Q3 2021 Vocera Communications Inc Earnings Call

October 28, 2021

Yes.

Yeah.

Good afternoon, ladies and gentlemen, and welcome to the Vocera Communications Conference call. My name is to me and I'll be your coordinator for today at this time all participants are in a listen only mode until the Q&A portion of the call I would now like to turn the conference over to your host for today's call Sue Dooley of US here at Investor Relations. Please proceed.

Thanks, very much and Hello, everyone welcome to those tariff conference call to discuss our third fiscal quarter of 2021 earnings.

Joining me today are both serious CEO, Brent Lang and Steve in here our CFO.

Earlier today, we distributed a press release detailing our announcement the release is posted on our website at investors <unk> Com and is also available from normal news sources. This conference call is being webcast live on the Investor Relations page of our website, where a 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 anticipated market opportunities.

Forward looking information is subject to risks and uncertainties described in both series filings with the SEC 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 this call we will refer to both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release.

With that I would like to turn the call over to Brent.

Thanks, Sue and welcome everyone.

We just completed a fantastic Q3, delivering record revenue growth of 18% compared to Q3 last year.

We saw broad based strength across our business.

Our teams are executing well in the market for our solutions is very strong.

Our customers appreciate the breadth and depth of our products and our clinical solutions based sales approach is resonating with key decision makers as demonstrated by this quarter's large new wins expansions and success in our international and non health care markets.

Here are a few highlights from the quarter.

In Q3, we achieved the highest bookings quarter in the history of our company, we continue to win large new customers and expansions.

This quarter, we won another one of the largest deals in our company's history. This time at the Cleveland clinic capping off a quarter with an impressive 15 deals over $1 million.

Our bookings in the federal market were impressive.

To leverage our strong position in the fed as the de facto standard for clinical communications and combine that with great sales execution.

Software bookings were strong again, and our software solutions continue to drive many customer engagements has integrations and optimizing clinical workflows remain top of mind with hospitals.

Our unique wearable badges continue to differentiate our solution as evidenced by strong device sales performance this quarter.

In fact, Q3 represented our largest bookings quarter ever for both the Vocera badge and our smart beds.

Our newer growth initiatives are also being well received in the market specifically, we booked our largest ease expansion ever.

And we're driving good pipeline growth for Vocera edge, our cloud based communication solution, which we officially launched in July.

Overall, it was another amazing quarter with strong performance by our teams across the business.

We have tremendous momentum.

Our solutions are resonating with customers, our salesforce transformation is really paying off and I could not be prouder of our entire team.

The sales highlights from the quarter included 15 wins over $1 million demonstrating the strong demand for our complete solution.

To stand out among these wins was with the Cleveland clinic, representing the second largest deal in our company's history, just slightly smaller than last quarter's weighted Providence health care.

This win with Cleveland Clinic's flagship operations in Ohio, and Florida was the result of years of hard work by dozens of our skilled sales clinical and technical experts as well as the demonstrated success of our solution already in place at the Cleveland Clinic in Abu Dhabi and in London.

Tiny example of our clinical expertise and how our customers look to us as a partner in defining and deploying best practices.

During the evaluation process of this enterprise deployment spanning 18 hospitals, Cleveland clinic, prioritized streamlining clinical workflows accelerating time to care and reducing alarm fatigue.

And these priorities led to significant interest in our engage software.

Our wearables smart badge and the ability to communicate hands free in isolation areas as well as our dedicated panic button were also key aspects of this win.

We are now the standard for clinical communications across this world famous health system, which we believe will provide a great example of the value our solutions for hospitals around the world.

The federal market also continues to embrace our solution our federal sales team delivered several million dollar plus wins, including New Jersey, VA, Albany, Stratton, VA and Buffalo VA Medical center to name a few.

They also achieved success selling our recently <unk> certified smart beds to both new and existing customers, including cross selling into previously engage only customers.

We have plenty of room to land, new facilities, and cross sell and upsell within existing customers across the federal market.

Turning to some of our newer initiatives. This quarter, we won the largest ever ease expansion at memorial Hermann Health system. We previously conducted a successful he's pilot in a single surgical Department and now Memorial Hermann is expanding ease into surgery centers in all 13 of their hospitals.

As they look to compete in the Houston healthcare market. They are investing in patient experience and they placed a high priority on the patient facing benefits of Es.

Nurses connect EES to the patient idea upon admission and care team members can send messages throughout the entire patient journey to the patient's friends and family across the country and even around the world.

Meanwhile, edge, our cloud based smart smartphone centric clinical communication solution is also achieving healthy traction with robust pipeline growth since our launch in July.

Customers are interested in integrating edge with engage to expand clinical workflows and edge further differentiates our ability to maximize our customers' EHR investments, while empowering mobile clinicians with meaningful information at the point of care.

Moving to international our focus on localizing, our sales initiatives is really starting to pay off.

An example of this is in Australia, and New Zealand, where we're making good progress expanding our presence in acute care.

