Vocera Communications, Inc.
Q3 2014 Earnings Call Transcript

Published: 31 Oct 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Third Quarter 2014 Vocera Communications, Inc. Earnings Conference Call. My name is Cindy, and I’ll be the operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now turn the conference over to Mr. Jay Spitzen, General Counsel. Please proceed, sir.

[Jay Spitzen:]

Hello, everyone. Vocera distributed a press release detailing our quarterly results earlier this afternoon. It is posted on our Web site 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 and Exchange Commission. And actual results or events may differ materially. Let me now introduce our President and Chief Executive Officer, Brent Lang. Brent?

[Brent Lang:]

Thanks, Jay. Good afternoon, everyone. I’m happy to say that Vocera made good progress in the third quarter, delivering overall results that were better than expected. We achieved revenue and profitability that were slightly better than our guidance ranges, and ended the quarter with a substantial increase in backlog both year-over-year and sequentially from Q2. Bookings were also up nicely from Q2, although down slightly from a year ago, which is expected. Customer loyalty remains very high and we’re proud of the fact that our maintenance renewal rates continue to be above 98% for our healthcare customers. There are five significant takeaways from Q3 that I’ll highlight on today’s call. Number one, the quarter demonstrated that we’re making good progress on our strategy to enable communications broadly across the hospitals and even beyond its walls. Two, we saw continued improvement in sales effectiveness and execution. Three, our new products continue to make early progress in building pipeline and generating sales. Four, our solution portfolio continues to expand as demonstrated by the new product enhancements that were announced two days ago. And five, international continues to be a highlight with a pipeline that is growing dramatically over the course of the year. As I look at our business overall, I’m optimistic about the progress we’ve made in the quarter. However, the U.S. hospital spending environment continues to be a challenge, and our year-over-year comparisons are down. In this context, we’re continuing to stay focused on our key growth investment areas, and are being even more disciplined on expense management. The sequential improvements we saw in the third quarter give us confidence that we can achieve modest growth next year. In addition, if we see patient populations grow, stabilization of hospital spending, or a reduced emphasis on meaningful use, we could see market conditions improve next year, which could accelerate our growth. Let me switch next to some of the highlights from our five pillars of growth and provide some specific proof points and color around the company’s progress. Bookings for new U.S. commercial hospitals were up in the third quarter, both year-over-year and sequentially. Bookings for new federal hospital customers were solid, but were down year-over-year largely driven by smaller initial deal sizes. You may remember that Q3 of last year was particularly strong for new federal hospitals, and included several very large bookings. Let me highlight some of the new hospitals in the quarter that were new wins. On the commercial side, I’d like to mention two in particular, because they reflect our evolving product mix. Marshalltown Medical Center is a rural acute care organization in Iowa with a 114 bed main hospital, four clinics and two rehab centers. This new deployment will combine a large number of Vocera badges with the Vocera Collaboration Suite running on Smartphones. The Ravenswood Family Health Center here in the Bay Area is building a new facility and will be using both our wearable badges and Smartphone Collaboration Suite to integrate outside physicians. Both of these are notable that they combine badges and the Smartphone-based Vocera Collaboration Suite and support our strategy of offering a single platform that supports a variety of devices. Within our federal business, we added five new VA hospitals, including Miami VA, Ann Arbor VA, West Palm Beach VA and Bedford VA. We’re now in 30 of the 153 VA hospitals, and we expect to continue our expansion in this space. We also added one new DoD hospital, a house-wide deployment at [Irwin] (ph) Army Community Hospital. Our second pillar is expansions within our install-base. U.S. hospital operating budgets continue to be a challenge in Q3, and our U.S. hospital expansion bookings were essentially flat year-over-year. Highlights included Banner Health, which did a large badge upgrade across three Arizona facilities, and Sunrise Hospital in Las Vegas. We also book an expansion at West Roxbury VA in Boston, and large B3000 badge refreshes at Fort Belvoir and Evans Army hospitals. In addition, the Naval Hospital in Jacksonville expanded their insulation. As I mentioned, our customer loyalty remains strong and software maintenance renewals continued at a high rate. Measured on a dollar basis, our maintenance renewal rate for healthcare customers using our voice communications solutions was above 98% in Q3, slightly higher than Q2. Our competitive win rate for new opportunities continue to be very strong. We believe the competitive mix we saw in Q3 shows while the environment is challenging, we continue to win a disproportionate share of the competitive deals against both traditional and newer competitors alike. We also know that hands-free still matters, whether you are in the ICU or the operating room, clinicians rely on our hands-free communication for critical, clinical care. Recently, as hospitals have become more focused on reviewing and improving their infectious disease management processes, Vocera’s unique ability to facilitate communication inside personal protective gowns and equipment, and remain hands-free, has re-emerged as an important consideration. Our third growth pillar is developing and acquiring new products to cross-sell into our install-base of customers. We saw continued uptake of our Collaboration Suite Smartphone application in Q3. As I previously mentioned, several deals were mixed with traditional badges, providing enhanced -- providing evidence to support our strategy of promoting mixed environments. We saw fewer big deployments in Q3 compared to Q2, but booked several pilots, and the overall pipeline looks good. One of the biggest recent developments is that we’ve begun working with the leading electronic healthcare record providers on deeper integrations