Q1 2021 Vocera Communications Inc Earnings Call
Good afternoon, and welcome to the Vocera Communications Conference call. My name is Shantou and I'll be your coordinator for today at this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session asked the question during the session, we'll need the press star one on the telephone.
The advice of today's conference is being recorded.
You require any further assistance. Please press star zero I would now like to turn the presentation of what the CBD.
Please proceed.
Thank you Hello, everyone well.
Thank you for this area of the conference call to discuss our first quarter fiscal 2021 earnings as well as the acquisition we announced today.
Mr. Sood, you lands on the share Investor Relations and joining me today are our CEO Brent Lang.
Interest in Sprint's our CFO.
And I would like to welcome Steve and I are to our call Steve will become our CFO in June.
Earlier today, we distributed two press releases detailing our two announcements those releases are posted on our website and are also available from normal news sources. This conference call is being webcast line on the IR page of our web site for replay will be archived.
Before we begin 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 the anticipated market opportunities and the impact on your business and financial results of the acquisition we are announcing today the.
Forward looking information is subject to the risks and uncertainties described in our filings with the SEC and actual results for events.
May differ materially.
Sept as required by law, we undertake no obligation to update or revise these forward looking statements.
On this call we will refer to both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP financial measure is provided in our poster of the earnings release.
With that I'd like to turn the call over to price.
Thanks Sue.
Everyone I hope, you're all doing well.
I am pleased to report the 2021 began with an outstanding Q1.
We continue our strong momentum from Q4, winning large new customers and expansions from existing customers.
We start Q2, feeling great about our market position financial outlook and product differentiation and are excited to share of the latest updates on our business.
We have a lot of cover on today's call. So I want to give you an idea of what to expect for.
First I'll review the highlights of the first quarter, along with the market update.
And then I will comment on our acquisition of patient safety, we announced today.
I will turn the call over to Justin and Steve who will go into detail around our Q1 results and discuss the financial aspects of today's M&A transaction and its impact on our guidance.
For concluding our prepared remarks, we'll open up the call for your questions.
Let me start by reviewing the highlights of Q1.
We began the year with strong performance throughout our business continuing the momentum we had last year.
COVID-19 specific demand is being replaced by a broader awareness of the importance of our value proposition raising the priority of our solutions and translating into great performance in our business.
Our sales team executed well and delivered excellent Q1 bookings and our services organization utilized our clinical and technical expertise to effectively deploy our solutions Inc.
Some very strategic accounts.
Our bookings growth was driven by large new customer wins and sizable expansions with existing health systems, continuing the trend towards larger deals.
The international was the highlight this quarter with broad based strength, we have large wins and robust bookings growth in the middle East, Canada, The United Kingdom, Australia, and New Zealand.
Revenue growth accelerated to 20% year over year as the investments we've made in our products and sales organization continued to pay off.
Software related revenue was particularly strong with both engage and EES performing well.
The Vocera smart beds continues to build momentum and was the big part of the large new win we book this quarter in the Middle East <unk>.
Hands free definitely remains one of the key differentiators of our solution.
We received two important security certifications this quarter, adding to our differentiation.
We earned <unk> certification for the smart badge and important milestone for our federal business and in the U K. We are now cyber essentials of plus certified.
Which should streamline our sales into the strategic markets.
Before I get into the market commentary I'd like to go into some greater detail on our sales and service of successes in the quarter.
Our Q1 bookings performance was simply outstanding with very high year over year growth, particularly in our software bookings.
Our solution is driving meaningful our line across these organizations as customers expand to new users and new use cases for our products.
In general we saw very little COVID-19 related demand and we believe the strength of our business. This quarter was about <unk> of becoming the new high priority standard.
Yeah.
Our WJ Barnabas health was the largest booking of the quarter and one of the largest bookings in our history.
The leading health care system continues to expand their use of Vocera and will leverage our voice messaging and engage software across the health system in.
In parallel we expanded our deployment of ease from the Barnabas children's hospital to all adult patient areas.
As I mentioned international was another highlight for Q1.
In an exciting 15 hospital wins in the UAE, we signed a multimillion dollar deal at the Ministry of Health and prevention.
This ministry already has the Cerro deployed in one of their hospitals.
And is now standardizing systemwide on Vocera solutions.
What began in 2017 with a small deployment of 55 <unk> thousand badges has now grown to an enterprise wide unified clinical communications strategy built around for 500 smart badges.
We believe this broad deployment of our solution will build our presence there and set the standard of care across the region.
We also see.
<unk> success in New Zealand with the new customer win at Auckland City Hospital the <unk>.
Of these largest acute care facility.
