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Edited Transcript of VCRA earnings conference call or presentation 27-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Vocera Communications Inc Earnings Call

San Jose May 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Vocera Communications Inc earnings conference call or presentation Thursday, April 27, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brent D. Lang

Vocera Communications, Inc. - CEO, President and Director

* Justin R. Spencer

Vocera Communications, Inc. - CFO and EVP

* Sue Dooley

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Conference Call Participants

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* David M. Larsen

Leerink Partners LLC, Research Division - MD, Healthcare Information Technology and Distribution

* Eugene Mark Mannheimer

Dougherty & Company LLC, Research Division - Senior Research Analyst

* Matthew Gregory Hewitt

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Michael Joseph Ott

Oppenheimer & Co. Inc., Research Division - Associate

* Nicholas Michael Jansen

Raymond James & Associates, Inc., Research Division - Analyst

* Nina D. Deka

Piper Jaffray Companies, Research Division - Research Analyst

* Steven Paul Halper

Cantor Fitzgerald & Co., Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Vocera Communications Conference Call. My name is Kelly, and I'll be your coordinator for today. (Operator Instructions) Thank you. I would now like to turn the presentation over to your host for today's call, Sue Dooley, Vocera's Director of Investor Relations. Please proceed.

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Sue Dooley, [2]

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Thank you, Kelly. Hello, everyone. Welcome to Vocera's conference call to discuss our first quarter earnings. This is Sue Dooley. Joining me today are Vocera's CEO, Brent Lang; and Justin Spencer, our CFO. We distributed a press release detailing our quarterly results earlier this afternoon. The release is posted on our website at investors.vocera.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. This forward-looking information is subject to risks and uncertainties described in Vocera's 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, let me turn the call over to Brent.

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Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [3]

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Thanks, Sue. Good afternoon, everyone. Thank you for joining us. On today's call, I will start by summarizing the highlights from the quarter, then I'll provide more detail on some key customer wins. I will conclude my prepared remarks with some commentary about the market and hospital spending environment.

First quarter revenue was $36 million, up 36% over the same period last year. Revenue was also up sequentially over Q4 for the first time in many years. This was the fourth quarter in a row where we achieved revenue growth of over 20%, and our revenue visibility remains high as we head into Q2. Our Engage software had good success in the market with some marquee new customer wins. We completed the integration of the acquisition into our business and our unified sales team is armed with ROI case studies that they can apply during our clinical assessments with customers.

In Q1, we had significant new customer wins at Houston Methodist in Texas and St. Elizabeth in Illinois, demonstrating a large greenfield opportunity. We also received another order from MEDCOM, validating our success with the Army. Finally, our installed base produced healthy expansions in a growing supply of business. This success illustrates the value our customers see in our platform and highlights the tremendous growth opportunity we have within existing customers who continue to expand to new departments and new users.

Overall, our first quarter results reflects a market that is driving hospitals to become more efficient and patient-focused. The demand for our products is robust as both new and existing customers seek unified solutions to address their communications and clinical workflow challenges. Our mission is to help hospitals achieve the quadruple aim of improving cost, quality, patient experience and staff resiliency, and Q1 gives us a great start towards delivering on our 2017 strategic initiatives.

Now let me dig deeper into the some of the highlights from the first quarter which showcase strong sales execution and integration of the combined offering. One of the highlights of Q1 was a $2.6 million booking at Houston Methodist's health system. The customer purchased an enterprise-wide deployment of our Engage software, for clinical alerts and alarm management which will be used in conjunction with our collaboration suite software on MC40 smartphones. This deal illustrates how quickly we delivered an integrated solution to the market and brought this sizable win over the finish line in Q1. With this epic EHR deployment now in place, Houston Methodist will use our solution to help optimize their EHR and achieve productivity enhancements by standardizing their clinical community on a single platform for communication and event management.

We also had a $1.1 million win at St. Elizabeth Hospital in Belleville, Illinois, not to be confused with the previously discussed $1.2 million Q4 win at St. Elizabeth in Northern Kentucky. We are replacing in-building wireless phones with MC40 smartphones and Vocera badges and we'll be leveraging our Engage software across 5 clinical integrations. St. Elizabeth's commitment to patient safety drove a focused mobile communications strategy around alarm management and delivery. Falls prevention and patient response time improvements are among the operational priorities we will help them address.