to enable better communication. On Tuesday, we announced several new capabilities as we continue to expand the reach and level of integration of the Vocera system. Mobile EHR apps such as Epic Haiku for physicians and Epic Rover for nurses can now connect directly to the Vocera Collaboration Suite creating a simplified communication experience. This integration enables care team members to communicate instantly by launching Vocera’s unique voice communication and secured text messaging functionality from within the EHR Smartphone application. In addition, our enterprise software platform can now synchronize care team assignments between EHR and Vocera platforms making sure both are up-to-date to enable accurate and effective communication. Alarm management which was launched at the end of July is on track with our expectation. Having completed training, the sales force is focused on building pipeline, and we have a solid number of opportunities we’re now tracking. This week, we launched a new cardiac consult solution that delivers ECGs to doctors’ Smartphones and tablets allowing them to immediately evaluate and compare to historical data, potentially speeding treatment, improving patient outcomes, and improving cardiology team coverage and satisfaction. In our care experience product line, which is focused on helping hospitals deliver better patient experience and increasing patient engagement, we added three new customers in Q3; Good Samaritan here in Silicon Valley, Lucile Packard Children’s Hospital at Stanford, and Guadalupe Regional Medical Center outside San Antonio. These were all good sized bookings for three-year subscription commitments. In addition, we added a seventh module to the Care Experience Suite, a pre-arrival communications module. This new capability enables organization to provide patients with important information, including appointment reminders and educational content, prior to their arrival for schedule procedures. Streamlining the pre-arrival process decreases no shows and last-minute cancellations, and can increase throughput and improve patient engagement. We’re encouraged by the progress of our new products. While we expect these to grow significantly in 2015, they’re likely to remain a modest portion of our overall bookings in the near-term. I also want to note that in the third quarter we made a small tuck-under acquisition of cloud-based mobile technology that will extend our product reach to physicians and other clinicians outside the hospital environment. Just as we did with alarm management, we are going to take a couple of quarters to integrate and productize the technology, and expect to launch the product next year. International bookings were even with the year ago quarter, but our pipelines has grown significantly, primarily in Asia pacific and the Middle East. These international markets represent a great opportunity for us because anywhere there is new hospital construction, we’ve had success. The Middle East, Singapore and Malaysia are aggressively building hospitals, and governments are making large investments in hospital infrastructure. As a result, this year we have been increasing our investment in these growth regions. Recently I saw some of these international opportunities firsthand having just completed a trip through Southeast Asia and the Middle East. In places like Singapore, Dubai, Abu Dhabi and Qatar, there is a strong desire to have the latest technology, and patient experience is very important. Medical tourism is partly responsible, but these countries also have made significant commitments to increase their country’s abilities to delivery quality care to their citizens. In addition, they’re very focused on efficiency, as most of their medical labor is contracted from outside of their countries. Our solutions are very compelling for them, because we address both patient experience and productivity. While Australia is a more mature market, there are strong opportunities for growth there as well. Out team has been successful driving adoption in aged care facilities and they provided the most significant third quarter highlight in the region booking nine new doctors community service facilities in New South Wales, to help handful of other new customers in Australia. Across different healthcare models in various countries, Vocera is mobilizing healthcare and is a catalyst for positive changes in efficiency, quality and patient experience. The trip reinforced me the tremendous growth opportunity in front of us, and the impact we can have on health and safety in these markets. This global perspective will help inform and expand our thinking about the solutions we bring to market. While bookings and revenues from outside the U.S. are less than 10% of our business today, we expect it to outpace the growth in the U.S. and ultimately it could be 25% of our business over the next few years as we become a global company. Our final growth pillar is focused on developing non-health care markets. While this market comprised a low single-digit portion of our bookings, it included several notable wins. We added three new nuclear facilities with small initial installations that can grow over time. As of quarter end, we’re now in 13 of the roughly 70 nuclear facilities in North America. On the hospitality front, we were added to the approved products list for Marriott properties. This allowed us to win a deal at the Ritz-Carlton club in St. Thomas. Well, that concludes the normal five pillars discussion. I want to highlight one other area focus for driving our future growth, partnerships. We talked a little bit about this on the last quarter call. So I thought I’d update you again on this call. We’ve rapidly built a pipeline of potential partners representing a variety of different structures, including alliances cum marketing relationships, integration partners, resellers, white label and bundled solutions. The integration with Epic Haiku and Rover mobile apps noted on Tuesday’s new product’s press release is a good example. We’ve received some very positive responses and are pleased with our progress so far. Our goal is to establish a small handful of high impact partners that can make a meaningful impact on our growth. I’m pleased with the progress we’ve made across these growth pillars during Q3, and we’ll continue to push them forward to drive growth. Finally, I’m thrilled to have Justin Spencer here as our new CFO. He is already having a significant impact on the company since joining us in August. So let me turn it over to him now for his financial commentary. Justin?

