Q4 2019 Earnings Call

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Thank you Hello, everyone welcome to Voceras conference call to discuss our fourth quarter fiscal 2019 earnings joining me today our RBC.

Brent Lang ingested sensor our CFO.

Earlier. This afternoon, we distributed a press release detailing our quarterly result.

At least is posted on our website that investors don't Vocera Dotcom and is also available from normal news sources.

This conference call the webcast live on the Investor.

We should page of our website a replay will be archived.

Well, we began our prepared remarks I'd like to take this opportunity to remind you that during the course of this call. We will make forward looking statements regarding projected operating results and anticipated market opportunities.

Its forward looking information is subject to risks and uncertainties, describing plus are assigned.

These are the FCC and actual results or events may differ materially.

Except as required by law, we undertake no obligation to update or revise these forward looking statements.

On his call we will refer to both GAAP and non-GAAP financial measures reconciliation of GAAP to non-GAAP financial measure is provided in our posted earnings release.

With that I'd like to now I'll turn the call over to Brent.

Thanks to good afternoon, everyone and thank you for joining.

On today's call will start by summarizing the highlights from the fourth quarter and a full here.

That will provide some details on key customer wins.

In some specifics on bookings.

Each area of our business.

I will conclude our prepared remarks with commentary on the market environment and our priorities for 2020 before turning the call over to Justin for more detailed financials.

The fourth quarter of 29 team with a great quarter for Vocera from a bookings perspective, and I'm very proud.

Out of our team's performance as we finished up here.

We ended the year strong note.

The actual year over year bookings growth in Q4, setting a record for quarterly bookings.

Hi, I'm building significant amount of backlog that we provide much better revenue visibility for 2020.

What are your we.

Bookings growth of 10% compared to 2018 and continued the trend towards large new customer wins.

And sizable expansion demonstrating both the continued high win rate and the value of our existing customers PNR solution.

Revenue was roughly $50 million in Q4 in line.

Our expectation and resulted in revenues of nearly $181 million for the full year.

Well you annual revenue growth was not what we originally hoped 2019 was your great accomplishments for us and I believe the strategic bets, we placed will be important to our long term success.

I'm, probably we finished the year strong and won several large enterprise accounts and significant expansion.

2019 was a record for the number of large customer win and we had a significant number of new healthcare customers strong leading indicator of future growth potential.

We also made significant.

Progress with our large customer deployments and maintain a very high customer satisfaction as reflected by both our maintenance renewals and customer service.

The completeness of our solution remains a differentiator for us and we continued to succeed against competitors.

Hi win rate.

Customer demand for communication and club.

Operations solutions drove our business this year and we continue to see strong levels RFP activity.

2019 wells a year of important transitions in our business and our pace of innovation is paying off advancing our leadership in Spain.

As we begin 2020 I'm excited by our large market opportunity.

Increasing differentiation of our unified solution.

And our pipeline of business.

Now I'd like to provide you with some more detail on our bookings performance in Q4.

We had outstanding new system wins that Gordon held for $7.4 million and at the University of Chicago.

For $1.8 million.

Norton Health based in Louisville, Kentucky, we'll be rolling out our complete solution across their entire health system.

This deal represents the second largest commercial win in the history of the company.

University of Chicago was already a customer for our care experience product and in Q4 after an extensive.

RFP process they awarded both fair the business for their entire communication suite.

Our team delivered large expansion orders for our solution from existing customers.

Looking at $2.7 million Cross sell you feel like who had previously only been engaged customer and that was purchased our for.

For platform, including the new Bina smartphone app to replacing aging pager solution.

Houston Methodist a great land and expand example for US is leveraging our software with a $2.4 million smartphone booking.

In Houston methods to the great mix device case study.

I've seen a variety of devices at the seamlessly operate with our software.

We want a $1.2 million expansion Bastard brothers Medical center, which included the rollout of engaged as well as several hundred smart batteries.

We had $1.2 million in booking that Kaiser and 1.1 billion.

In dollar in bookings inner mountain.

Both for existing customers, who continue to build out there have been Sarah capabilities.

In our federal business, we continue to achieve solid result in Q4.

For the year, we set another record for federal booking and our team continues to build momentum by leveraging our strong track record in the.

Hey, Dan Gorey to operate and say talk purchasing vehicle with the D.

Moving on performance in our international markets. We were pleased to book to sizable new facility win for our smart bad in the Middle East.

Building on our relationship with the Ministry of Health and the Julie we won.