We had several acute care wins, including Royal cursed Auckland City, and Sydney local Health District.

The new South Wales health system of over 200 public hospitals.

It's great to see this traction and I believe we will build on this momentum in the future as these new wins set the standard for clinical communication in the region.

Outside of hospitals, we won a large deal with the Ohio Department of developmental disabilities, which is eight centers, providing temporary residential placement and programs that teach skills necessary for individuals with disabilities to live in community settings.

Replacing overhead paging and heavy Motorola radios. The center aims to improve status staff communication and provide their teams with a panic button to connect with colleagues at anytime.

We also had a great win at a private school in Florida, which we believe will provide a leading example for schools everywhere.

While it's still early days for our efforts in school safety, we believe our value proposition is resonating with school leaders looking to adapt to new operational demands while also ensuring the safety of staff and students.

Finally, it's worth noting that our supplies business and our software maintenance renewals, both performed very well this quarter demonstrating the value of our solutions and the loyalty of our customers.

Our strong bookings performance this quarter continues to underscore how our enterprise selling approach is working.

Our team has effectively differentiating our offerings by working with our customers clinical leadership to create solutions and demonstrate results that address the most severe and pressing clinical workflow challenges facing hospitals today.

Both series viewed not only as a priority must have but also increasingly we are considered a strategic partner.

Hospital leaders are turning to us as they look for expertise to establish best practices and achieve operational goals.

More about this in my market commentary section.

Now I'd like to shift to some highlights from our services team we.

We continue to deploy our solution through a combination of on site and remote work and our teams had a very busy quarter.

This quarter included the successful deployment of our solution at the London Medical office of the Cleveland Clinic.

The long awaited opening at this state of the Art hospital with a great precursor to this quarter's big win at the Cleveland Clinic here in the U S.

We also had a sizable deployment at UCLA is Ronald Reagan and Santa Monica Medical centers.

UCLA is undertaking a broad initiative to replace pagers with smartphones across the system.

You see like care team members are very positive about our solution and are already seeing the benefits.

We had a large engaged deployment at the University of Vermont, where we are delivering patient waveforms to care teams across the hospital on their smartphones.

And we went live with edge at six Bay care facilities streamlining a fleet of disparate devices and unifying nursing documentation clinical workflow and communications.

And notably in October.

We had our first deployment of ease and in an emergency department at one of the largest <unk> in the country Lehigh Valley Cedar crest.

He's concerned over 25 unique messages based on the patient status as care team members update the EHR.

This frees the care team to focus on patient care.

These emergency department deployments represent additional growth opportunities for <unk> beyond the traditional surgical environment.

Our professional services team is executing well through these changing times continuing the level of excellence excellence that optimizes in person time, while working in partnership with our customers.

Okay.

Now I'd like to describe my observations on the market environment for our solutions.

While the pandemic extend its impact we continue to execute well with a combination of remote selling and deployments and valuable in person engagement with our customers.

We believe the events of the last 18 months have further highlighted how our solutions drive effectiveness and safety.

We do not believe COVID-19 is significantly impacting our ability to work with prospects and customers. Although it has forced us to become more flexible as we react to changes in our customers' environments.

We didn't see much in the way of urgent Covid orders. This summer as hospitals were already prepared for the pandemic environment. However, we do believe our solution has risen to a new higher priority, which we believe supports our long term growth aspirations as we work to modernize health care communications around the world.

We continue to see evidence that we have entered a new era of focus on care team safety.

We believe our solutions are the most complete in the industry today connecting all of the people and information needed to deliver patient care and simplified communication and workflows.

But our leaders are urgently looking to strengthen their staff safety reduce alarm fatigue, cognitive burden and speed time to action and intervention.

We also believe hospitals in pursuit of these goals are looking to consolidate the number of vendors they are working with.

And they want to build platforms that are secure unified fully integrated and future proofed.

This plays right into the heart of our value proposition, our selling approach and our market leadership.

As evidence of this trend Jupiter health became our first customer with all four pillars of our solution enterprise voice and messaging engaged clinical integration ease patient family communication and edge for smartphone based collaboration.

<unk> wanted to work with a single vendor to address a variety of communications and workflow challenges and we'll be using all of our solutions.

At <unk>, we are helping our customers and our industry to find a new normal for hospital operations.

Our clinical and customer experience gives us a powerful seat at the table to discuss clinical workflow goals and the industry is increasingly turning to us for help and advice.

The large systems standardizing on our solution provide the best testimonial to this.

Here are a few other examples of how the industry is recognizing our leadership in transforming the market <unk>.

First we continue to lead the CEO coalition working collectively to take action to protect the well being of clinicians and ensure that they have the tools technologies and resources they need to feel safe at work.

Just read a stat and of Becker's article that 18% of health care workers. So quit their jobs during the pandemic worsening and existing labor shortage that further exacerbates the urgent need to improve the care team experience.

Hospitals are working to address the staffing crisis that exists in health care today and are turning to products and technologies to drive empowerment and retention for their staff.