[Justin Spencer:]

Thanks, Brent. Hello, everyone. I’m very happy to be here at Vocera, a great company with a strong customer base, passionate employees, and an expanding product portfolio. In my comments today, I plan to provide some color on our Q3 financial results, along with the actions we’ve taken to accelerate our business and return to growth and improved profitability. I’ll also provide come insight into how we expect our financial model to evolve as we execute against our financial plan. Finally, I’ll wrap up with guidance. Our third quarter results came in above expectation and demonstrated sequential momentum from Q2. Revenue was $23.1 million, just above the high-end of our guidance range. We also increased our backlog, both year-over-year and sequentially from Q2. Product revenue was $12 million, down from Q3 last year, due primarily the lower backlog entering the quarter, and slightly lower bookings in last year as a result of lower federal sales. In Q3 last year, our federal sales were particularly strong. This quarter, federal represented a more normal pattern and was right in line with our expectation. Sequentially, product revenue was flat from Q2, with 12% growth in software and a nominal decline in device revenue. Services revenue was $11.1 million, up 7% from last year, and was roughly half of our total revenue. We benefited from an increasing base of customers, utilizing our software maintenance and support services. Software maintenance and support revenue were up 10% from last year. It’s all recurring and represents 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 install-base expands. To complete the revenue fixture, we were able to once again build backlog in the quarter. Our backlog is an important leading indicator of future revenue performance. Please note that our backlog tends to follow the typical seasonal patterns we see with our sales activity, usually declining in the first half of the year, and increasing in the second half. On the profitability side, adjusted EBIDTA and EPS were better than our Q3 guidance as a result of higher revenues and strong expense control. Let me drill down on our gross margin and operating expenses; non-GAAP gross margin was 60.4%, down 340 basis points year-over-year, due principally to lower product revenue, where some of our costs are fixed as well as some one-time charges for obsolete materials. We expect gross margin to improve in the fourth quarter. Brent mentioned last quarter that we had taken steps to reduce our costs. These actions resulted in lower operating expenses of $17.9 million, down 600,000 from last quarter. R&D was up 4% sequentially from Q2 as we continue to maintain strong investment in new products. Sales and marketing expense was down 6% sequentially, primarily as a result of the changes in our sales organization that we mentioned last quarter. We are very pleased with our progress here, and have already begun to see positive results in the field. In addition, we have taken action this quarter to further reduce and realign our cost structure entering 2015 with a focus on maximizing investment in new products and expanding the reach of our sales force. We are shifting more resources to our highest growth areas and are reducing expenses elsewhere, enabling us to enter 2015 on a more efficient footing and align our cost structure with a modest revenue growth plan. As a result, we expect to incur $700,000 restructuring charge in Q4. A portion of that savings we realized from this action will be redeployed to our growth initiatives, including some key hiring, and the balance is expected to reduce our operating expenses by approximately $3 million versus 2014, and lead to improved profitability in FY15. Now, I’d like to make a few comments on our balance sheet. Our balance sheet is very strong with $117 million in cash in short-term investments and no debt. The tuck under acquisition in our third quarter that Brent noted consume $4.25 million of cash, comprising $3.5 million for purchase consideration, and the remainder is satisfied from employee retention [entered] (ph) now. We have strong liquidity and working capital metrics. In Q3, we generated improved operating cash flow due principally to the timing of collections. Our collections were particularly strong in Q3, which we don’t expect to repeat to that degree next quarter. So, our cash balance will likely decline slightly in Q4. The cost savings from the actions I described earlier are expected to contribute to better operating cash flow performance in 2015. Now, let me turn to the guidance. For the full year 2014, we expect revenue of between $92 million and $95 million, non-GAAP loss per share between $0.68 and $0.57, and adjusted EBITDA loss between $14.9 million and $12 million. We expect GAAP loss per share to be between $1.23 and $1.12. A reconciliation of our GAAP to non-GAAP calculations is included with our press release. Q4 guidance reflects the different between year-to-date results and our full year guidance, which is also included in the press release. So in summary Q3 represented solid sequential progress. We built backlog, and revenue and profitability exceeded our expectations, but we recognize there is plenty of work left to be done. We’re focused on accelerating the traction of our new products and extending our market reach to restore revenue growth. And we’re reducing cost to improve profitability and cash flow, and create a strong platform for growth going forward. Again, I’m very happy to be here, and I look forward to helping drive Vocera’s growth and profitability in the future.