Al can see any women's and children's hospital and in our first win in the Kingdom of Bahrain, We were selected by the newly built and largest cardiac center there.

Well, we have several meaningful wins in international markets in 2019, we continue to invest in the sales team and marketing support with.

The goal of building on this momentum across all the regions in 2020.

International is a large opportunity and continues to be top priority for us.

Oh sort of health care roll up at Nordstrom are now complete for the initial order that we booked last year.

Before we had a new booking which included a distribution.

Center.

Nordstrom is being quite creative in their use of our solution to generate efficiencies and enhance the shopping experience.

The connected fitting rooms, the hips and we believe there are opportunities for more workflows and future orders.

Finally, we added another four seasons facility this time in Madrid.

Now I'd like to make two final comments about our progress in 2019.

First we've largely completed the transformation of our Salesforce to address today's market opportunity.

These investments and changes were necessary to be successful in this evolving market Werent decision, making is being consolidated and enterprise selling.

Is essential.

We thought the changes were justified by the opportunity and we see them starting to pay off.

Today's trend towards larger deal benefit subs.

While this transition can present challenging selling dynamics, we're constantly striving to enhance our enterprise selling capabilities.

I feel good about where we are today.

We have several new sales leaders and territory reps to bring substantial experience in enterprise selling and I'm confident that we're well positioned to capture this market opportunity.

On the product front, we introduced new products that stretch the thinking of both the market and our customers.

Meanwhile, we distance ourselves from our competitors.

As far smart, that's device and Venus smartphone App, our game changers redefining their categories, winning innovation awards, demonstrating our vision and further extending our market leadership.

Engage software remains a mainstay of our conversations with customers and an important part of our deal mix.

Demonstrating important clinical results.

For example, adult day health recently implemented our solution as part of an effort to reduce acceptance related risks.

With both zero they saw significant reduction in festus related fatalities and are now at a rate that is less than half the state benchmark.

What we believe are the best products in the market and a revamped sales team. We continue to convert our large deal pipeline to vendor of choice awards and eventually bookings at our win rates remain high.

Now I'd like to talk for a moment about the market first solutions and share what we're hearing in or conversations with customers.

You Peel back the level of interest and amount of discussion around communication and clinical workflows solution is higher than it has ever been.

In the field myself conversation interactions with hospital executives continue to underscore that improving bargains staff safety and quality of care consistently rise to the top of their.

Our analyst.

Yeah, there seems to be a growing awareness of the rule the communication solutions can have on improving these outcomes.

Of course spending in health care always requires rigorous justification.

As we begin 2020 hospitals are looking for ways to reduce cost and improve throughput by eliminating friction in bottlenecks and.

The mining operations.

In a recent op, Ed New York Presbyterians cheese experience officer, Evan spoke about the criticality of transforming the presents journey by connecting technology and communication from beginning to end.

He also said as a goal.

Great zero harm culture for both patients.

At Hospital staff.

These easily priorities play right into our value proposition.

Staff safety is the particularly compelling aspect of our him to present this year.

Our complete solution, combining real time voice secure texting and deep clinical integration is effectively addressing these off.

Attunitys industry is taking notice that the theres a great partner based on our high quality services, the breadth of our solution and our increasing number of integrations for.

For example, a new integration with the Stryker ipads for bed exit alarms is now being showcased in strikers customer experience center.

And with the.

In addition of the spectral diversity smartphone we have the most comprehensive and unique portfolio of mobile devices for health care, all of which seamlessly operate with our software.

Based on the strategic moves we made in 2019 around product sales initiatives. We believe we are well positioned.

2020.

I'd like to take a moment to highlight a couple of our key priorities for the coming here.

First well work to expand and harvest or large deal pipeline and made continued progress in enterprise deals.

Well also expand our presence in the federal market by adding new facilities and successfully cross selling our solution.

Well continue to drive expansion as our customers love to standardize on communications platform and broaden the ROI benefits.

And finally, we'll work to extend our international success, thanks to our investments in increasing marketing support new sales resources and new country leadership.

Our continued focus will be on sales execution will continue to develop our team hone the deal closure process and work on a recent success with large academic medical centers like you'd be a university of Chicago, you feel a need and northwestern who represent great. Examples for there appears to emulate.

We plan.

We continue to invest in product innovation to extend our clinical relevance both within and outside the four wall Hospital.

We are bringing to life, our vision of consolidating clinical data and delivering actionable information and context to the right care team member at the right time.

Well also.

We continue our focus the arming our customers with analytics that will describe diagnose predict and prescribed the best practices around clinical collaboration and workforce.