This represents significant progress in our goal to leverage our strong brand in the long term care market in Australia, and New Zealand to begin penetrating the sizeable acute care market there.
In the UK, we had a big win at Belfast Health and Social Trust and we had good success in Canada, where the renowned University Health network completed a pilot of our solution and expanded to all three icu's at Toronto General.
International remains a big opportunity for us and it's great to see widespread success this quarter.
And while Q1 is historically quiet in our federal business, we continue to expand our presence in the Dod's of this quarter with the new win at Naval Medical Center campus of June.
The Navy still represents a meaningful opportunity for us to add new hospitals as we grow our federal business.
And in the significant highlights of happened since the end of the quarter I am very pleased to report that we just booked the single largest deal in the history of the company with a highly prestigious healthcare system. The.
The majority of the revenue from this sizable deployment will occur in 2022 and beyond and adds to our long term revenue visibility.
Now I'd like to shift to some highlights from our services team.
Despite the dynamic environment due to COVID-19, our team's continued both remote and in person customer engagements in Q1, delivering on a number of important projects.
Our professional services business is settling into a new normal that manages travel and access restrictions with the combination of remote services and online tools.
I'm really proud of the innovation and customer focus of our services organization. In fact, just last week. Our services team was awarded the business Intelligence Group's 2021 excellence in customer Service award for innovative service the hospitals the need during the pandemic.
Overall Q1 was a tremendous start for the year, we achieved our strategic priorities, including further penetration into the market expansion within our existing customer base building momentum for our smart beds growing our international presence and advancing of our solution outside of health care.
Our teams on all of our targets this quarter and our success in achieving these priorities positions us well for the rest of the year.
Now onto some observations on the current market environment for our solutions.
Yeah.
I fundamentally believe the events of the past year has solidified our solution as a strategic imperative of lasting importance.
Just on my conversations with hospital Ceos, the physical emotional and psychological safety of care teams is the priority that is rapidly on the rise.
Safety has long been a core part of our mission and a compelling part of our value proposition at.
<unk>, we are taking a leadership role in helping our customers and our industry to find a new era for hospital operations as we address both safety and operational efficiency challenges.
We are continuing to build awareness of staff safety is a crucial priority of healthcare and throughout this year, you will see us become even more visible and active around this important topic.
One example of how the industry of stepping up to create standards around safety is the society of critical care medicine.
With members of more than 100 countries. The society of the largest nonprofit medical organization dedicated to promoting excellence and consistency in the practice of critical care.
This organization maintains a collection of guidelines for ICU use the.
The recently made three recommendations aimed at ensuring safety and expanding ICU capacity, including the communicating under PPE keeping families informed and remote monitoring of ventilators to protect the care teams.
<unk> addresses all three of these recommendations.
We are also growing our presence outside of the acute care hospital setting.
The last month, we announced the partnership with status solutions to empower clinical care team members in long term care facilities with the <unk>.
Critical critical and contextual information needed to quickly mobilize the right people and resources.
This opportunity demonstrates broadening acceptance of our solutions outside of the acute care environment, providing evidence on the rising importance of having modern clinically oriented solutions for care team communications.
On a related note we are renewing our exploratory conversations around school safety.
Our schools are opening on campus learning, we are resuming the process of reaching out to schools and working with partners, who have influence in the education market to help them understand the value that we can bring to this environment.
It's early days for us in this market, but we are hopeful that we can reengage and meaningfully develop this new market opportunity.
With that I would like to turn the call over to focus on today's acquisition announcement.
We are delighted to announce vocera is acquiring patient safe solutions for approximately $35 million in an all cash transaction.
Based in San Diego, California, The company delivers safety quality and productivity improvements to health systems.
The solution unifies, the existing clinical workflow applications and communications infrastructure into a smartphone app for care teams to communicate collaborate and execute on mission critical workflows.
We believe this is an excellent strategic fit for Vocera and complementary to what we do.
We anticipate this transaction will accelerate our evolution to the cloud and will add to our high margin software and recurring revenue base.
He will enable us to further penetrate our addressable market through an offering targeted for regional health systems, and small to mid sized health care facilities as well as ambulatory facilities and clinics that may not have the resources to maintain an on premises solution.
This acquisition also represents an opportunity to leverage some important relationships with key industry participants.
For some time now we've been describing our M&A strategy as a way to expand our software platform in order to achieve our mission of improving outcomes lowering cost and enhancing patient and staff experience with the goal of keeping everyone safe.
We look for businesses that enable us to expand our reach across the care continuum and empower us to become more clinically relevant.
We like software businesses that have complementary offerings enjoyed high gross margins produce recurring revenue and are consistent with our business model, which is the high degree of financial leverage.