[Brent Lang:]

Thanks, Justin. Let me wrap up by saying that I view the third quarter result is demonstrating material continued progress on our strategy. We showed strong sequential bookings growth. We are browsing our product portfolio in order to reach more clinical users in a wider range of facilities. Our sales execution continues to improve, and we are expanding our capabilities overseas to capitalize on the big international opportunities. Thank you for listening today. Operator, we are ready to open it up for questions. Thank you.

[Operator:]

(Operator Instructions) Our first question comes from Mohan Naidu with Stephens. Please proceed, sir.

[Mohan Naidu:]

Thank you very much for taking my questions. Brent, on the EHR integrations that you’re talking about; so far you already connect to several EHRs and IDs, this integration going much beyond that level of integration, and you have better pull from customers who are the EHR vendors for this type of integration right now.

[Brent Lang:]

Hey, Mohan, thanks for the question. Yes, you can think of this as kind of a multiphase integration effort. It’s getting deeper and deeper as we go forward. As you’ve commented, for a while we’ve had the ability to do what we refer to loosely as kind of a tap on the shoulder, where -- for example, when an urgent lab value gets calculated into the EHR or an urgent order gets input into the HER, we can generate an alert out to the Vocera user either on their badge or on their Smartphone using the integration that we’ve had there for a while. This new integration is really interesting, as you know, several of the EHR companies have mobile apps run on Smartphones and iPhones and Android devices that allow clinicians to actually go in and access the EHR from the mobile device. And what we’ve been able to do with this latest [rave] (ph) of integration is while you’re in the mobile app on the Smartphone, imagine yourself being inside of the Haiku or Rover, you will actually have a portion of the screen that is dedicated to blood serum and you’ll actually be able to click on the screen from within the Haiku that will take you directly to either sending a text message or placing a voice call using Vocera’s directory and all the information about the care team inside the Vocera system. And further more, we’re actually going to be syncing those care team assignments between the EHR, which may have some of the assignments and Vocera staff assignments, which have the other assignment, so that the care team assignments are always up-to-date. So, this is representing a new level of integration, and we’re going to continue to do more. We think this is important to drive these integrations more and more closely. To answer the second part of your question, this was almost entirely driven by customers, and customer requests for us to work with the EHR companies. We use those customer requests to go to the various providers and get their cooperation to work with us. And then, we’re able to deliver the integration as a result.

[Mohan Naidu:]

That’s very helpful, Brent. Apart from Epic, are you guys working with any other vendors? Are these a reusable application that you can use across several vendors?

[Brent Lang:]

It’s definitely reusable, and the intent is that we’d use it across multiple vendors. Each of those relationships is in a slightly different stage of development, but we’re making, I’d say, good progress on the number of fronts there, and the anticipation is that this is functionality that we get rollout pretty broadly.

[Mohan Naidu:]

Great. One last question; on the federal bookings, nice flow, but you said it’s still below year-over-year. On the VA hospitals, I thought the FIPS certification that you guys got was the bad year and now that you’ve got it. What else is stopping the rest of the VA hospitals and DoD hospitals to adopt Vocera right now?

[Brent Lang:]

Yes, good question. So two things I will highlight. Number one, if you remember back to Q3 of last year, that was somewhat the combination of two years worth of activity. In Q3 of 2012, this is when we were heading into the -- some of the budget issues with the Federal Government, there was actually a [bet] (ph) Federal Government shutdown at that point in time, a lot of budget uncertainty. So, some of those deals actually slipped into the following fiscal year. So you can look at the federal bookings that were done in Q3 of last year as representing not really two years worth, but certainly more than just one year’s worth because we had some spillover that ended [evolving] (ph) recognized there. So the federal bookings that we achieved in Q3 of this year were very much in line with our expectations. I think you remember on the last call, we indicated some level of risk associated with the Federal Government bookings. This ended up coming in right in line with our expectations. There we’re quite pleased with the results, but it was down year-over-year as a result of that carryover effect that occurred in the following year. And as you say, FIPS is an important criteria for the B3000. What that actually impacted was more on the expansion side of our business and refresh. And as I mentioned, places like Fort Belvoir ended up doing a nice badge refresh moving from the B2000 to the B3000. That was a direct result of the fact that B3000 now have the FIPS certification.

[Mohan Naidu:]

Great, thank you very much. Congrats on a good quarter.

[Brent Lang:]

Thanks, Mohan.

[Operator:]

Our next question comes from David Larsen with Leerink Partners. Please proceed.

[David Larsen:]

Hey, guys, congrats on coming in at the high-end of your revenue guidance. Can you just talk about what you’re seeing in terms of hospital volumes? Is there any sort of reacceleration there? And can you also give an update on sequestration?