We also expect to deliver ongoing smart batch enhancements, including a week word Teva Sarah.

Which recently became available and enable they truly hands free experience.

Numbers will also soon be able to use the wake word to say, hey, vocera send the text message triggering an interaction that converts their voice into a text message by other smart badge and of course, we believe our number of integrations and workflows.

Isn't a clinical systems will continue to grow.

Moving forward, we're continuing to look for ways to expand our offering across the health care continuum.

Building buying or partnering to enable frictionless patient journey.

Well well health care remains our primary focus we also plan to continue pursuing market opportunities outside.

Part of health care in luxury hotel and high and retail to name a few areas of recent success, we're investing incrementally in the space by adding a few experienced sales reps and we intend to capitalize on the opportunities that are out there.

Well on this topic I'd like to talk about an exciting new initiative in school safety, where we now have.

Awesome active pilots.

Early for this opportunity with school safety fits well within our overall mission and our team is easily exploring the opportunity.

We are building relationships to inform educate school system navigate funding dynamics and prove our value in what we believe is a pricing.

And crucial use of our solution.

Overall I'm happy with how we ended the year and I'm excited by the opportunity that lies in front of us.

That I'd like to give our CFO Justin.

That's the cover the financial details around our Q4 results and then we will discuss our guidance Justin.

Thanks, Brent Hello, everyone.

Our Q4 results represented a strong finish to year end put us in a position to begin 2020 with good momentum.

I'll summarize our Q4 results and then turn to guidance for 2020.

Total revenue in Q4 grew to $49.7 million fueled primarily by double digit growth of our device.

Business and continued expansion of our recurring software maintenance revenue.

For the full year total revenue was $180.5 million up slightly from 2018.

Product revenue in the quarter with $26.9 million similar to last year.

Device revenue.

With robust growing 15% compared to last year as a result of shipments to several new customers. Some large badge refreshes and continued strength of our recurring supplies business.

We shipped a record number of badges and smart badges in 2019, reflecting the continued appeal of our wearable hands free.

Devices.

Our Q4 device revenue also included a shipment of third parties smartphones, Houston Methodist who had purchased messaging licenses a few quarters ago.

Well software revenue was lower in Q4 and 2019.

Software and software maintenance revenue.

Mine, which we view holistically as our software business was 55% of total revenue for the full year consistent with the prior year.

And we have record software backlog as we begin 2020, which gives us confidence that will once again, how strong growth in this category.

Services revenue in the fourth quarter with $22.7 million up 5% from last year.

Our professional services revenue was down year over year, as we have transitioned to a more streamlined implementation process and lower cost for our customers.

With a large backlog of deployments already scheduled we expect.

National services to grow again in 2020.

And with a larger customer base this year and a renewal rate well about 95% our software maintenance and support revenue was up again in Q4.

This has been a consistent recurring revenue engine driving our growth and directly reflect.

The enhance value and functionality our customers received from our software.

As our software revenue increases again in 2020, our software maintenance growth should also expand accordingly.

Now I'd like to comment briefly on our backlog and deferred revenue.

This combined balance at.

The ended the year was $136.3 million up 13% compared to the end of 2018.

This is the most significant increase in a few years and gives us confidence in the long term health of our business.

In the short term it also enhances our revenue visibility, which I'll touch on a bit more when I discuss guidance.

Turning to profitability in Q4, we achieved adjusted EBITDA of $6.9 million.

And for the full year, our adjusted EBITDA was $16.9 million.

As we look forward to 2020, we expect our profitability to improve again with operating leverage from higher revenue and more software.

With that as some context, let me get into some more detail on our non-GAAP gross margins and operating expenses, including a comment on what we expected 2020 for each of these areas.

Non-GAAP gross margin in Q4 was 64%.

Product margin decreased from last year, primarily as a result of lower.

Software revenue and the third party devices, we shipped to Houston methods.

Although the margins we achieved from reselling smartphones are less than those of our own badges, we provide them to customers who are looking to leverage our software with a complete solution from a single vendor.

Our services gross margin increased.

Compared to last year as we continued to drive leverage in all parts of that business.

As we now look forward, we expect our overall non-GAAP gross margin percentage to increase in 2020 as our software growth returns and we realize even greater leverage from growth on the fixed costs in our services business.

And with our.

Well pattern agreement revenue seasonality expected again in 2020, we expect our gross margin percentage to be in the low sixtys in Q1, and then improve in subsequent quarters as revenue increases.