We have successfully executed the strategy with our two most recent acquisitions extension healthcare and ease of applications and we believe we can be equally successful with this acquisition.
The patients the platform as a cloud ready solution that integrates communications and clinical workflows by consolidating secure messaging voice over IP, calling alerts EMR clinical data and task driven workflows into a single mobile smartphone app.
Patient safety customers encompass 85 health care facilities and includes some marquee names we are delighted to serve.
This customer base is highly complementary to ours and represents an opportunity for us to more effectively reached new target markets that had been historically underpenetrated by Vocera core products.
Hospitals want simplified communication and workflow solutions from a partner who understands their clinical challenges and has the right solution for their size scale and use cases.
On all of these points Vocera is delivering.
With over 300 U S hospital customers and market leading product capabilities the <unk>.
<unk> is the leader in the clinical communications and collaborations market the.
This acquisition positions us to extend our reach into the small and mid market with the simple easy to use solution.
With the tradition Vocera of further extends our leadership role both in terms of market reach and capability.
Now I'd like to give our CFO Justin the chance to cover the financial details around our Q1 results.
To that Steve will cover the financial details of the transaction and our guidance for the rest of the year Justin.
Thanks, Brent Hello, everyone. We had a very strong start to the year exceeding our expectations across the board.
Total revenue in Q1 was $48 7 million up 20% over last year.
Product revenue, which includes both devices and software increased 27% to $22 6 million.
Device revenue increased 10% to $15 3 million, which we were pleased with considering the Q1 last year with such a strong quarter for bad shipments.
Additionally, our smart badge momentum continued as we shipped a record number of units in Q1.
Including deliveries to several large customers.
Software revenue in the first quarter was $7 $3 million up over 85% versus last year.
This year over year increase came from strong bookings and the software backlog that we converted to revenue in the first quarter.
We continue to have healthy software backlog, which should help fuel our software revenue in the future.
One final comment on our software business.
On our last call we discussed how we evaluate the health of our software business overall by combining software with the subscription and support revenue streams, which we view holistically as our software related business.
We like the SKU because subscription and support revenue includes the software maintenance contracts that are tied to the ongoing customer use of our software as well as our recurring SaaS offerings such as EPS.
Software plus subscription and support revenue combined grew 29% in Q1 and represented 58% of our total revenue.
We expect this mix the increase even more in the future as our software related business growth fueled in part by acquisitions, such as EPS and patient safety.
This increasing mix of high margin software related revenue will also be a key driver of our profitability growth going forward.
Our services business also had an outstanding quarter.
Services revenue increased 14% from last year to $26 $1 million with growth in both our professional services and subscription and support revenue streams.
Our professional services team successfully managed the full schedule of customer deployments with a mix of both onsite and virtual work.
And the momentum of EPS, along with high customer renewal rates for our software maintenance contracts.
Enabled us to increase our recurring subscription and support revenue by 16% versus Q1 last year.
Due to the strong bookings in Q1, we continue to have a very healthy combined level of backlog and deferred revenue.
At the end of Q1, our combined backlog and deferred revenue was $169 3 million up 35% versus Q1 last year.
As we discussed last quarter, we have a higher proportion of multi year subscription and support contracts and a growing number of larger multi facility deployments the span more than one year.
So we are anticipating a higher percentage of this backlog and deferred revenue to convert to revenue beyond 2021.
For example, the Barnabas minutes Ministry of Health and the large Q2 deal that Brent just mentioned will contribute much more to revenue in 2022 net in 2021 based on the current expected deployment schedules.
This increasing mix of longer term backlog is a positive trend for the future growth of our business.
Meanwhile, we believe that the combined backlog and deferred revenue scheduled for the remainder of this year continues to provide good visibility to our revenue for 2021.
Now I'd like to comment briefly on our profitability, which was also a real bright spot in the quarter.
Our adjusted EBITDA was $5 $2 million significantly better than last year and above our own expectations of.
Our GAAP net loss for the quarter was $7 6 million also better than last year and includes a $2 $1 million, one time expense related to our convertible notes financing.
Absent this onetime charge, our GAAP net loss would have been even better.
Here's some color on our non-GAAP gross margin and operating expenses.
Non-GAAP gross margin in Q1 was 66% the highest gross margin for for a first quarter that we have ever had.
Both product and services margins increased substantially from Q1 last year due to higher overall revenue and a favorable revenue mix from our higher margin revenue streams.
Non-GAAP operating expenses of $28 $1 million were up 3% compared to last year with the additional ongoing expenses from the acquisition we announced today.