[Brent Lang:]

Yes. So I’m not the best expert on these topics, David, but I’ll give you my perspective. There were definitely has been some indication in the media that patient populations are starting to increase. HCA made a comment in their call and their release yesterday that talked about patient populations increasing. I think it’s too early to know whether this is a true trend or not. There’s other countervailing forces. There seems to be a question around bad debt related to the higher deductible plans. So, well, patient populations may go up and Medicare populations may go up. The hospital may be facing a higher bad debt. So I think it’s too early to know what [trend] (ph) line is going to happen there. We see that there are winners and losers as the consolidation seems to be occurring. The larger systems seem to be benefiting from that as they consolidate and merge with some of the smaller organizations. And the smaller facilities maybe having more of a struggle there, but I’m just looking at it [intentionally] (ph). I think there is also a time lag effect here. What we’re seeing is quarterly progress each quarter this year in terms of overall momentum in spending. If you compare the headwinds we were facing in Q1 versus where we’re now, I think we’ve made sequential progress each quarter, but I would say it’s too early to say in fact where we’re going clearly there are still deals that are being held up for budget approval, there are deals that were anticipated to close in Q3 that are taking longer, that are slipping out into following quarters. But the positive news is that, deals that in some cases we had originally anticipated in closing in Q1 or Q2 did end up coming in Q3. So, overall, our win rate remains very, very high. We’re still working on how do we get the deals to close in a more timely fashion, but we’re not losing more deals to competition, the deals are not going away, they’re just taking longer to close. And second part of your question was around sequestration; really the only update there is that the cuts to Medicare reimbursement that came in as a result of sequestration became permanent. Beyond that, there is no whole lot of additional impact. The VA and DoD organizations are back to standing in a more normal way. It will be interesting to see whether or not the changes within the VA system can help accelerate our business there. And just to circle back on one of questions, Mohan asked, I don’t think I properly addressed earlier, really the biggest inhibitor towards us getting a much larger number of the VA facilities is the timeline associated with their wireless LAN deployments. Right now, we basically trail their upgrades to the wireless infrastructure. And as they rollout more and more properties to the latest and greatest Wi-Fi infrastructure, typically Vocera then falls in behind that. So that’s I think as much as I can say on that topic.

[David Larsen:]

That’s actually very helpful, thank you. And then, can you just describe what the $700,000 charge will be for in the fourth quarter, and there was a decline I think in the sales and marketing cost line items sequentially, can you just perhaps give a little more color around that? Thanks.

[Brent Lang:]

Hi, David. Yes, the $700,000 is principally for severance to reduce the headcount. So it’s tied to the cost savings initiatives. So the majority of the $3 million reduction that we expect in our operating expenses is tied to the cost of reducing our workforce. So that we’ve initiated now as we enter 2015 on a strong footing. In regards to your question about sales and marketing, sales and marketing expense was down sequentially. I believe there was some commentary last quarter about how we’re -- we had taken action to reduce the bottom performing part of our sales force. And so, those actions were taken and we started to benefit from that this quarter and look forward to continue the improvement there.

[David Larsen:]

Okay. Do you want to add to the sales force in an ideal world for 2015 or not?

[Brent Lang:]

Yes. So I think what we’ve described is there are some puts and takes. We’re certainly going to be adding to the sales force internationally, and in particularly -- some of the key growth areas might have additions related to some of the new products. And as we bring in some of the partners, we’ll likely add headcount associated with some of the partner relationships and channel aspects of it. But we’re feeling like the core U.S. [quota-carrying] (ph) group is pretty well covered at this point. And major focus for next year is actually driving better sales productivity. We recognized at the end of last quarter, if you look at sales marketing as a percentage of sales, it gotten out of whack, and so really the focus is on not necessarily adding a bunch of heads, but driving better productivity through better sales enablement, better sales tools, better pipeline management and lead generation activities. And so, the goal for next year is really to try to drive the sales dollars per head up by quite a bit.

[David Larsen:]

Thanks very much.

[Brent Lang:]

Thank you, David.

[Operator:]

Our next question comes from Ryan Daniels with William Blair. Please proceed.

[Ryan Daniels:]

Yes, thanks, guys for taking the question. I wanted to continue a little bit on the sales force front, but turn it specifically to all U.S. You mentioned in your prepared comments that could grow to as much as 25% of your business over time. So I want to get a little more depth on how you are going to go forward in maximizing that, both of that relates to expanded partnerships, are you asking them what’s the size of the direct sales force could look like in certain markets?

[Brent Lang:]

Yes, so let me give you a little bit of color on that. This is I think still a work in progress because the 25% is really meant to be, as I said, over a several years. But having just been, I spent some time in Singapore, I spent time in Dubai, Abu Dhabi and Qatar; really going out and looking first handed some of these opportunities. And there is a tremendous amount of growth going on there in terms of new hospital constructions in the region. We’re extremely well positioned. We’re partnering with local partners. We’re also partnering with IBM in some cases to bring us into these opportunities, and the dialog is happening at the most senior levels in the country and within these healthcare systems. They’re very excited about the functionality and capability that Vocera brings. And in some cases, if you look at the pipeline, there are some deals that are quite large, quite a bit larger than our typical deals here in the U.S. And that’s what’s driving some of the excitement and interest in those regions. The sales force internationally is still relatively small. Today, we have one person in Singapore; we have a couple of people in Middle East, and we’re adding more in each of those regions. So it’s starting from a small base, and it will definitely be a leveraged model where we use the channel partners to bring us into account and try to scale the business. So I don’t think we’ll certainly see a ton of headcounts associated with that, but we do think through large deals and through leveraging partners we can make that into a meaningful part of our business.