Non-GAAP operating expenses were $25.9 million in Q4 similar to last year.

As we continued to focus our spending on growth.

Given the market opportunity, we see ahead for us.

We are investing to drive long term growth, particularly in sales and product development.

As a result, we expect our operating expenses to increase this year.

We expect our non-GAAP operating expenses to be roughly 58% of revenue.

And with spending at a fairly similar level in each of the four quarters.

Now I'd like to make a few comments about our cash flow and balance sheet.

We added $9 million attached to our balance sheet in Q4, as a result of our profitability and working capital management.

The full year operating cash flow increased to 15 point.

$90 million.

And we expect us to even higher in 2020.

Our capex is expected to be around $5 million. This year, we're roughly 3% of revenue.

Our balance sheet, because positions us well to capitalize on new growth opportunities.

Turning now to guidance Brent.

Spoke earlier about the market dynamics, we expect this year and we have touched on the good progress we're making.

Evolving our sales capability to align with the ongoing changes in the market.

The sales reps that we have added in the last 12 months are relatively early in their ramp.

But we expect them to contribute to our success this year.

Additionally, the higher level of backlog and deferred revenue increases our confidence and provide better visibility to our revenues than we had entering 2019.

We expect our revenue seasonality in 2020 to be similar to our historic pattern with roughly 45% in the first half and 55% in the.

Second half.

With that as background for 2020, we expect revenue to be between 186 and $196 million.

With this annual revenue growth, we also expect to improve profitability.

In 2020, we expect adjusted EBITDA to be between 15.5 and 20 point.

$5 million.

In the current year, our profitability will be closely tied to our revenue pattern. So we expect adjusted EBITDA to be the lowest in Q1, and then expand as topline increases through the year, reflecting higher profitability and progress toward our target operating model.

For the first quarter we.

Revenue to be between 36 and $39 million.

Adjusted EBITDA is expected to be between negative five and negative $2.5 million.

We now look forward to 2020 with a lot of optimism. We continued to see a large opportunity ahead of us and feel we're making the right moves to align your.

Organization and drive long term growth and enhanced profitability I'll now turn to Dr. Brian.

Thanks, Justin.

Overall, I believe 2019 was year of great accomplishment for US we finished the year strong and we believe we've made the right strategic bets to address the long term opportunity.

It's still early days in the evolution of hospital communications away from teachers loudspeakers and wireless phones.

Functionality and scalability of our differentiated software platform is unmatched in the marketplace.

And our solution provides a compelling value proposition for hospitals of all sizes.

We had a great year for large.

Wins, and the large expansions underscore the strategic importance our customers see in our products.

Our differentiated technology, and our large greenfield opportunity inspire us to pursue the goals we set out to achieve.

You May know that 2020 is the year of the nurse and I'd like to take a moment.

To highlight something really important to me so why that drives our mission and Vocera.

Our mission is to transform health care by improving the lives of patients and caregivers.

We have a long track record, providing nurses with tools to improve resiliency reduced oil and burnout and return a sense of joy.

Back to their time with patients.

I'm proud of our last in connection with nurses and the broader hospital staff and we look forward to celebrating the year of the nurse.

I'd also like to thank our employees, who dedicate their talents to developing our solution extending our reach into the market delivering thought leadership.

And contributing to our unique culture.

In 2019, Vocera and our employees made meaningful charitable contributions of both time and money to our local community deciding together where to donate those dollars and working side by side volunteering in our communities.

Finally.

Before opening up the call for your questions I'd like to personally invite all of you to our investor breakfast at him on March 11.

Feel free to context too if you have any questions about this event.

And please stop by our booth at him, where you'll be able to experienced our solutions firsthand.

With that.

We're ready to conclude our formal remarks. Thank you for listening today, operator, we're ready to open up the line for questions. Thank you very much.

As a reminder to ask a question you want me to press Star one on your telephone to withdraw your question question press, the pound key or hash key.

Please standby Molly.

About the culinary roster.

We would like to ask everyone if possible to limit to one question. Thank you.

And your first question comes from the line of Sean Dodge from RBC capital markets.

[noise].

Good afternoon, thanks for taking the questions.

Maybe just starting with the revenue guide your targets implied 6% growth for the first quarter and and about 6% growth for the full year. So it looks like it'll be pretty flat growth trajectory over the course of the year I would've thought Brian given the comments around bookings and ending backlog.

In deferred revenue.

You'd be expecting revenue growth to accelerate over the course of the year. So maybe you can just help square that for me.