And some return to travel, which we assumed in our guidance. When we began the year, we anticipate that our non-GAAP operating expenses will increase sequentially as the year progresses and be approximately 55% to 57% of our total revenue in 2021.
Transitioning now to the balance sheet, we ended the quarter with roughly $315 million in cash up roughly $85 million from the end of last year.
This includes the impact of our recent financing as well as $9 million of cash that we generated in Q1.
In March we strengthened our balance sheet by redeeming most of our 2023 convertible notes and issuing new 2026 convertible notes with the lower interest rate and higher conversion price.
Our capital structure is now even more efficient as we will have much less interest expense than we did before.
And a higher level of cash available to fuel our growth.
And shareholders have significant dilution protection given the higher conversion premium on the new notes and the cap call instrument, we put in place.
After the quarter ended we issued an additional $24 $5 million of the 2026 convertible notes through the exercise of the underwriters Green shoe, which brings our total convertible debt to approximately $265 million.
And increases our cash balance by an additional $21 9 million.
Net of issuance costs.
Now.
I'm excited to introduce the van hire who will be our next CFO on June 15.
I have really enjoyed working with Steve who is an outstanding leader in our company.
I believe he has the right skill set to work effectively with Brent Our board of directors, our investors and the rest of the of Altera management team to help take vocera to the next level.
I'll turn it over to Steve to talk about the financial aspects of the acquisition, we announced today.
And our updated 2021 guidance Steve.
Thanks, Justin and Hello, everyone I'd like to start off by saying how much I've enjoyed working with Justin over the past few years.
Now turning to the announced the acquisition and guidance I will start by providing a financial summary of the transaction and then talk about how the acquisition impacts of 2021 guidance.
The acquisition is an all cash debt free transaction of approximately $35 million.
Much like our previous acquisition of extension healthcare needs. We are acquiring the software base high margin business that nicely complements our product portfolio.
While the acquisition will only add a modest amount of revenue in 2021 due to the standard purchase accounting and associated deferred revenue adjustment, we expect it to contribute roughly $10 million in 2022 revenue.
I'd like to take a moment to discuss the patient safe revenue model. Historically the company has sold licenses with multiyear terms with software revenue being recognized upfront and then maintenance revenue over time.
However, as the solution eventually moves to the cloud, we see an opportunity to grow and expand teacher reoccurring SaaS subscription revenue.
We plan to quickly integrate the business into our existing organizational structure helped us realize the cost synergies, we have identified and focus our investments on the cloud based product capability.
We expect to fully realize the cost synergies over the next 12 to 18 months at which point, we believe the acquisition will be accretive to our business.
Now turning to guidance.
Reflecting the revenue we expect from this acquisition in 2021, we are increasing our annual revenue guidance to a range of $218 million to $228 million the strength of our recent large bookings increases our confidence and the priority being placed on our solutions and the long term growth and visibility in our business.
As Brent and Justin discussed the large enterprise bookings typically have longer deployment times, and therefore are projected to have a much greater impact on revenue beyond 2021.
Our key drivers for revenue continued to be healthy, including our bookings backlog and deferred revenue, which provides strong visibility into 2021 revenue.
We want to emphasize that we continue to expect approximately 45% of our revenue to occur in the first half of the year and 55% of revenue in the second half of the year.
Turning to guidance for profitability, we now expect adjusted EBITDA from 2021 to be in the range of $26 million to $31 million, reflecting the impact of the acquisition.
We expect to see our typical pattern of higher adjusted EBITDA in the second half of the year, both from the increased revenue and the ongoing realization of acquisition cost synergies.
The rest of our GAAP and non-GAAP guidance, which now includes the expected impact of acquisition and our recent financing can be found in our press release.
In closing we are very pleased with the financial results in the first quarter and our overall business momentum, but the.
This acquisition, we have an opportunity to accelerate our progress in our market and over time, a greater reoccurring high margin software revenue. This.
This is the transaction that aligns closely with our existing financial story and has the compelling long term strategic and financial profile.
For your time I look forward to working with all of you in the future and now I will turn the call back to Brian.
Thanks, Steve.
I'm really excited to be working with you through this transition and as you step into the new role as CFO of Vocera.
Happy to have you meet our investors on today's call and I look forward to a busy quarter of investor outreach with you during Q2.
I'd also like to take a moment to thank Justin who has been of great partner to me for several years now is.
He has contributed so much of the building of our culture growing our business and bringing vocera to where we are today.
We wish you the best in your next chapter.
Before we conclude and as a follow up to our last call I wanted to let you know that we have recently published our initial framework for ESG.
This is an important step for us and we're excited to share of the framework with you.
I Hope you will take some time to review it on our website.