As they move to a new facility, care team members will transition from an environment where they carry multiple devices across various platforms to our unified and secure mobile communication platform. As I mentioned, we were pleased to receive a nearly $1 million follow-on order from MEDCOM for a deployment at Moncrief Army Health Clinic. Our hands-free communication system is the main standard for all MEDCOM medical treatment facilities worldwide, and our deployment which started in Q1 is going really well.

Continuing in the federal theme, we had a good win at Charlie Norwood VA Medical Center in Augusta, Georgia. This medical center has 2 campuses that provide tertiary care in medicine, surgery, neurology, psychiatry, rehabilitation medicine and spinal cord injury. Our Engage software will be deployed at both facilities, encompassing 356 beds and multiple clinical workflows to improve patient experience and safety.

Our business with existing customers was particularly healthy this quarter, with expansions in supplies delivering robust results and software management support continuing to prove a very high renewal rate. One customer I'd like to feature today is Banner Health who has been a long-term Vocera customer. After a badge expansion order and a hardware refresh in Q1, Banner is now utilizing our solution across 14 sites, with over 20,000 users. We are pleased to see this kind of ongoing commitment from Banner for our solution.

Another highlight from Q1 was the ongoing success of the deployment at our large enterprise customers. The focus we are placing on these large accounts is paying off and I'd like to describe a couple of them this quarter.

During Q1, we went live with our Engage software at New York University Langone Medical Center. With 42 nursing units across 3 facilities and over 1,000 beds covered, there are very few facilities in the world using such an advanced and deep implementation of both middleware and event response technology. Workflows included Rauland nurse call, Philip's patient monitoring, AirStrip wave form and Epic treatment team integration for staff assignments. This go live was a great milestone for the company.

University of North Carolina REX Hospital also went live with our voice messaging and Engage software solutions. We now have almost 11,000 users at UNC in the Vocera system. This deployment demonstrates how rapidly we have brought a complete solution to market. Now I'd like to talk for a moment from a market perspective. We know that the question on everyone's mind remains the political landscape, health care policy and how this impacts hospital budgeting. We continue to listen carefully to industry sources as well as our customers about their budget priorities and spending levels. We've said in the past that there are some indications hospitals are being careful with discretionary spending but so far, we've heard it's generally business as usual for technology purchases.

In our experience, budget priorities have remained constant since the election. And while uncertainty around the ACA remains, we think hospitals are becoming used to this background noise and are moving forward with their priorities. We continue to believe the completed EHR deployment are freeing up resources for other IT priorities. Solutions that optimize the EHR and resolves workflow pain points are increasingly prioritized to meet the goals of efficiency, quality and staff and patient experience.

Our push to help hospitals achieve the quadruple aim and our emphasis on addressing ROI-based spending priorities directly addresses these pressures and helps in our conversations with large health systems.

On our last earnings call, I highlighted some of our strategic priorities for 2017, and I'm pleased with our execution and progress on those so far this year. We have completed the successful integration of our acquisition, unifying our brand, systems, organization and culture. The combined teams are out selling together and as you can see from our first quarter's results, they are winning and displacing competitive solutions. Our large customer deployments are moving forward on schedule and our ROI-based sales approach and utilization and clinical assessments to drive conversations with large IDNs and health systems is working well.

We are successfully selling an integrated solution into our installed base and we are acquiring new customers with our solution which is now comprised of even greater clinical workflow capability. The awareness of our solution in the market is also rising. At HIMSS this year, despite a reduction in overall event attendance, we experienced a 15% increase in booth traffic and a record level of lead generation activity. We are further expanding our leadership position as the #1 clinical communication and collaboration provider by delivering a unified software platform, simplified mobile apps and differentiated device of choice strategy.

I'm gratified by our continued progress in Q1 and our enhanced position in the market. Strong momentum in the business is continuing with strategic new customer bookings, successful large-scale deployments and high customer loyalty. We believe we are in the early innings as we bring our solutions to an underserved market.