[Ryan Daniels:]

Okay, that’s helpful. And then, after the sales force distraction taking place, I know you’ve talked a little bit about and generically kind of referenced 15%, but did you have the number of quota-carrying sales reps that you stood at the end of the period?

[Brent Lang:]

Yes, as of right now, its right around 60. And you should expect it to be somewhere between 60 and 65, over the coming year. In prior years, you may remember in Q4, we ended up doing a fairly substantial hiring of new class, if you’ll, and brought those on-board for the beginning of the year. We don’t anticipate doing that this year. It will be more strategic hires in specific locations. So the total quota-carrying headcount will be right there in that 60 to 65 range going forward.

[Ryan Daniels:]

Okay, perfect. Then one last one, and I’ll hop out; you mention your win rate remain strong, pipeline is building, one of the things that you talked about last quarter was the free text applications, even some of the premium ones that people are looking at those. Are they starting to realize that that’s not really applicable for the solutions you address? And are those accounts coming back to market, if you will, or is that still out there as a noise in the channel?

[Brent Lang:]

I think it’s still a noise. In some cases, we’re seeing customers who are coming back and saying they’ve trialed some of those solutions and they realize that they’re not appropriate for their environment and they’re looking for more of an enterprise class solution that includes a wider range of functionality. But certainly the noise is still there. And I think we’re continuing to try to educate the market on pros and cons of the different offerings.

[Ryan Daniels:]

Okay, perfect. Thanks again guys.

[Brent Lang:]

Thank you, Ryan.

[Operator:]

Our next question comes from Gavin Weiss with JPMorgan. Please proceed.

[Gavin Weiss:]

Thanks, guys. I just wanted to touch on about your comments regarding [growth rate next year] (ph). First, I just wanted to clarify that you’re referring to top line, because it sounds if like with the operating expense reductions you get some benefit there. And second, I just wanted to maybe talk about where you’re seeing the biggest swing factors in that growth rate; is it international market versus U.S. market, is it your new products that you’re bringing, what’s the biggest swing factor?

[Brent Lang:]

Yes. Hi, Gavin. So I was referring specifically to top line growth, although to your point with the expense reductions that we’re were taking, and the expense management that we’re doing, that would obviously translate to improve profitability as well. So I think you’ll see improvements in the income statement top and bottom. In terms of overall growth, I’d characterize it into things that are under our control and things that are not under our control. Clearly in the category of the things that are under our control, the big drivers for us will be, as you mentioned, international, the new products which you’re starting from a small base that can I think growth after than then the rest of our business. Clearly, improving sales force productivity and effectiveness will help. Those are all things that are within our control. And we’re making those investments. Outside of our control, which -- and I also mentioned on the script, I think there are some factors that could change the market conditions a little bit. Obviously, if patient populations or budget environments change, and frankly, as I mentioned, if meaningful use ends up being slightly de-emphasized, there seems to be a fair amount of meaningful use fatigue right now, and a lot of our hospital customers are coming back to and saying that they’d actually like to focus on other aspects of information technology that can a bigger impact on patient safety and patient experience. And so, to the extent that meaningfully used Stage II ends up being de-emphasized, I think that could be a tailwind for us that could actually help drive additional growth. So I guess our focus is on the areas where we can control things, and I think that is on the new products and international and the sales execution, but we’re hopeful that some of the broader market dynamics could also help with this top line.

[Gavin Weiss:]

Okay. That’s definitely very helpful. And then, Justin, you talked about gross margin improvement in the fourth quarter. Is that from sequential basis or year-over-year, and is that being driven by mix shift, maybe higher device revenues?

[Justin Spencer:]

Yes. Hi, Gavin. Yes, my comment regarding the improvement in Q4 was a sequential comment. So we do expect our gross margin to increase again from Q3 to Q4. We had lower product revenue end-to-end in Q3 as well as some one-time charges to write-off some obsolete or old inventory, which we don’t expect to recur next quarter. So we’ll benefit from what’s we think will be an improved mix in next quarter as well as you’re not incurring those one-time costs.

[Gavin Weiss:]

Okay. Thanks very much.

[Operator:]

Our next question comes from Matt Hewitt with Craig-Hallum Capital. Please proceed.

[Dillon Hoover:]

Hey, good afternoon. This is actually Dillon on for Matt. Just a quick question on your top line guidance for the full year, I know you raised it from 90 to 92, if my math is right, it looks like you actually do just a little over $21 million in the fourth quarter to hit that bottom level. Just wondering what was the rational of not raising it maybe a little bit higher, you guys have any large renewals in Q4, and what I think is typically a seasonally strong quarter for you guys just kind of picking your brain on that, probably, Justin.