Our business is performing well and our uniquely differentiated solutions are in high demand.
We began the year with great execution, achieving impressive Q1 bookings accelerating our revenue growth and making an important strategic move with the patient <unk> acquisition.
We have a resilient business loyal customers, a strong cash balance of powerful selling engine and a large market opportunity in front of us IMAX.
I am excited about our future.
With that we will conclude our formal remarks. Thank you for listening today, operator, we are ready to open up the line for your questions. Thank you.
As a reminder to ask the question we need the press star one on your telephone to withdraw your question press the pound or husky.
Order to a lot of time for everyone to ask the question today. Please limit yourself to one question. Please standby for we compile the Q&A roster.
Our first question comes from Sean Weiland with Piper Sandler Your line is open.
Hi, Thanks, so much. So my one question is around patient safe and.
Steve.
Start with you congrats on.
On the new the new role I wanted to confirm that the guidance change is entirely related to the acquisition or were there some other moving parts in that.
Well, thank you for that and yes that is the confirm the guidance change was entirely reflective of the acquisition.
Great. So now on the integration strategy with patient safety.
Are there any overlaps broadly from the team any overlaps with engage in and if you can maybe talk a little bit about how the two complement each other.
Yeah, Hey, Sean So there is clearly some overlap of the products, we are competitors of where historically competitors in the marketplace, but we see the products more complementary than competitive the overlap is less on the engage side and more on the the smartphone communications side of our business, but what we found when due.
We looked at the marketplace was that the customer base that they were serving was pretty complementary to our customer base they tended to focus on.
On smaller and regional hospital facilities, where we are more focused on the the larger facilities and that combined with the fact that they had more of a smartphone centric approach to the business and the cloud ready capabilities of their product offering net this could be really complementary to our business and an opportunity to <unk>.
Holidayed and build share and expand our reach within the market.
And just thank you and just one more on the financial side are there any acquisition related.
Intangibles or any of the assets can be written off thats kind of.
With numbers.
No Sean so youll see the acquisition related costs flowing through our updated adjusted EBITDA I think from a bigger picture perspective.
We've taken down EBITDA, but patient safety will be breakeven next year, then accretive thereafter, and what we're really excited about is it the software base business high margins and it fits really nicely into our long term financial profile.
Okay.
Super Thanks, so much and Justin and best of luck.
Thank you.
Our next question comes from Sean Dodge with RBC capital markets. Your line is open.
And for Sean Thanks for taking the question.
Just kind of one can you guys talk a little bit more about your partnership with status solutions and maybe some of those opportunities you guys are seeing in the long term care space.
Yeah, you can draw a lot of parallels between what we're doing with status solutions and what we're doing in the acute care market around delivering sits.
Situational awareness and contextual insights to caregivers the status solutions.
Product is really designed as the integration tool that connects up to many of the.
Others are monitoring systems in clinical solutions inside of the long term care facilities that we are a different set of integrations and different set of clinical data and what we are typically integrating within the acute care marketplace. So there's some parallels to what we do with engage within the acute care marketplace and we saw this as a way of of delivering some of the.
Same value proposition into this the newer market opportunity and we're really excited about the partnership the status.
Okay. Thanks for the congratulations Steve and the profile of Tulsa.
Thanks, Sean.
Our next question comes from Ryan Daniels with William Blair. Your line is open.
Yes, thanks for taking the questions team and Justin Steve wishing you both of the best in the future.
Maybe if we could start again with the transaction I wanted to understand if you think there is an opportunity to cross sell into your existing client base, obviously, you've got relationships with large systems, but those systems, often have smaller facilities and probably the ambulatory offices afcs.
Is there kind of of land and expand strategy, there as well where you can leverage your base to sell into maybe facilities that your current product offering wasn't applicable for.
Yes, absolutely Ryan.
Core to the strategy when we looked at their customer base, there and around 85 hospitals today. There were a portion that were unique that there was no overlap in and as I mentioned many of those were <unk>.
Mauler facilities and then there were a portion maybe a third of little less than the third that were actually joined customers where the the health system was using vocera in certain parts of of the environment and the patient safe solution in and other parts of the environment of with different groups of users and so we do think that there is a natural synergy here.
We also feel like as.
The movement towards the cloud starts to accelerate there may be customers, who want to have a portion of their customers are running in the cloud solution.
And then finally I think we realized that there were just deals that we were not even aware of or maybe even being invited into I think there is still a little bit of legacy associated with <unk>.
Sarah as the badge company or whatever that maybe prevents us from getting visibility into some of the more smartphone oriented deals and so this is of great opportunity to extend our reach there, but we see the products working very complementary together and we definitely see this as a way of.