Today, we're in roughly 1,100 U.S. hospitals which we believe represents an 18% market penetration. We see a large market opportunity to add new hospitals to that list while at the same time, we continue expanding the use of our solutions within our existing customer base. We're making good progress in the market and I am confident in our ability to continue to drive double-digit revenue growth in our business while delivering increasing profitability.

Now I'd like give our CFO, Justin Spencer, a chance to cover the financial details of Q1. Justin?

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Justin R. Spencer, Vocera Communications, Inc. - CFO and EVP [4]

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Thanks, Brent. Hello, everyone. Vocera's first quarter results represented a great start to our year, highlighted by strong revenue growth and profitability that was in line with our expectations.

Total revenue in Q1 grew 36% to $36.3 million, with double-digit growth in both our product and services segments. We entered the year with a strong backlog and deferred revenue position which helped fuel our revenue growth in Q1. The MEDCOM deployments are ahead of schedule and we saw some incremental revenue in Q1 from this faster time line.

While we had a great bookings quarter in Q1 for the Engage product line, the amount of revenue from our recent acquisition was small as we expected. We will begin to convert these Engage bookings to revenue in the second half of this year and they will fuel additional growth in 2018.

Product revenue in the quarter increased 45% to $20 million, with double-digit growth for both devices and software. Our device revenue grew 36% in Q1 and was driven primarily by the strength of expansion of supplies within our installed base as well as devices we shipped to new facilities, including several U.S. army hospitals.

Software revenue grew 74% in Q1 and represented over 16% of our total revenue. Software revenue growth was particularly high this quarter, driven by a high volume of new customer deployments. Software continues to be the fastest-growing part of our business. Services revenue in the quarter was $15.3 million, up 25% from last year.

Our professional services revenue grew over 56% to $4.4 million as a result of a high volume of new customer implementations that I just mentioned. We believe that we will see another strong year of growth for professional services in 2017. The other large portion of our services portfolio is software maintenance and support. With a renewal rate above 95% and several new deployments over the last year, our software maintenance and support revenue grew 17%. This revenue is all recurring and was approximately 33% of our total revenue.

The last comment I'll make related to our revenue is that we continue to have a healthy backlog in deferred revenue position. Based on the seasonality of our bookings, we tend to see a reduction in our backlog during the first quarter which occurred as expected. We carry a healthy backlog in deferred revenue position into Q2 with good revenue visibility.

Turning now to profitability. Our Q1 results were in line with our expectations. I mentioned on the last call that the added cost to the acquired business would reduce profitability in the first few quarters, but we expect improvement as the year progresses along with the ramp in revenue. Our gross margin and operating expenses came in as expected in Q1, and we believe we are well positioned to expand profitability on our current cost structure as revenue increases.

Now here is some more detail. Non-GAAP gross margin in Q1 was 61% as we expected. Product margin increased nearly 72% on the strength of both our device and software revenue. Services margin decreased to 47%, reflecting the full impact and fixed nature of the acquired services expenses. We added roughly 55 people in professional services and technical support last year from the acquired business which increases our overall capacity. So we see significant margin expansion opportunity later in 2017 and beyond as we ramp this revenue and we align the utilization of these resources with Vocera's model.

As I mentioned last time, we expect our gross margin percentage to be in the low 60s in Q2 and around 64% for the full year. Non-GAAP operating expenses were $23.4 million which now reflects a full quarter's worth of cost from the acquired business. We expect operating expenses to be relatively flat in comparison to Q1 through the rest of this year. We plan to maximize the utility of our combined workforce with higher operating leverage and therefore, profit expansion as the year progresses.

The integration of Extension Healthcare is complete and we are now focused on driving sales as one company with a broadened platform solution under the Vocera brand. We are excited about the talent we brought over, adding strength to our leadership bench and have seen very favorable retention thus far.

Our balance sheet continues to be very strong, with roughly $71 million in cash and short-term investments and no debt. We used cash in the quarter as expected and our operating cash flow will likely mirror the expected improvement in profitability over the next few quarters.