[Justin Spencer:]

Yes. Hey, Dillon. So I think that just reflects principally the comments that Brent made earlier about just taking a cautious look at our business. We just didn’t feel like -- there’s still a lot of headwinds out there that we’re facing. We do have pretty good visibility to our current quarter Q4, but we just felt like raising the bottom hand with the appropriate thing to do, and didn’t what to get out of our -- get ahead of our [skis] (ph) too far. But we’re feeling good about the quarter, and we’re off to a good start in terms of overall bookings. And we’re really focused on building strong level of backlog as we enter 2015 and trying to position ourselves for a strong start there.

[Dillon Hoover:]

Okay. And then, kind of pivoting over to the Collaboration Suite, it’s been a couple of quarters since you guys launched that (indiscernible). I’m just wondering, you offered some great examples of customers who are signing both the Collaboration Suite and the badges. Are there any hospitals out there that are coming to you guys looking just for the Collaboration Suite or does everyone want a piece of the badge pretty much?

[Brent Lang:]

No, there are some that are making a decision that they want to go entirely Smartphone solutions. I think there is really a range across the different customer base. And the beauty I think from our perspective is that we can configure any way they want, and they want to start with one area and expand others, it’s very easy for them to do that. So, you see different philosophical approaches from different organizations.

[Dillon Hoover:]

Okay. And then, last one from me, on the adjacent markets, again offer some good examples of some wins, and congrats on being added to the Marriott approved list. Did that -- I forget, did those adjacent markets carry typically a higher margin profile given thank you those customers are little less price-sensitive or are they pretty similar?

[Brent Lang:]

I think the biggest difference is that a lot of times they’ll end up being subscription business, rather than outright capital purchase. The margin profile on the price sensitivity is actually pretty strong. I don’t think that we’re going to necessarily see higher margins out of those markets there. Often times what we’re placing is walkie-talkies or low-end solutions, and so, there is a pretty high degree of price sensitivity there. So I wouldn’t expect necessarily higher gross margins in those markets.

[Dillon Hoover:]

Okay. Thank you.

[Operator:]

Our next question comes from Jamie Stockton with Wells Fargo. Please proceed.

[Jamie Stockton:]

Yes, good evening, and thanks for talking my questions. I guess maybe the first of all on the channel partners, it sounds like with Epic that you guys are really trying to take proof points that you’ve been able to establish with a handful of clients and then you’re going to other clients and trying to sell that who might also be on Epic or one of the other EHR platforms that you’re working on, it’s not really the EHR vendor necessarily at this point that’s helping you push it. And I guess my first question is, is that the right way to frame it? And then, my second question would be some of these other channel partners that you’re watching on who might potentially become resellers, could you talk about whether there is some initial traction that you have experienced with them, or if it’s already contributing to business or is that more of a 2015 event?

[Brent Lang:]

Hey, Jamie. Yes, in terms of the Epic relationship and the EHR vendors in general, you’re absolutely right. This is more of a technology partnership. We don’t anticipate that they’re going to be driving sales specifically, but I think the uplift effect of having that tight technology integration allows us to have a conversation with the customer, which is quite different from what we could have if we were a standalone entity. So it helps our sales force be more effective as opposed to relying on that as some sort of secondary sales operation. And as I mentioned in the script, we’re really looking at a wide range of different kinds of partnerships, everything from strategic alliances, to OEM, to white label, to partnerships, to borrowers, that kind of thing. So they all fit into the same bucket. The other half of your question is related specifically to the borrowers. We have signed a handful, a couple of international, and one here in the U.S. that are small regional-oriented players. We think they will help drive business and extent our reach. It has not contributed meaningfully to our revenues so far. So I’d answer the second party of question to say that’s really more of a 2015 expectation. And it certainly has not been factored into any of our forecast or guidance at this point.

[Jamie Stockton:]

Okay, that’s great. And then, may be one more question; one of the things you guys have talked about previously is the ability to demonstrate an ROI to customers, and that was kind of a hurdle that used to be -- the functionality of the platform was so intuitive that you’re able to close deals, but then when budgets got tighter, you needed to be able to actually demonstrate that there was a hard dollar ROI. And I think that you’ve talked about working on some ROI tools, I guess my question would be have you seen deals more recently where your sales people leveraged to some of those ROI tools, and you’re able to close the deal, and that would be a proof point or maybe that could help on unfreeze some of what seems to be especially some expansion business going forward?

[Brent Lang:]

Yes, that’s exactly right. And I think I’d broaden it to even beyond just pure life selling to more benefits selling. And one of the things that we’re being much more disciplined about with our existing customers is tracking the metrics that they’re interested in measuring from the initial deployments, so that we can then use that information to talk about the benefits of the expansion in the broader deployments. So the sales force is definitely using the new ROI tools, and I think it’s helping them establish a more credible conversation. And in some cases raise the conversation off to a higher level in the organization, and then this whole mindset around benefit selling I think has become more pervasive in the organization as well, and that’s going to help sales.