Really accelerating our ability to penetrate all of our Tam.
As opposed to sort of more of the higher end of the marketplace the term.
We've been focused on over the last couple of years.
Okay makes a lot of strategic sense and then one quick follow up if I could you.
You mentioned the largest bookings in company history.
Thank you for the Saint Barnabas, but one I want to check that and the number two more importantly can you just discuss in a little bit more detail. What's led to the selection of Vocera. There I assume given the size of it it was probably a highly competitive bid so talk a little bit about some of the key things that helps us narrow when the.
Yes, Ryan Thanks for clarifying the question actually.
We have of we have a wealth of rich's this quarter. So the Saint Barnabas deal was a very large deal in Q1.
Close it was one of the top deals we've done in the history of the company.
But that's separate from the deal, but I was talking about in Q2, which was in fact, the largest deal in the company's history and we're not disclosing to the health system is at this point in time.
But those are two separate two separate deals.
One in Q1 and one in Q2.
The St. Barnabas deployment was the situation, where we have had a small deployment with them for a number of years.
And also had the deployment as I mentioned in the prepared remarks with the E solution. So both solutions had a footprint in the marketplace. The.
The big part of what drove the expansion was expanding the use of engage to a broader set of users users and use cases, and then rolling out the communications solution across the marketplace. I think this is the classic case, where.
We're looking at hospital customers, who are looking to reduce the number of vendors that they are wanting to work with they are looking for a unified platform that they can handle for voice messaging clinical alerting an alarming and have it all kind of run together with the common database and common administration from a trusted brand with the professional services tobacco.
And the long history of having delivered a positive outcomes for them. So they were able to measure of the impact of our solution in their environment and they were able to use that to justify the expansion out of the broader health system.
Perfect. Thank you for the color and again the best of luck, Jeff just in the Steve Thanks, guys.
Our next question comes from Scott Shawn Hall.
Your line is open.
Hey, Thanks for taking my question and just and best wishes for your next journey and Steve Congrats again.
Okay.
So all of my questions regarding the mutation <unk> acquisition had been asked so let's maybe go back to some of your legacy business and the ongoing opportunities there.
So my first question is on the Federal certification you guys received at the end of March.
I believe you guys are over 55% penetrated in the federal market exposure across over 100 hospitals.
And some of these federal contract contracts start to come up for renewal from 2016, when they were for signs or.
Or when they were signed can you provide some color on the upselling opportunities here in the federal market from your legacy standard batch to the smart badge.
Yes, it's something we're really excited about the federal team has been waiting to get the Pip certification and they have been talking about the smart edge with the VA customers in the DHA the Dod.
The customers.
As you mentioned a large number of those.
Customers in particular have batches that are reaching the three to four year typical useful life and many of them are now out of warranty and so we do think that there is a replacement cycle that we can now pursue and the.
Vantage of getting the fifth certification now early enough in the year that we can actually respond to this and sell into this marketplace. During this fiscal year for the federal government, which would end at the end of September was an added bonus for us and so we had previously communicated that we were hoping to get the script certification in the first half of the year.
<unk>.
With the with the with COVID-19 and all of those sort of uncertainty within the federal government. There was some question in our mind as to when exactly we would get the certification I would say that this ended up happening sooner than we originally anticipated. So we're happy with that result, and the sales team is now kind of go back and start those conversations with the.
Installed base customers about that that upgrade and replacement cycle.
That's great color, Thanks, Brian and I guess as a follow up you mentioned briefly about your EPS.
Software can you talk more about the traction youre seeing there.
With the cross selling.
Correct me, if I'm wrong, but if you are sick they were 60.
Hospitals.
That had when you when you first acquired ease and just talk about kind of where you are cross selling.
Where you are in the cross selling opportunities and.
They can go in the next I guess 12 months.
That's it.
Yes, I think at the time of the acquisition it was closer to 80 customers that were using the product.
We continue to cross sell we're happy with the progress we're making there. The team is executing really well we are continuing to invest in that business. We've added.
Both salespeople in engineering and services people to that business unit to help them.
That's the growth that they're seeing in the marketplace and.
We're making introductions I think.
Some cases, its a different decision makers. So it's not an automatic cross sell but at least we have a relationship with those customers and we can use that to open doors.
I would say that so far the acquisition has exceeded our expectations in terms of the the growth of the new customers and overall revenue.
Thanks, Brian.
Our next question comes from.
Brian Colley of Securities. Your line is open.
Thanks, everyone.
Great quarter and start to the year I joined the call a little late but can you tell us on patient safe I mean this is a company that's been around for nearly 20 years in various forums and iterations I just curious what does the what is patient safe to give you that you don't already do or that you couldnt.