We are collaborating with the CEO coalition to drive meaningful change across the industry by promoting the coalition core principles of physical and psychological safety and health Justice <unk>.

<unk> is building in the coalition has already received very high level of visibility in the media and has nearly doubled its membership among the top hospital leaders in our country.

And finally, our class report on our industry that was just published ranked at the top for demonstrating positive outcomes.

The customer feedback highlighted our deep experience leveraging clinical integration with patient monitoring tools, which enables clinicians to respond more quickly to critical notifications and improve patient care.

Improved nurse satisfaction was noticed as a top outcome. Thanks to our ability to decrease the clinicians tool belt of communications devices improved collaboration and reduced noise.

The report also acknowledged the added capabilities edge brings to our portfolio.

Our solutions are resonating in the market, we are winning because of our broad solutions are helping modernize communication and collaboration we are winning because our customers are we are winning because our outcomes based selling approach and our ability to integrate across different clinical systems to deliver alerts and alarms intelligently.

And we are winning because hands free communication is highly valued by those who are providing hands on care to patients.

Finally, our ability to innovate with a mix of internal development and careful M&A make us the clear choice as customers look for a partner who can help them establish best practices to deliver better outcomes and lead them through this new era of safety.

In summary during Q3, we achieved the highest bookings quarter in the history of our company, we advanced our strategic priorities, including further penetrating the market expanding within our existing customer base, increasing our software momentum growing our international presence and leading with new product innovation we are in.

In a great position to continue delivering on these priorities are.

Our large backlog and deferred revenue balance provide revenue visibility and help create a solid foundation for the future.

Our mission is more relevant than ever and we have remarkable momentum in the business.

Now I'd like to turn the call over to Steve who will cover the financial details around our Q3 results and our guidance for the rest of this year Steve.

Thanks, Brent and Hello, everyone. We continued our strong momentum in the third quarter highlighted by record across our financials, including bookings revenue margin and profitability all of which were ahead of expectations.

Starting with revenue in the third quarter, we delivered $63 $6 million or 18% year over year growth and through the first nine months revenue increased by 19%.

Q3 product revenue, which includes both devices and software increased to $32 $9 million or 16% year over year growth.

Focusing on device revenue this segment increased 21% from the prior year driven by robust demand for the Vocera badge and our smart badge.

It is important to highlight that even after the strong revenue quarter. Our device backlog grew significantly in Q3 and is now at an all time high.

While deployments can fluctuate from quarter to quarter. We believe we are well positioned for future device growth are strong device bookings backlog and deferred revenue demonstrates the continued demand and compelling value of hands free communication.

Software revenue in the third quarter reached $12 3 million, a new high watermark for our software business and grew 7% above last year's strong Q3 performance on.

On a year to date basis software revenue grew 42% and remains our fastest growing revenue segment.

As we discussed last quarter engaged continues to be a significant component of our software business, which highlights the growing value customers place on our clinical integration and event driven workflows.

Even clinic booking that Brent discussed is a great example of this with engage being the largest element of the deal.

Thanks to our strong bookings performance our software backlog continues to grow and as of September 30th is at an all time high significantly above the previous year.

The growth in software backlog positioning us well for continued revenue momentum and is a key driver for our operating model, which I will touch on shortly.

One final comment on our software results.

As previously discussed we evaluate the health of our software business by combining software with subscription and support revenue, which we view holistically as our software business.

Software subscription and support revenue combined grew 17% in Q3 and represented 60% of our total revenue on a year to date basis up from 56% in the prior year. We expect this mix to continue to increase our long run driven by demand for our software portfolio and growth in our backlog.

Our services business continues to perform well service revenue increased 21% year over year to $36 million with growth in both our subscription and support and our professional services revenue.

Q3 was another quarter with healthy new customer deployment, resulting in professional services revenue and delivery of new software and devices.

Now.

Turning to our combined backlog and deferred revenue with a record bookings quarter. In Q3, we have again significantly increased our backlog and deferred revenue.

At the end of Q3, our combined backlog and deferred revenue was $253 million up approximately $100 million or 67% versus this time last year.

The increase was largely driven by organic growth with a smaller inorganic component.

We continued to see strength in multi year subscription and support contracts and large multi facility wind, which contribute to our growing backlog. We view this as positive as our backlog in deferred revenue provided visibility into 2022 and beyond.

I would like to briefly go into more detail on our non-GAAP gross margins and operating expenses.

Non-GAAP gross margins in Q3 were 71%, representing a 170 basis point improvement from last year, and again set a new high watermark for the company our product gross margins expanded to 78% up from 76% in the prior year.

We saw the benefit from device margin improvement related to healthy volume and pricing.

The value our customers assigned to the functionality of our devices.

We also continue to have healthy software margins.

Lastly, our services gross margins supported by our high margin subscription and support revenue were well above 60% and grew approximately 100 basis points from the prior year.