Yeah, Hi, it's like do you think what feel good about coming into the year. We as you know we tend to set our guidance on the conservative into the spectrum, So we'd love to be towards the top into that range.

And I think we're still in the early stages of understanding really the market growth dynamics and so we don't really want to get ahead of ourselves, but I think it's fair to say that we're feeling good about where we ended the year and about the momentum that we have in the backlog that we have in the business.

Okay, and then is it the 10% booking trips a full year you said.

Fourth quarter wins were substantially higher year on year. It can you give a sense is just how much higher fourth quarter was I guess with the most of the growth for the year generated in this most recent quarter.

Yes, I think that that's fair, we had a really strong fourth quarter after relatively mild growth in the than the previous quarters and.

Several of the large deals.

That I talked about obviously helped drive that but overall I think the sales team is feeling strong momentum right now and.

And it was a great way to finish the year.

Understood. Thanks again.

Your next question comes from the.

Hi, Matt fit from a cash.

And no glass from Guggenheim Securities.

Yes, thanks for taking the question I just want talk about the Salesforce comments for a moment I. Appreciate your commentary on how that's been evolving maybe if you can just talk about how far along you are in that transformation overall and maybe what the key changes are that you expect to make threats.

2020, and from a high level, how you'd characterize that the productivity level of the salesforce today relative to what you had throughout 2019.

Yes, so there's sort of two components to the changes that we made in the Salesforce. One was trying to upgrade to people that had more enterprise selling capabilities.

Used to be able to sell the C suite with these larger more complex deals and the second piece was to grow the absolute number. So we're actually growing the size of our quota carrying sales force to address the the growing mark larger market opportunity that we see in front of both domestically and internationally and those hires.

Place during the course of 2019 sort of spread through Q2 Q3 in Q4.

Theres a few remaining that are still in the processes of occurring but the vast majority of the hiring has been completed.

And then the corresponding sales ramp obviously is corresponds to win win there start date was so.

We typically expect to see someone ramp to full speed within about six months of their higher date. So some of those folks are now fully fully ramped and others are still in the process, but I.

I think as we look into 2020, we expect the vast majority of them to be fully ramp for the full year.

I came from our sales kickoff meeting last week in Dallas, and we had the whole grouped together and it was really exciting meeting for me. It was great to meet the new reps a lot of great capabilities from folks who have been selling enterprise solutions many of them for much larger organization.

End of the C suite, and really understand that complex deal dynamic.

So I think it was great to see them and meet them and it really increased my level of confidence in their ability to see succeed this year.

Okay, Great and maybe just a quick follow up to that on the smart badge. If you can just give us an update on how the adoption trends have been and the associated.

Hi, good attach rates for that and and why you than embedded and the assumptions and the outlook for 2020 that'd be great. Thank you.

Yeah, our progress continues there.

The we highlighted a few of the larger deals that had smart badges attached to them and so are you we continue to.

Got it kind of worked through the dynamics of got new customer versus existing customers and we're finding that existing customers are going to likely adopt the smart badgett natural points of refresh or large band batch purchase as well, it's a little bit easier for new customers to adopt because they're not as particularly tied to a previous.

Energy.

But overall, we're we're pleased with the progress.

We've made some enhancements to the product brand talked about the the wayward edition, which we're really excited about that we think just continues to enhance that hands free experience for the for the smart badge and then in terms of our assumptions for.

Q4.

For continued ramp of the product in 2020, you know they're relatively modest led the way we look at our AR device business. We look at it is that portfolio into our objective is to grow the overall.

Device revenue category, which can come from a mix of FY 2000, and the original Vocera badge the.

Badge and now complemented by the two smartphone offerings that we have in our goal is to it so offer our customers a true device of choice option and allow them to select the best.

Set of devices that work the best with the software platform and that our best for their environments. So our.

Assumptions for 2020 as it relates to the smart Badger quite modest.

Okay, great. Thank you.

Your next question comes from Ryan Daniels from William Blair.

Yes, thanks, guys for taking the questions just another one Justin for you on the.

Hi that you indicated that you have better visibility entering the year does that indicate a change in the philosophy of how you're providing guidance as it relates to bookings and backlog in regards to kind of percentage of revenue. You think is locked up at least early on in the year versus maybe how you.

Report that are.

Guide in the past.

Yeah, Hi, Ryan.

I'd say the 2020 kind of represents a return to our historical norm are.

2019 was a bit unusual because we had anticipated that there would be a bit more ramp.

In the second half the didn't quite materializes, we expected and so 2020.

