bill. So I mean, we are not going to provide any guidance at this point until the next call. I think the only thing you look concerned at this point is that clearly we have been able to -- every quarter this year increase our backlog which will give us more visibility exiting this year going into next year. So that gives us some increased confidence. But in terms of where Q1 is going to be or any color beyond that for the year. We are going to hold off on that until the next call.

[Gavin Weiss:]

Okay. Thank you very much.

[Operator:]

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

[Jamie Stockton:]

Hi, good evening, and thanks for taking my questions. I guess, maybe the first one Brent just as we think about the environment in 2014. I know you said in your prepared remarks it sounded like that you thought hospitals would reevaluate their CapEx plans. I guess maybe I think that they will be able to plan for 2014 a little more easily than they have planned for 2013 given that I think a lot of hospitals didn’t see the slow down in volumes coming in 2013. How do you think that that hospitals are going to approach 2014 from a CapEx standpoint at this point you think budgets will be up and just any thoughts on that we would be great?

[Brent Lang:]

That’s a million dollar question, David. I think it’s – [indiscernible] you to focus on what we are hearing is that IT budgets are going to be up next year. Now, there continues to be range of competing priorities with IPD-10 and potentially meaningful use of Phase 2, and some of the exchanges and even at a more macro level, some of the M&A activity is going its causing distractions. But I think that the big issue that we are seeing for 2013 is that everyone is kind of in a wait and see mindset because they just didn’t really know what they are getting into. My feeling is that for 2014 because they will have more lead time and able to plan out 2014. They will be able to be doing a more systematic and thoughtful process of planning our budgets for next year. And in that environment that actually I think is a positive for us, because we hear pretty consistently that we are a high priority for these hospitals in terms of their spending priorities. What has impacted for this year is just the lack of certainty in the market, so they essentially got into a freeze mode or wait and see mode. And I believe that if there is a little bit of more certainty on what the patient volumes are going to be; what the revenues are going to be; what their expenses are going to be that we can get in there and sell and make Vocera a priority that makes the cut. I’m not in the business of predicting of what’s going to happen with the Federal Government, so I’ll try to stay away from that but in general we see that this year was definitely taken up by a lot of distraction and we are hopeful that increased level of certainty going into next year will help us.

[Jamie Stockton:]

Okay. And then maybe just one other question on the international front. You may not be breaking out how many sales people you have planned to add next year there, but can you talk about maybe this year what the mix of revenue internationally is between sales where you actually have a sales person who is making that deal old versus working with a partner and how you expect that to evolve over the 3 or 4 years as international when it comes to bigger portion of the overall business?

[Brent Lang:]

Yes, it’s a good question. It varies quite a bit by region. Today most of our international efforts are direct selling efforts from our guys. And I think what we are realizing is that we’d like to bring more partners into the mix. So for example with the entrance into the Singapore market we are bringing IBM in. I’ve mentioned Malaysia will likely involve IBM there. In France which is an area that I have been disappointed in the progress we have made to-date. We are in discussions with a reseller partner there that has the local presence that has local relationships and connections into the hospital market there. I think what we are realizing is that it really takes -- both takes some level of local presence from us to have feet on the street there in countries. But also you need local partners that have the relationships and can navigate the landscape. So I think it will continue to be a hybrid model there. But I think relative to where we are right now, you will see an increasing focus of partners.

[Jamie Stockton:]

Okay. Thank you.

[Brent Lang:]

Thank you.

[Operator:]

And your next question comes from the line Eric Coldwell with Robert W. Baird.

[Eric Coldwell:]

Hey. Thanks very much. Just a couple of quick ones. The comment on the third quarter having the highest back log ever heading into a fourth quarter, I just want to make sure, I’m clear, interesting that its your best ever third quarter but not necessarily the highest backlog quarter in the company’s history. Is that correct?

[Brent Lang:]

That’s correct.

[Eric Coldwell:]

Okay. And on the collaborations suite for smartphones, did you see that’s going into beta here in the fourth quarter and if so when would you expect to start booking the first sales, something where we might see -- something here near term or something to focus on for 2014?

[Brent Lang:]

Yes. So we will be going into beta here in December. And then we’d plan to start shipping or booking and shipping in Q1. So you will start to see that we will add in the marketplace in the Q1 timeframe. And we are really excited about it. I think that the feedback that we have gotten based on the earlier views of the user interface have been very positive. And the functionality is truly differentiated in the marketplace. It’s able to take some of the aspects of our voice product that are truly unique, the ability to call by role, call by group activity based calling, combined that with the some of the secure messaging capabilities and then mould that together into a single application. And even play off of the desire in some cases for users to bounce between different devices, so if your person is wearing a badge inside of a hospital for some portion and then you want to quickly make the shift over to using a smartphone device, say outside the hospital you could make that transition very seamlessly. So its really been designed from the ground up has being a more integrated uniform and unified collaborations capturing suite capturing all the different media that people may want to use and the different devices that they may want to use in course of their job.

[Eric Coldwell:]

That’s great. I look forward to seeing that product. And then finally, on the comments in response to Sean and I think Ryan is well on the – the current portion of backlog being up 50%. Just to be clear is that the number that we should compare against the $22.5 million of backlog in 2012 and the $16 million of backlog in 2013. So, on a year-over-year basis you are up somewhere in the ballpark of let’s say $8 million versus $16 million is that how I should look at that?

[Bill Zerella:]

That 50% up is versus Q3 of last year – yes, versus September 30, 2012 backlog.

[Eric Coldwell:]

Okay. Did you – I don’t think you gave that number, did you?

[Bill Zerella:]

No. We haven’t.

[Eric Coldwell:]

Okay. I got it.

[Bill Zerella:]

We’ve only --

[Eric Coldwell:]

I’m sorry.

[Bill Zerella:]

No. We haven’t.

[Eric Coldwell:]

Okay. And that’s –

[Bill Zerella:]

And that’s only the – and Eric again just to clarify that that is not total backlog that’s the portion of the backlog that shippable within the next 12 months.

[Eric Coldwell:]

I got it. Okay. Very helpful. Thanks again.

[Brent Lang:]

Thanks Eric

[Operator:]

There are no more questions at this time. This will conclude the question-and-answer portion of today’s conference.

[Brent Lang:]

All right. Thanks everybody. Appreciate your time and we will be in touch.

[Bill Zerella:]

Thanks everyone.

[Operator:]

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