Now let me turn to guidance. We're off to a solid start in the year and on track to deliver strong revenue growth for the full year. We continue to have a healthy backlog in deferred revenue position and maintained good visibility to revenue. As has been our past practice at this time of the year, we reiterate our previously issued annual revenue guidance for 2017 of $154 million to $161 million and adjusted EBITDA of $5 million to $10 million. As an additional note, we have updated our estimates for stock compensation expense to align with the new accounting guidelines and for tax expense based on the treatment of certain acquisition-related deferred tax liabilities. These noncash changes only affect our net income and per share guidance. Netted against these noncash changes, we have also reduced our estimate for acquisition and restructuring expense as the integration has gone well and our deal-related costs are lower than we originally planned.

For the second quarter, we expect revenue to be between $36 million and $38 million and adjusted EBITDA to be between negative $1 million and positive $400,000.

In summary, we were very pleased with the financial results in the first quarter and the momentum we carry into Q2. We are now focused on strong execution in Q2 to set us up for a solid trajectory as we head into the second half of the year.

I'll now turn it back to Brent.

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Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [5]

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Thanks, Justin. In summary, I am pleased with the start that Q1 provides for 2017 and I believe our success underscores the strategic importance customers are seeing in our products. We believe the market need for our solutions is increasing and customers are recognizing the unique value of our solutions to their long-term operational success. But we think we're just getting started. With highly differentiated products and a large market opportunity in front of us, we're excited to build upon this momentum. We look forward to delivering powerful solutions that make a difference to the hospital's bottom line as well as to the quality of care and staff experience. We believe these are core values and should be prioritized in all environments.

I want to thank you for listening today. Operator, we are ready to open up the call for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Matt Hewitt from Craig-Hallum Capital.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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First up, I think you mentioned it sounds like there was some of the MEDCOM revenues that came in a little bit earlier than you had anticipated, yet you're maintaining obviously, your full year guidance. Are you looking at the pipeline, seeing the opportunities there and that's what gives you confidence that the back half of the year is going to remain as robust as maybe we had anticipated exiting last quarter?

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Justin R. Spencer, Vocera Communications, Inc. - CFO and EVP [3]

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Hi, Matt. Yes, the MEDCOM deal is progressing really well. It started in Q1 and we shift a significant amount of product, the software and the hardware. The implementation thus far is going well. We had assumed already in our annual guidance that the majority of that revenue would be in the first 2 to 3 quarters. So it's all already kind of fully baked into our annual guidance. What's happening is a little bit more revenue shifted into Q1, but we still expect to recognize a significant amount of revenue in next quarter of this -- or this next quarter Q2 and even a little bit in Q3. So no change really, to the full year estimates for us as a result of the MEDCOM deal. And to the second part of your question, we do have a healthy backlog in deferred revenue position and feel like we've got good visibility, not just to Q2 but to the full year at this point.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Okay. And then the service gross margin, a noticeable step down there. You just, I think, touched on it here briefly, talking about the additions to the service team. I'm just curious, will that bounce back here in the second quarter? Or is that going to be a progression as the year goes along? And then maybe an update, I know when you announced some of the largest deals 1 year, 1.5 years ago, recognizing the need and how critical those were to get those first implementations done well and on time, you had gone and hired a group to help with that. Is that party still involved? Or have you kind of taken it all over with internal resources?

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Justin R. Spencer, Vocera Communications, Inc. - CFO and EVP [5]

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So in terms of -- we began making a more significant investment in our professional services team in early 2016 and it's been a gradual evolution. But we feel really good about where our resources are, how many we have and the large deal implementations, including MEDCOM have gone really, really well. Our services margin in Q -- when we announced the transaction in October, we indicated that we would see some margin impact from -- in the services area as a result of bringing in just over 50 people from the Extension Healthcare organization in technical support and professional services. So the revenue from that part of the business is actually starting to ramp. And we expect the services margin to increase gradually over the next few quarters. And ideally, we expect over the next probably 3 to 4 quarters, to normalize the profitability, if you will, of that part of the business with what historically Vocera has been at. But it's going to take a few quarters to get there and it will be largely a function of the professional services and the maintenance revenues stream. Now we have a really healthy backlog and deferred revenue position related to services, so we do have visibility to the revenue increase in that part of the business over the next few quarters.