Build yourself.
And why is now the right time to to acquire thanks.
Yes, Jim It's Greg question, then Youre absolutely right. The company has been around for a while it has pivoted its strategic market focus a couple of times during that period of time you may remember early on they were in the Med administration and Barcoding.
This end.
Only in the last few years of pivoted, Moreover to the clinical communications and clinical workflow side of things and.
They were a competitive product as I mentioned before but serving the slightly different part of the marketplace. So for US number one this really extends our reach into the middle and small hospital market.
70% of U S hospitals are less than 200 beds, but.
But if you look at our installed base only about 50% of our customers are less than 200 beds. So we are underpenetrated in the small to medium sized hospital marketplace.
If you look at patient sees customer distribution. They are much more oriented towards that sub 200 bed hospital.
Space Secondly, this adds some great high margin software revenue and recurring revenue streams to our business, particularly once we convert it to a true SaaS cloud based offering we are on a march to add more SaaS based revenue to our business and so we saw this is of great opportunity to do that.
Third we were really impressed with the product that they built it was of cloud ready product that was designed for the cloud in mind from the very beginning.
Smartphone oriented solution.
And a little lighter touch so for it organizations that may not have the resources to manage an on premise solution and are looking for something thats.
A little lighter touch.
This seems like it's a really good match for that into the marketplace and will allow us to target a portion of our Tam that we hadn't penetrated very heavily in the past and we see this as an opportunity to sort of drive down.
Total cost of ownership for those types of customers and then I think fourth.
We were quite excited about the level of EMR integration.
They have developed in the product around transitions of care working with the major EHR companies.
And part of their selling strategy had been in kind of an EMR compatible our EMR companion mode, where they were augmenting some of the core capabilities of the MRO, we are driving for customers, who sort of made a strong commitment to the EMR mobile applications, where the thats epic Rover, where some of the other mobile clients. We see this is of great.
City for us too to augment those environments and really have an important role to play for us strategically.
It's a great way to to increase our market share and consolidate the market a little bit and add some great strategic revenue streams to our business.
Great I appreciate that makes a lot of sense. Thanks.
Our next question comes from Matthew.
Your line is open.
And for Matt Hewitt, I guess, you know software it sounds like it was an area of strength during the quarter could you give us an update on the engage product specifically and how the attach rates for that have been trending lately.
You bet the.
The software is a real bright spot for the quarter up over 85% of and we've been.
Having lot of success in selling our software and really the broader platform.
Includes engage.
And our attach rates are very high in fact engage in many instances is actually one of the.
Kind of leading edge.
Areas of the of the product here in the the solution that customers start.
Coming interested in and then.
It often grows beyond that to a much broader communications place. So there are now.
We have over time gradually increase the.
The penetration or the.
The rate at which our customers have engaged and there is now a very meaningful portion of our base that have that there is still more growth with engage that we can we can do in and more expansion within our within our installed base, but we're just really really pleased with how that product has performed.
Both individually in terms of its contribution of our software, but more significantly.
Because it allows us to get deeper and deeper into the clinical workflow of the hospital and beat makes our solution even that much more sticky and and there is a nice recurring component to it through the maintenance contracts that we have associated with that software.
Our next question comes from the.
David.
SBB Leerink your line is open.
Thank you for taking my question.
Lot of my thoughts on the patient data aggregation of bio path I have a little bit of an out of the box question as of resolve.
So we've seen some of the tech names start to raise concerns around the microchip shortage and follow on supply chain issues that they have a hardware component.
So two parts first.
Seeing anything on the supply chain side, just given it could be a little bit what's adjacent beyond your smart bachelor's and secondly, what does your cadence look like from bumping of new wrong to fulfilling the full batch order.
Hi, Stephanie, Yes, Youre exactly right. There is a there is broad based concern for around components currently.
In the in the overall supply chain more broadly in the industry I will say that we.
We anticipated this in.
And we have historically maintained.
And if it actually been building a little bit more inventory.
We have added over the last few quarters to hedge this.
Risk and so we feel very comfortable given the amount of inventory that we currently have on our books that we can just continue to manage this but we're obviously watching it very very closely we.
We do stay in very very close contact with our two contract manufacturers that manufacture our badges.
And feel like we've got very good visibility to our specific and unique supply chain, but we have purposefully built more inventory just to give us the buffer that we feel that we need to continue to satisfy demand in terms of the timeframe typically it varies by customer some of the larger customer.
Or is that we've recently booked won't likely take delivery of badges for several quarters on the other hand, if we receive a booking from an existing customer there often times wanting that product fairly quickly. So we we design our supply chain. The deal that respond we never want to be in a position, where we're not able to.