Non-GAAP operating expenses increased to $30 9 million or 22% year over year growth, mostly due to investments for our recent acquisitions. We also continued to find key initiatives aligned with our growth strategies.

Now I'd like to comment briefly on our profitability. Our adjusted EBITDA in Q3 was $15 $3 million up 14% this quarter and up 69% for the year.

As a percentage of revenue adjusted EBITDA was 24% in the third quarter, which was well ahead of our profitability goals.

While there can be quarter to quarter profit fluctuations based on revenue mix and spending initiatives are growing software business healthy device margins and our continued focus on operating leverage as resulted in expanded profitability highlighting our strong business model.

We continue to invest for growth with the objective of maintaining our top line momentum while delivering on our long term business model.

Lastly, and also important to our profitability journey, we achieved GAAP net income of $2 1 million for the quarter.

Now transitioning to the balance sheet.

We ended the quarter with approximately $305 million in cash and short term investments, which is up $13 million from the prior quarter. Our strong cash position allows us to continue to invest in growth opportunities.

Yeah.

Now, let me turn to guidance.

On the strength of the first three quarters for both bookings and revenue we are on track to deliver strong revenue growth for the full year.

For the third quarter in a row, we are increasing our annual revenue guidance.

The new revenue guidance range is now $226 million to $233 million up from the previous range. We gave last quarter at 221 at $231 million.

The high end of our revenue guidance now represents 17% year over year annual growth.

In addition, our substantial backlog and deferred revenue provide great visibility and enhanced line of sight to long term revenue growth.

Turning to our profitability with the higher annual revenue expectation and our profitability performance in Q3, we are raising the top and bottom of our adjusted EBIT guidance range for the year.

We now expect adjusted EBITDA in 2021 to be in the range of $35 million to $40 million, reflecting the impact of the strong Q3 performance greater topline revenue guidance for the year the software rich backlog and our continued operating expense discipline.

The rest of our GAAP and non-GAAP guidance can be found in our press release.

In closing.

We are extremely pleased with the overall business momentum and financial results in the third quarter capping off an outstanding first nine months.

And leading to our new guidance range. Our solutions are rising in priority our growth is accelerating and our business model continues to be very strong.

Thank you for your time and now I'll turn the call back to Brian.

Thanks, Steve.

Before opening up the call for questions I want to conclude by thanking the entire Vocera team, which continues to excel as we navigate the pandemic.

Our mission has never been more relevant than it is now and I'm very proud of how our people have risen to the challenge.

Our business has good momentum and the results. We delivered this quarter are evidence that our solution is in high demand and delivering tremendous value to our customers.

Our customers are looking to us for leadership as they implement best practices around the future of care communications.

We have a large market opportunity highly differentiated solution and a finely tuned selling engine generating robust demand.

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

Certainly we will now begin the Q&A session, if you'd like to ask a question. Please press star followed by one on your Touchtone keypad.

Any reason you would like to remove that question. Please press star followed by two again to ask a question Press Star one as a reminder, if you are using a speakerphone. Please remember to pick up your handset before asking your question and the interest of ensuring all participants have the opportunity to ask a question. Please limit your question to one per participant.

We'll pause briefly to allow questions to Tonight. Thank you.

The first question is with Sean Dodge with RBC capital markets. Please proceed.

Thanks, Good afternoon, and congratulations on another.

Late quarter.

I guess, we're all right you mentioned.

Strong bookings momentum and I'm curious to hear your thoughts on.

How we should you should.

You can kind of expect to see that manifest itself in margin expansion over the next couple of years, you've made some pretty significant investments in our sales organization that are paying off.

You pointed out software mix is increasing you've got a couple of recent acquisitions youll be spending time to integrate but as we think forward to <unk>.

Your next 12 to 18 months do you see.

The level of spending growth continuing or do you think we're approaching a point where you can.

Maybe not pulled back but begin to more meaningfully paper paper growth and really start driving toward the.

The longer term margin targets you all have laid out as part of the longer term model.

So I guess I'd start by saying I Love, our financial model does a tremendous amount of leverage in our financial model and we see a lot of drop through profitability as we grow revenues and I think you saw evidence of that this quarter with the 24% of EBITDA in the quarter.

As you go through the different parts of our business, we're seeing big increases in sales productivity, we've been able to grow bookings pretty dramatically over the last couple of years without having to increase the size of our sales organization and we'll continue to make investments that we think will drive growth, but I do think that there is leverage there.

Obviously from a G&A perspective and from the rest of the Opex, we're seeing we're seeing leverage in the model.

You mentioned software increasing software margins and increasing sulfur is a mix of our total business is helping to drive profitability as well. So I guess, we always try to strike a balance between growth and profitability. Our bias is towards growth. So we're looking for areas. We can continue to invest that will drive further growth in the future.

But I think based on just the structure of our models youre going to continue to see increases in profitability.

Okay, great. Thank you.

Thank you Mr Dart.

The next question is from Ryan Daniels with William Blair. Please proceed.