It's more similar in pattern to.

The years before that where we don't have as much of a backend ramp. So for example, we expect our revenue to follow the seasonal curve of roughly 45% in the first half and then 55% in the second half and that's kind of spot on with where we were.

In 2018, 2017 and before that.

The second thing is that because of the strength of our bookings, particularly at the end of the year it allowed us to build.

You know reasonably healthy amount of backlog.

And deferred revenue and so we go into the year with a with a a level of visibility that we didnt have.

At the beginning of last year and that again is more similar to where we were in in prior years and so as a result to that we just feel better about where are our guidance is we try generally to be conservative with our guidance. The framework itself has not changed we looked at the amount of revenue, we expect from our backlog and deferred revenue.

The amount of supply that we expect which has been very consistent and steady.

No two elements added together represent the amount of revenue that is visible to us.

At the beginning of the year and I'd say, we're in a better position now than we were at this point last year.

Okay. That's helpful. Then just a follow up if.

I could I know, we're supposed to warm, but EBITDA it looks like the midpoint of guidance would be 9.4% EBITDA margins. This year I think you reported 9.4%, but throughout your script you indicated that.

Gross margins would increase this year and profitability would increase and op expenses would be relatively similar looks like year over year.

So why wouldnt EBITDA to be a little bit stronger from a percentage margin basis on a year over year with the organic growth returning.

We expect with organic revenue growth, we do expect our gross margins increase but we're also investing in our business. So operating expenses will.

We'll increase a bit.

In 2020 be areas of investment as we talked about or neat primarily in sales and new product development, we're trying to kind of focus our spending manage our spending and other areas. So that we can direct as much as we can to those.

Essentially revenue generating more innovation related areas.

So we'll see our operating expenses increased stock split create on kind of near term little bit less leverage but in the long run those investments are going to allow us to to read.

Recapitalize the profitability, having said all that we try to guide pretty conservatively with our with our EBITDA and where.

Always targeting the higher end of the range and so it's as we think about kind of where we're targeting.

That would be our expectation to try and aligned with that the higher end of the range.

Okay. That's helpful color. Thank you.

And your next question comes.

From Sean Wilan from Pipers 10 Sandler.

Hey, Vocera to ask Ryan's question, a slightly different way if if we applied the same or the same ratio of backlog to deferred revenue to forward 12 months.

Revenue.

That you had last year as we're doing this year. It would suggest a number slightly higher than the high end to your range. So I want to understand.

Are there specific mechanical issues or or things that you see in that in that in that calculation that is different for is it just you dialed up the.

Conservatism a little bit.

Hi, Sean we.

Certainly we trust, we're trying to be have been more conservative.

Where we can I think probably the the factor that I'd point to there though is there are several large deals in our backlog.

And they they each have a little bit different timing.

And so that can that can move if you're looking at a rate a ratio like that which is a good wanted to look out for you. We also had kind of factor and.

The timing of specific deal, we had to a record quarter in terms of.

You know the size and impact of these larger deals on our bookings on so.

Most of those are now teed up to be delivered in 2020, and some will carry forward into even 2021.

Just because they're they're large projects.

So that's probably the single most.

Determinant of kind of how the timing about unfold.

But overall, we feel like we're in a much better position from a from a.

Clogging deferred revenue standpoint.

Okay. Thank you and then specifically on the Opex. The you know the R&D increase.

Can you call out maybe one or two.

Big projects that you're spending the money off.

Yes, a couple areas that we.

We remain really excited about a one is around the overall voice experience. When we recently created Vocera, we were very much mavericks in the use of voices user interface and.

It's an area, where we feel like we've got lots of competitive differentiation speech recognition has become much more mainstream and there's a lot more things we.

Can do with it now and so we're expanding what we're going to be offering in terms of that voice user interface.

And I talked about some of those things in the past there now becoming more of a reality so that would be that would be certainly one area.

Another area.

But I mentioned is the continuation of.

The integrations and.

Really vitalizing, revitalizing and expanding integrations with additional clinical systems and scaling the platform to be able to support these larger and larger system wins in 2019 was a lot of what I'll call sort of new product introductions of new platforms, both the smart badge and.

2020 is more about scaling those two really address the needs of these very very large customer deployments and the complexities of the integrations and workflows that they're wanting us to capture for them.

Oh, that's super helpful. Thank you very much.

And your next question comes from Matthew Gilmore from Baird.

Hey, Thanks for the question. This is probably related to Sean first question, but I just wanted to ask specifically on the elongation of the sales process I know, obviously, that's a trend do you.