[Jamie Stockton:]

Okay, thank you.

[Operator:]

Our next question comes from Sean Wieland with Piper Jaffray. Please proceed.

[Sean Wieland:]

Hey, I just got one more; total bookings, did I miss it, were the total bookings, were they up or down in the quarter year-over-year?

[Brent Lang:]

They were up sequentially, they were down slightly on a year-over-year basis, and that was primarily a function of the decline on the federal sides. So, U.S. Commercial Healthcare bookings were up year-over-year and sequentially, but the Fed business was down, and so, total bookings on a year-over-year basis was down just slightly.

[Sean Wieland:]

Just slightly, okay. And can you give us any flavor between device versus software bookings and the mix there?

[Brent Lang:]

I don’t have it in front of me. I don’t think it was that different from what we’ve seen historically. In terms of overall mix, I think the one thing that was slightly different, services was slightly higher, and product was slightly lower, but I think to mix within -- do you want to take it?

[Paul Johnson:]

Yes, I’ll be happy to jump in. So I think our voice device is looking for about just over third of our total bookings in that quarter, and the software bookings were about 10%.

[Sean Wieland:]

Okay. Great, that’s helpful. And the EHR integration, how many customers do you have that are using some, some facets of EHR integration with you right now?

[Brent Lang:]

I’d say a couple of dozen that are using what I described to Mohan earlier is kind of that Phase I, and then the Phase II piece that we just announced obviously is just coming out of data, so we’re starting to roll that out to customers now.

[Sean Wieland:]

Okay. So, just to clarify; are you able to maintain patient contacts with respect to the apps, so that is, if I want to communicate with the care team, that’s the care team with the patient I’m working with now, so you can carry that context into your app or no?

[Brent Lang:]

Correct. So, typically the EHR will have some members of the care team, typically the physicians and the Vocera system will typically have the staff assignment associated with the nursing staff and nurses that are associated with the particular bed or a patient. And the synchronization is actually matching those up, and you can set profiles as to which one you want to have is the primary source for the information. One of the challenges with some of the EHR data is that it will often times have multiple shifts worth of care teams in the record, whereas within the Vocera system, we typically have data on who is the nurse and nursing team that is associated with the patient right now. And so, that synchronization ties back to the patient and keep track of the entire care team, essentially once the synchronization is done, it keeps track with both within the EHR and within the Vocera app.

[Sean Wieland:]

Okay. Thank you, very much.

[Brent Lang:]

Thanks, Sean.

[Operator:]

Our next question comes from Gene Mannheimer with Topeka. Please proceed.

[Gene Mannheimer:]

Thank you, and congrats on a good quarter, guys. I joined the call a little late, so I hope I’m not redundant in asking about mVisum. I know you acquired it in January, and my understanding was you started to sell it during Q3. So just curious, how much revenue if any is contemplated in your full year guidance from mVisum? And then, on the B3 upgrade cycle; did you happen to give us any stats around percent of the base that has migrated over to that? And then my final question would be about your revenue outlook, it reflects 7% to 10% decline year-on-year and short of giving guidance for next year, is it fair to say that you expect to grow revenue next year? Thanks a lot.

[Brent Lang:]

Okay. Yes so I think I got all three questions. On mVisum, from a revenue perspective, it’s not a meaningful piece of our guidance for the rest of this year. It’s primarily been focused around building pipeline. Keep in mind the typical sales cycle for these enterprise products is nine months or more. So, launching it in July, we’re really pleased with the pipeline that the team is working and we are tracking a number of deals. But the guidance that we’ve provided for Q4 doesn’t factor in revenues for the mVisum, the alarm management product. On the B3 upgrade, we didn’t give a specific number in terms of the portion of the install-base that’s converted over. We just mentioned that there were a number of large refreshers and upgrades that occurred during the quarter. So I think we’re continuing to see that happen, but we haven’t updated that calculation. We could certainly get back to you once we’ve had a change to look at it. And then on the third one, in terms of revenue outlook for next year, we’re crucially not ready to give guidance for 2015, but both Justin and I, both mentioned that we expect to be able to return to modest growth next year. So, yes.

[Gene Mannheimer:]

Okay, thanks a lot.

[Brent Lang:]

Thank you.

[Operator:]

We have no further question. I will now turn the call back over to management for any closing remarks. Please proceed.

[Brent Lang:]

Okay. Well, I just want to thank everybody for taking the call. I know it’s a busy season, and I appreciate the good questions. And we’ll be following up seeing if we can answer any additional questions that you might have. I appreciate your time. Thank you.

[Operator:]

This includes today’s conference. You may now disconnect. Have a great day everyone.