Yes, thanks for taking the question Brent maybe somewhat philosophical one for you given the momentum you are seeing really across all aspects of the business both in the badges and the software.

Fees et cetera, and the fact that there is some vendor fatigue in the market with people wanting to move towards one vendor versus multiple point solutions.

What's your thought on investing more heavily in the sales force, whether it's direct expansion or kind of novel marketing initiatives to really capitalize on all the momentum you're currently saying, thanks and congrats on the quarter.

Yes, Thanks, Ryan it's something we spend a lot of time thinking about I think if you talk to our sales organization. They would say that they feel like they've got pretty good coverage across the accounts in the U S. A lot of this is driven by just when hospitals are ready to make some of these transitions I will say that we look potentially to bring in more <unk>.

<unk> to help drive.

Some of the newer products and newer initiatives, where maybe the broader salesforce doesn't have as much experience and so we'd look for investments there as well as continuing to grow the international business.

But with increasing deal sizes.

We feel like we've still got an opportunity to drive continued sales productivity and so it's always a balance there.

Don't feel like we need to grow sales nearly at the rate that were salespeople at nearly at the group great right, but we're growing bookings just because of increased deal size allows us to do fewer transactions to continue to grow bookings, but I do think as our solution becomes more complete and we've got more products in the bag.

With them to sell them, adding some specialist could help drive that growth.

Ryan are you still there.

Yes. Thank you I appreciate that sorry, I was on mute.

Okay.

Thank you.

Okay organically came into line.

Thank you Mr Daniels.

The next question.

This with David Larsen.

With <unk>. Please proceed.

Hi, congratulations on the very very good quarter.

Did I did I hear you say that you won a hospital system in Australia that had 200 hospitals.

Is that correct.

We won a single hospital, that's part of a 200 hospital system in Australia, we didn't win the entire system.

It was a hospital in Sydney.

Public Hospital, that's part of the New South Wales Public hospital system, but I think the significance of why we talked about it is because obviously now that we've got traction there. We can use that as kind of a lighthouse account and use it as a reference to hopefully expand to other facilities there and for us.

You may remember that most of our business in Australia, New Zealand historically has been in aged care and long term care, Texas facilities. We were just starting to break into the acute care market, both last quarter and this quarter. We started to see some nice traction there with some new selling and marketing activities, we've had going on down there and so this is just a continuation.

That activity and we now look forward to hopefully being able to expand to some of those other facilities.

Yes.

Yeah, that's sort of what I was getting at like with the Cleveland Clinic expansion. As an example, I would think that you have a very good in cell opportunity in that site and 200 hospitals. It sounds like it's a countrywide or.

Opportunity.

Okay.

And then the.

The backlog itself, if I'm doing my math correctly, it looks like it was about $200 million in the quarter up 110% year over year.

These are just fantastic gross numbers I guess, what was the do you have an organic growth rate in deferred revenue and backlog for the quarter. I think you gave one last core of like last quarter of about 45%.

Did you have another one for this quarter.

Yes, David So we grew our backlog and deferred revenue 67% year over year.

Approximately $100 million is actually up $102 million.

The majority of the increase is the organic last quarter, we broke out he's an edge as being $34 million of backlog.

Now that we've had a full cycle in EES, we can say there is organic.

So we're really excited about <unk> and edge.

Think olive drive long term growth.

But right now it's relatively small part of our business I think what we point to is how successful engagement. Then we purchase engaged in 2016 and now thats, leading deals as evidenced by Providence and Cleveland Clinic.

While he's in edge are still pretty small right now we're excited about the future.

Okay, and then and then just broadly speaking.

Like the momentum of the business is very very good at it.

The highest sort of growth rate I've ever seen can you, maybe just talk a little bit about the pandemic and the delta variant and it seems like Vocera has becomes more of a must have than a nice to have.

Just any any additional color there would be helpful.

Yes, David I think youre touching on a really important point I think our solution is really aligned with where the market is right now.

Some of it's related to pandemic, but I think more of it is just a change in the mindset of our customer base, who are probably the top of mind issue for many of our hospitals right now is the nursing shortage and retention related to that and so they are looking to invest in technologies that can help address that and make through.

They are nurses more empowered and reduce the stress level and hopefully increase the retention level.

The second piece is this focus on staff safety and reducing cognitive burden, which I think has become very much of a top of mind issue for them.

<unk> experience is rising in importance.

And the focus on clinical integration that drives a reduction in cognitive burden and then obviously the hand Street piece has continued during the pandemic to be a really important driver. So I think if you just kind of look at the core elements of our value proposition. They are really lining up very nicely with the priorities that the C. Suites of these hospitals and health systems are focused on.

Spending.

Great. Thanks, very much I'll hop back in the queue.

Thank you Mr Larsen.

The next question is from meta Marshall with Morgan Stanley. Please proceed.

Great. Thanks.

Your gross margins seen uplift from some pricing power I just wanted to get a sense is that.

Yes.

Difference in the small hospital large hospital mix or just less discounting due to value proposition.