Talks a lot about the last two quarters in the fourth quarter.

Quarter bookings would obviously.

Indicate maybe that's improving a little bit I'm sure you don't want to declare victory yet, but I was curious if you add any updated perspective on the elongation of the sales process and how you're factoring that into guidance is that different then okay. Thank you are kind of calling out some lumpiness with deals with.

I wanted just the same thing or is it would you characterize it as sort of a different dynamic and how's that dynamic been trending.

So I think we're right at the middle of it.

But the trend line is certainly continuing towards the larger deals the difference between where we are today versus where we were a year ago or two years ago.

It was that we've had a longer period of time in this period of larger deals and longer sales cycles, and so eventually sort of steady state that out I'll. Just give you one interesting data point I talked about the Norton deal 7.4 million dollar when.

This was the deal where we were awarded vendor of choice.

In 2018.

And actually when we came into 2019 had a high degree of confidence that it was going to book early in the year and actually planned to recognize the vast majority the revenue associated with that deal in 2019.

In reality, even though we were.

Good working on the deal for years and had been awarded vendor of choice.

Two years ago.

We just received that booking in Q4 and other revenue is now going to be in 2020 and beyond and so this is the new normal I think it's taken some time for us to get used to that but now that we have.

Will that are in various stages of closing within our pipeline, we have a much better understanding of what it takes to close these larger deals and therefore, we can factor that into our forecasting methodology and evaluate both the pipeline and the backlog.

As it relates to revenue. So I don't think it's going to be a continuing slowing force on our business because.

For now.

State, where we've got various deals in various stages of clothing closing, but but we are definitely much more aware of what some of these deals take to close each one of them has kind of its own story.

Got it fair enough and then.

Yeah, I think you called out some third party.

Nice revenue that that came through and I was curious if if jessica quantify that so we can understand how that influenced revenue in the quarter.

Hi, Matt we don't break it out specifically, but I can tell you that you know a poor eight a meaningful portion of the device growth was attributed to that Houston.

This shipment we do we provide the smartphones the zebra smartphones and now the.

Spectral inc. first of the.

As a.

As a way to for the customer to essentially.

Receive a slew a combined solution from us, it's convenient for them and they're able to work with.

The one on one partner for the whole solution bundled with the software.

We also though in the quarter.

Even absent that we also had growth and badges as well so but that the majority of the growth in device category did come from the from the Houston method of smartphones.

Okay got it thank you.

And your next question comes from the line of Gene Mannheimer from Dougherty.

Adrienne company.

Thank you good afternoon.

I wanted to ask the guidance question.

A different way cut it another way if you had it sounds like you're drawing more of your.

I didn't soft backlog right than you did a year ago. So if you add if you have 70% visibility into your midpoint today, how much how much visibility did you have a year ago. When you gave guidance.

We do you probably not going to be in position to share. The exact numbers that I can just tell you it's significantly.

Our.

And ER and so that's why we.

We just feel like we're in a better better situation the backlog and deferred revenue.

We have we have more software backlog, which we think it's going to yield.

Better growth in 2020.

On an overall as we look out.

The combination of our supplies and then the backlog and deferred that we expect to convert.

We.

We're just in a much stronger position as it relates to the overall revenue target for the year.

Yes that makes good sense, thank you and.

A follow up with with respect to this.

Smart badge adoption that you're seeing the product spin out now about a year.

Is it still the dynamic that customers are are piloting. These in small phases are departments or when might we start to see that change and see more full house wide deployments of the smart badge. Thank you.

I think we're well beyond the pilot stage gene.

I mentioned in my prepared remarks, we've got customers that are ordering hundreds of these smart badges at this point and particularly newer customers that are looking to standardize right out the gate, they're going with the smart badge upfront.

I mentioned, the two deals in the middle Eastern when smart badges house wide.

And with their initial deployments and even some of the the existing customers are starting to rollout larger number. So it's definitely beyond the pilot stage I think what we're seeing is that there continues to be a strong demand for this device of choice variability and they're seeing.

Specific use cases tied to the various.

This is that we offer whether it'd be the bad for smart Badger the smartphone for different groups of workers within the hospital and really the power of the platform is the interoperability and the seamless communication between those different form factors.

And I think it represents really nice portfolio of products that allows the customer to get the devices.

Most appropriate for each style of worker.

Great. Thanks sense. Thanks.

And once again, if you would like to ask a question. Please press star one on your telephone mouth.

Star Wayne.