If the customer wants the badges sooner rather than later.
And we feel like we've got.
Adequate level of inventory to just manage through this over the next several quarters.
Our next question comes from Michael Mueller.
Your line is open.
Oh, Hey, good evening, just a couple of numbers questions on the deal so perhaps for Steve.
I heard $10 million of revenue for 2022 got that for 2021 guidance adjustment is all of the deal that's on revenue 3 million, but that restrained because it's the partial year and theres the accounting adjustment.
So what is kind of the pro forma but what was the <unk>.
Patients safe.
It to do for 2021 on a pro forma basis I'm getting to like $7 million is that.
Is that the ballpark.
Yeah, Hi, Michael So I think you had the right factors, absolutely where there is a pro rate of year SAR revenues from May through December instead of full year and then you have your standard purchase accounting adjustments and yes. You are you are in the ballpark number.
The perfect and then on the margin profile.
Several of allusions to.
Higher margin revenue stream can you, perhaps help us with a finer point or a range on what their what their gross margin.
Profile looks like.
Sure without getting into too much specifics as it expands over time, we do see software based type margins and.
What I'll say the b at both areas are of above our standard margins right now so it should be accretive to our business.
Just because of the software nature of it.
Yes got it thank you.
Our last question comes from Dave Windley of Jefferies. Your line is open.
Question is not a lot left to ask but Brent in your prepared remarks, you talked about the services team managing the full schedule of a mix of of on premise and remote deployment and I wondered.
As we kind of get closer to pulling out of of restricted access.
How much of that deployment do you anticipate will be permanent remote how much can can be virtualized on apartment of basis.
Hey day, Yes, great question I think it's too early to know, but we are excited about the prospect, obviously theres some great synergies associated with doing more of that work remotely both in terms of People's time and travel expense.
I've been really happy with the way of the teams of innovated and redefined some of the processes. There is always going to be of demand for on site capabilities and so it's not going to stay as low as it has been during COVID-19, but we've challenged the teams to sort of think about.
Driving more efficiency and synergies with more remote work and we're building tools actually to allow us to do more remote analysis and remote monitoring as well so.
I can't give you a specific number but I think it will definitely be more remote than it was historically and we're actually really excited about the virtualization of our business more broadly both in services and sales and marketing and even in the Investor relations. So.
The great opportunities across the board zone.
And that's the biologic one when it's virtual I guess.
The the other question I had for you is if you could provide us with an up.
Date on on renewal rates.
And your.
Your support line and maybe.
Unofficial metric, but as you are.
Engaging with clients around like you mentioned some of these these deployments in the federal that are sort of four years old and your <unk>.
Coming back around the replenishment there.
What might we think about as a as the revenue upsell as the typical.
Metric expansion of your of your relationships as you hit these renewal points, so kind of renewal rate, but then also what's the revenue on those renewals growth.
Yes, Hi, Dave.
We continue to see very high renewal rates of all of our software maintenance contracts, including our federal business.
We've stated publicly that those are in the mid to upper Ninety's and that's that was the case in Q1.
We expect that to continue and I think it's just a great reflection of the.
But the stickiness as well as the the loyalty and the utility of the solution that our customers customers have our software maintenance is.
Is is not inexpensive and so we recognize that and we aim to really deliver great value.
For that in exchange.
For the for the revenue and the fee that we charge there.
The the the upsell opportunity and the fed is.
There is great opportunity I would say, it's going to be very fluid and it's not like there's a kind of a massive wave of upgrades coming.
Right away I think it's going to be gradual over time, the smart badge the.
The fifth certification of the smart badges that great New development for us that we're excited about and certainly for those customers that have.
Badges that they purchased back in 2015, 2016, and 17 as Brent mentioned those will eventually need to be replaced and so over time, we believe that those customers will do that either by purchasing new badges or we hope also the smart badge.
Each of each each sale that we make is different and unique we have some customers that are.
Smaller in the fed space.
For the initial size was in that.
Few hundred thousand dollars range and then we have many other hospitals and facilities that were.
Much much larger than that and so each.
Each upsell opportunity are cross sell opportunities will be will be differences, depending on who the customer is but our kind of our federal team is really active actively engaged now and.
And on top of all of those opportunities.
Sure. Thank you.
There are no further questions at this time I'll turn the call back over to Brent Lang for closing remarks.
Thank you and thanks to everyone for taking the time to join US today, we're really happy to share. Our Q1 results for you and the strategic rationale behind today's acquisition and we look forward to continuing the dialogue with you in the in the quarter to come.
Have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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