Bundling upfront.

On just kind of dilute the gross margin uplift you're seeing thanks.

Yeah. Good question. So our margins were 71% in the quarter that represents an all time high.

Thank you see with quarters that we have high revenue and scale and especially with a significant software contributions we can start reaching the 70, 71% margins margins last year were 70%.

As a note software was the highest we've ever had for an individual quarter on the software revenue at $12 $3 million and then the last thing that was a real bright spot for US was the device margins.

So we had the volume growth for our device revenue increased over 20% year over year, and so that fixed costs were spread out over more badges.

But we also saw a healthy pricing environment and that wasn't.

Isolated just to the enterprise deals are or just the fed is kind of across the board on both <unk> and smart badge.

Great. Thanks.

Thank you Ms Marshall.

The next question is from Matt Hewitt with Craig Hallum. Please proceed.

Well I'll echo everybody else congratulations on the strong quarter, just a couple of questions for me first off and I think it kind of touches on the prior sponsor regarding gross margins, but regarding the supply chain are you seeing any issues. There I think you've been in a good position.

Well the past couple of quarters, but has there been any changes are your price increases are a result of some of the increases youre seeing with your supplies or is it more a function of just recognizing the value proposition that your devices are bringing in the software is bringing.

Yes, good question Matt.

Chart by saying it is more pricing discipline than price increases, but specifically to the supply chain I think the team's done a good job pre pandemic our inventory levels were about $5 million, we've increased that throughout the pandemic from kind of a range of $8 million to $10 million and.

And so we worked really closely with our two contract manufacturers. Obviously, it's a global situation is evolving our teams continue to monitor and watch it closely.

But we've done a good job so far and are the cost of our barges have stayed relatively flat year over year.

I would just add that I'm super proud of the job. The operations team has done working with the supply chain. We got ahead of this early.

And they've been very diligent on it and I think we've avoided any any major issues as a result of that that diligence by the team.

That's really helpful. Thank you and you kind of touched on this in one of your earlier responses, but I wanted to dig in maybe a little bit further regarding talent.

And there's two different aspects one is talent for both Sarah it sounds like you're in a pretty good place maybe not needing to add a ton of people others that we're hearing from so far this earnings period are struggling to find talent or replace talent, where there's been turnover. It sounds like you are in a good position I just want to confirm that and then regarding the <unk>.

Customer that has been in the headlines that has been a pain point and it sounds like.

Based on your early response that they're really viewing the badge is the software as a bridge until they're able to necessarily find the headcount that they need and maybe even then the your products will help but at least into until then this could be a bridge to help hospitals.

Bulls that are struggling.

Meet quotas from a hiring perspective.

Yes, So let me start with the Vocera employees I think we're very fortunate to have very high retention rates amongst our employees, there's a tremendous amount of loyalty and connection submission within the organization and we historically have had retention rates that are well above kind of industry benchmarks.

We've seen retention dropped during this tightening tightening labor market, but we're still well above.

The industry benchmarks and happy with that I think we have to be more diligent in our hiring practices and we're getting creative in terms of ways to generate.

More pipeline of candidates to come in but it hasnt been an issue for us up till now within our customer environments, you're absolutely right. This is a very much of a top of mind issue and.

I think Youre also correct in sort of labeling it is using technology as a way of bridging the gap between the work that needs to be done and the resources that are available.

This is a way to empower the frontline nurses to enable them to do their jobs more effectively and spend more time on patient care. It is also way to reduce their stress levels and improve their feelings of safety that may prevent them from making a decision to leave the professional in the first place and so I think the hospital decision makers.

Recognizing the role that technology can play in connecting them back to their purpose protecting them and keeping them safe and preventing any kind of burn out from them and making them more empowered to be able to give jumped on with reduced labor force.

I think that recognition of our broad category is really exciting for the industry as a whole and specifically for <unk>.

That's very helpful. Thank you.

Thank you Mr Hewitt.

The next question is with Arris, Wang with Baron Berg. Please proceed.

Hi, Thanks for taking my question, so I'm going to switch the topic, a little bit I have a couple of questions on the VA market I'm wondering how has this iain Mike performed versus your expectation, what's the demand like for the smart badge persistent badge I know that typically Q3 is interest.

Strong quarter, but can you remind us what the cadence for that business.

Like what's your expectation for the next few quarters.

Okay.

Yeah, Hi, Iris I think you're exactly right Q3, historically has been the strongest quarter for our federal business and.

This was no exception to that we had a very strong quarter.

And the fed closing a number of large deals and also a number of.

Refresh and expansion orders within our existing customers.

This was really the first quarter when we saw substantial orders of the smart badge within our VA customers. As you May remember, we received <unk> certification for the Smart badge in late Q1 early Q2 timeframe and so this was really the first buying cycle when they had access to that and we did see smart badge orders.

We're both new customers as well as from existing customers, who either expanding or replacing existing b 3000 badges.