And your next question comes from David Windley from Jefferies.

Hi, Hi, getting thanks for taking my question wanted to come out the on the operating expenses.

Slightly different way you've talked about.

Incremental margin and 30% to 40% range I think on.

On a normal circumstances. This guidance so you're giving today is more like 10, so call it $2 million to $3 million of additional operating expense investment I think youve pointed that.

Some of the sales investments in some product development R&D type.

Investments in the you've also said that the sales kind of top.

Eating is largely done.

I guess I wanted to understand.

A little bit of cadence, but that's I think I understand that reasonably well, but it sounds like the step function of operating expenses kind of already in place at the beginning of the year.

Is that right and then do you think that beyond.

Morning, 20, you getting back to that 30% to 40% incremental margin algorithm.

Yes, Hi, Dave Yeah, we continue to have where we believe is a very attractive financial model and as we've been able to demonstrate in the company's history, we do have inherently.

Operating.

<unk> leverage in that kind of a range.

We actually are going we're targeting leverage it's a little bit higher than what you what you stated but.

What I would just say is that as we think about the transition now to 2020, Brent touched on in his prepared remarks, we've made a significant portion of the.

Sales investments that already we've made those in the back half of the year and to some extent also the R&D through our actual amount of new hiring if you will in 2020 is relatively modest we've we've put the people.

In place really at the end of the year and so what happens as you have kind of a full year effects as we look to now to our first quarter operating.

So there will be likely a step up from Q4, just as result of the full year effect and then it will relative than it will remain relatively constant because we're not going to be adding significantly more heads as the year.

The year Progressive and then from there as we get to the back half of the year and then hopefully looking.

Into 2021 will be in a really strong position to.

Get back to the kind of leverage that we've been more custom to over the last several years.

Great. Thank you again, if I can ask a slightly different question.

Brian I think in your comments you commented about some product development investment.

Strategies.

Which kind of what's that that you want to build at some things I guess I wanted to gauge your appetite.

For buying [noise].

[noise] technology buying acquisitions, and if you're leaning more toward building would you entertain the possibility.

Of deploying some your capital into your stock.

So it's definitely a combination of both building and buying we have an appetite for doing boat and you know we haven't made an acquisition in a couple of years that we will remain active been looking at deals and we've put a couple of term sheets Ford on on deals that we found it to be.

Hugely important to us.

But in a couple of cases were outbid by private equity firms that hey prices on these deals that we just didn't feel were appropriate.

And so in some cases, we decided to go ahead and invest the r. and d. to build that capability in house and another cases will continue to to look for future acquisition opportunities you know to regard to use the last part of your question. We don't have plans at this point to evaluate any kind of stopped by.

<unk>, we think a better uses capital invested in the business either through into internal organic development or through the organic activities that we're pursuing.

Thank you.

<unk>.

Mm.

And you are last question comes from the line of <unk> <unk>.

Good afternoon, I apologize it jumped out a little bit late so if these or answered are addressing your <unk> I'm prepared to marks I apologize, but regarding see hot in the United Arab Emirate in the most recent press release, you mentioned to 11 additional hospitals coming on board.

Is there a timing set for those I mean, how should we be thinking about those coming on board is that <unk> over the course of 20 'cause extending the 21.

Yeah. So we don't really have a specific timeline associated with that you know what that is is really a an agreement purchasing vehicle you know the outline that we've been named as they're kind of vendor of toys and when you're dealing with the middle East the exact time frame for.

Windows, P.O.'s and and bookings and ultimate appointments will occur is a little bit hard to know we're we're encouraged by the activity what's going on there, but I can't give you any more detail in terms of timing.

Okay, and then I guess the last one here a lot of discussion about the additions to the sales force over the back half of last year and it sounds like you're pretty much complete.

What does that head count sit at today relative to last year, and maybe a little bit digging a little bit deeper how many of your existing sales force would you say our new over the past six months. Thank you.

[noise]. So lost numbers I think about 20 of the quota carriers are noon and the number is and constantly cycling. So there's you know there continues to be swap out some of those are replacement of existing people and some of those were incremental hires I think the total quarter carers is around 80.

<unk>.

Got it all right. Thank you very much.

Yep.

Mm.

And I'm showing no further questions. This time, I'll try and that kind of <unk>.

Remarks.

Oh, Thank you and appreciate everyone's time today, and I look forward to catching up with you and and seeing it in that.

Yeah.

[noise], ladies and gentlemen is complex things conference call. Thank you for participating you may now it is kinda.

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