We expect the federal market to continue to be a strong part of our business where effectively the de facto standard in both the VA and Dod and Theres, a tremendous amount of loyalty and excitement about our products.

There is still plenty of room for expansion there and this quarter was Q3 was pretty much in line with what we've seen in previous years, where we saw the bulk of the federal business occurring during the Q3 timeframe.

Thank you.

Thank you Ms Cohen.

The next question is from David Windley with Jefferies. Please proceed.

Yeah.

Hi, good evening compliments on the quarter I'm wanted to ask a question a follow up to matts around he he label that talent, Alaska Little more specifically around your implementation resources with the growth in your backlog are those.

Ones with the the kind of hybrid environment that you still feel like you have some scalability.

In that capacity or is that an area, where you need to hire more you know more specifically and then again.

You know, maybe specifically in that labor market is that.

Labor available.

So we're definitely hiring more implementation resources.

To help deal with these large deployments that we're working on.

It's not anything new we've been continuing to grow that part of our business over the last year or more as the business scales and we've got more of these larger deals but the nice thing is we typically have good visibility into these deals working their way through the pipeline and then even after they're booked there's usually some period of time between the booking occurring and when the revenue is going to roll.

As an example, the Providence deal that we announced last quarter.

The large deal that we closed in Q2 that really won't start rolling out until the first part of next year and so that gives us a little bit of time to scale up those resources and do the resource planning associated with that.

And I think so far we've been able to stay ahead of that but we are definitely adding resources. The other thing I would highlight is that we're really trying to get creative around the virtualization of that work. We've moved more of it to online training and online configuration, and that's actually delivered a level of efficiency that we might not have otherwise seen by.

Seeing the amount of travel time, and downtime associated with getting to a customer site.

The pandemic sort of force that upon us early on and what we found was it for certain portions of the professional services work, we could continue to do that remotely, which kind of gave us a boost in terms of capacity as well, but our utilization rate of our professional services team in Q3 was high.

And so that's that's a good sign you wanted to keep it high.

We're continuing to look at a combination of both in house resources, and then potentially some outsourcing of some of the components of the work as well to kind of create a variable capacity as well.

Got it just a quick follow up then.

If we go back really to before the pandemic you were describing and experiencing a a lengthening of sales cycle as.

Deals are getting bigger and moving to a more centralized decision process.

And then it kind of probably threw that into oh through that in the background, but.

Has that come back is that a stable environment not changing much now or are you still seeing I mean, obviously, you're closing a lot of deals but is is that sales cycle is still kind of centralizing and getting bigger and longer or is that a more stable.

Environment at this point.

I would say, it's stabilized it's longer than it was before but now that we've sort of transition of the business, where the bulk of the deals are on that same cadence.

Just a matter of building pipeline so.

Whether it's 12 months or 18 months sales cycle doesn't matter as long as you have made the transition to the new cadence and the Cleveland Clinic deal is one that we've been working on for a long time, So I don't think its.

Any.

It's not to say that that would suddenly an overnight success, where there was a tremendous amount of work that went into that deal, but as we plan for and prepare for those as long as we have a number of these larger deals in the pipeline I would like to think about the analogy of the planes landing.

Her airport, but.

It's a question of having enough planes in the air that you can have coming in on a regular basis, regardless, whether theyre, making trans Atlantic flights are just fine from Milwaukee and Chicago.

Got it thanks again.

Thank you Mr Windley.

The next question is from Jessica <unk> with Piper Sandler. Please proceed.

Hi, Thank you for taking my question and congratulations on the on the corner. So I think what we're interested in is you guys are managing to achieve record bookings without kind of commensurate increases in opex.

Spending so within your existing health system customer base, where the biggest opportunities.

For increased penetration.

Would it be an expanded device deployments and additional penetration of it.

<unk> is our edge can you just kind of help us understand some of the existing health system base, where the largest opportunities like that.

It's really all of the above.

We see examples of customers, who have maybe deployed badges in just a few departments that are looking to go house wide or health system wide and <unk>.

Providence was a good example of that last quarter we.

We see other deals where they may have been.

<unk> only customer and they're adding engage or they're looking to upgrade to smart badges. It's really each of those elements you talked about India being growth drivers I think with ease and with edge. We're just getting started with that survey today represent a relatively small piece of the business, but we're hopeful that we can drive the same sort of cross sell and expansion selling into our installed base.

With those products that we've seen with engaging with the smart badge.

Yeah.

Thank you Ms got it.

Okay.

Can I just one quick follow up I guess, how should we think about the total addressable revenue opportunity for each resolution so kind of comparing the magnitude of the Tam available for badges on engage.

And edge thank.

Thank you.

Yes, it's hard to quantify it succinctly. So I think maybe a longer offline conversation I would tell you that the engage opportunity is quite large those deals tend to be very large software deals because theyre typically going house wide or hospital wide and once they make the decision to do these kind of clinical integration they want to stand.

Is it across the health system, and so those into being very very large software opportunities.

The ease subscription.

Subscription typically starts out in just the operating room environment, Although as I mentioned in the prepared remarks, we have started to see some extension into the.

And even in the med surge floors, and so those deals while still quite a bit smaller than a voice or an engaged deal can start to represent meaningful size revenue.

The edge business is more similar to our voice messaging businesses or if a customer decides to go in that direction and that deal size is going to be similar to a voice or messaging deals. So I think.

There's a tremendous amount of cross sell and up sell opportunity represented by each of them.

Thank you.

Thank you Ms toxin.

Just a reminder, please limit questions to one per participant.

MS. Stephanie Davis with SLA Bank. Please proceed.

Hey, guys Congrats on Macquarie and thanks for taking my question.

Was hoping to follow up on the supply chain questions. If possible just given some market commentary that the chip shortage could persist until the second half of next year in that context, how should we think about that eight to 10 million devices figure.

What it could mean for that sort of timeframe.

Yes, hi.

So yes, we do planning on our business you know year and a dance right. There are some components that are at 52 week lead times, our supply chain 100 manufacturers worked very closely with us to monitor that we're providing forecasts out to them well in advance and so even though Steve commented earlier on the inventory that we have.

On our books, if you sort of look at it throughout the entire supply chain with our contract manufacturers inventory to work in processes, and then orders that they placed add onto chip components, youre looking well out into the future.

As I mentioned earlier, and Steve mentioned as well I think we're feeling comfortable about where things are right. Now I think you are right. I think there is certainly a possibility that these supply chain issues could extend well into next year or even beyond.

But I think for us, it's just a matter of.

Doing good planning and make sure. We're staying ahead of it and then keeping close communication with our contract manufacturing partners.

So far we've done a really good job of that and Hasnt been an issue.

I guess following up on that as well one of your largest suppliers did have some commentary about passing through costs from the current supply chain debacle onto its clients is that something that youll be shielded from because you have this livestock of devices or is that something you've already kind of heard something.

Some color on conversations.

Yes, Stephanie it's a good question, we've been fortunate where we've seen some very very modest price increases on a few parts, but that's been offset by awesome price declines in other parts that we worked really hard to to to lower though of our costs. So I'd say our cost position for our badge is very similar to what it was a year ago.

About early our pricing discipline has resulted in actually our device margins increasing.

Pretty substantially year over year, and so we think we're in a great position from a cost position on our batches.

Okay.

Thank you. The next question is from Michael Polak with Baird. Please proceed.

Hey, good evening.

Understanding it's early and I don't think you typically do this but given all the momentum you're seeing in the business and the mix shift towards.

Longer term multiyear deals.

Curious if you hazard a comment on.

2022 revenue.

Any takeaways from your initial planning or.

Comfort with where the street may be which looks about 13% to 14%.

<unk>.

Sure Mike.

As you said, it's early to talk about 2022 guidance, but we do feel like the momentum is building for us and what we look at our key levers and drivers of the business, our bookings or backlog deferred revenue and we feel like our value proposition is resonating. So we do take a very disciplined approach.

Our guidance will take historical conversion rates and just as a reminder, this year is the top end of the guidance of 17%. We always aim to be at that are above last year. We grew 10%. So our growth is accelerating.

I think youre right, we do have enhanced visibility to 2022 and that's a few of the reasons are the large enterprise deals the Providence, the Cleveland clinics that take multiple quarters to deploy but also the longer term maintenance contracts, which is just really sticky solution for us and then he's an edge, which is a pure SaaS business.

So Q4 will be important for us will want to generate more bookings, we're really focused internally on finishing the year strong and we will give guidance on the next call.

Thank you. The last question is from Scott <unk> with Stephens. Please proceed.

They almost got my last name.

Congrats team on the quarter like everyone else said very impressive.

So I kind of wanted to drill away from devices and talk about your new smart based app approach.

Obviously.

In the early stages, but talk about the success youre going in kind of down market into the mid hospitals stream I think you had 80%.

Inherited 85 hospital systems with patient safety and you've expanded your offerings with the edge can you talk about.

What youre seeing in your early rollout of that how it's contributing to backlog and then I'll just put my follow up question in as part of this since it's a one question deal, but if we think about that.

Smart.

Phone application expansion.

As the mix of your business.

How does that contribute to the margins obviously gross margins should be favorably impacted from these smart based app versus devices. So just two part question there all in one thanks guys.

Yeah. Thanks, Scott so as it relates to edge, which is our more smartphone based cloud based solution.

We're really happy with the launch we launched it in July.

Our sales force is really excited about the new product in there and Theyre tool bag and they are having some really strong conversations with customers. It's too early for it to have had a meaningful impact either in terms of bookings or backlog or revenue, but I would say in terms of pipeline. We are encouraged by the reception that we've gotten so far and I think it's very consist.

With our strategy around offering customers a choice.

They can choose between on premise or cloud based solutions. They can choose between the wearable badges and.

Q3 2021 Vocera Communications Inc Earnings Call

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