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Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [6]

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And in regard to the second part of the question in terms of outside resources, we maintain relationships with outside resources. But one of the nice things about the bench strength that we brought in with the acquisition is we now feel like we've got enough capacity inside the company to be able to address most of these service deployments. So we can ramp up those outside services or ramp them down pretty quickly. And right now, most of the work is being done with the internal resources as we sort of build up the revenue to match that increased capacity. At some point in the future, we could obviously turn that outside resources back on if necessary.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [7]

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Okay. Maybe one last one from me and I'll hop back in the queue. Given the success that you've had now for a couple of years and the growing importance of the communication platform within hospitals, have you seen any changes in the competitive landscape? Is there anything that you're looking at where you're seeing maybe an opportunity or potentially, maybe a little bit of a gap in your portfolio that one of your peers may be trying to exploit? And how quickly do you think, if that's the case, that you could develop that internally?

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Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [8]

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Yes. So I don't think there's been dramatic changes in the competitive landscape over the last 3 to 6 months. We, if anything, are continuing to increase our win rate in the marketplace. And with the addition of the Engage software as part of the offering and now delivering a more complete solution to the marketplace, we're not really feeling like there's major gaps in our offering. As a clinical communication and collaborations vendor, I think there's always an opportunity to expand the value proposition of what Vocera is giving to the marketplace. But from a competitive standpoint today, we feel like we have the most complete offering across this space and the win rate would reflect that success. So I think for us, as we look at M&A in the future, it would more likely be things that would help us expand our total available market or enable us to reach into other growing market opportunities.

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Operator [9]

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Your next question comes from Gene Mannheimer from Dougherty.

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Eugene Mark Mannheimer, Dougherty & Company LLC, Research Division - Senior Research Analyst [10]

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Can you remind us how much should Extension contribute to revenue in the quarter? You said it was small. I just wonder if you could quantify and reiterate the full year expectation from that acquired business.

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Justin R. Spencer, Vocera Communications, Inc. - CFO and EVP [11]

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Yes, Gene, it was relatively small. We're not breaking it out because we sell the solution now as really, an integrated solution with the rest of our software. However, we are very comfortable with the previously issued guidance of it contributing roughly $15 million of revenue in 2017. As Brent mentioned in his prepared remarks, we had a really solid beginning to the year with the Engage product line, several new deals, including a few large ones, and I really feel good about the momentum. So we have a good backlog, deferred revenue position with that part of the business specifically and the revenue is expected to be back-end weighted as we had planned all along. So we'll see more material revenue impact from that part of the business in the last -- in the second half of the year.

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Eugene Mark Mannheimer, Dougherty & Company LLC, Research Division - Senior Research Analyst [12]

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Okay, great. So fair to say that the strength in the Q was really driven predominantly by the core business pre-extension?

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Justin R. Spencer, Vocera Communications, Inc. - CFO and EVP [13]

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Correct.

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Eugene Mark Mannheimer, Dougherty & Company LLC, Research Division - Senior Research Analyst [14]

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Okay. And then, let me ask this, how much of the time in new bids is Extension being pitched? And what's the early reception? How often are customers opting for it?

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Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [15]

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Well, it's a great question, Gene. It's one of the things we're really trying to push the sales organization to do is to sell the complete platform. So I would say with new customer opportunities, we're trying to include the Engage software in almost every single one of those because we really believe that it's a core part of the overall solution offering. And I guess, the early results from Q1 would indicate that our success there has been quite high. Many of the large deals that we closed in Q1 were combinations of Vocera's core collaboration suite as well as the Engage software being sold together. And I think that that's really reassuring and encouraging as we look forward into the future quarters. Both the Houston Methodist deal as well as the St. Elizabeth deal had an Engage component to it. In fact, in the case of Houston Methodist, that was a deal that really had started on the Engage side and then expanded across the other products. So we're feeling really good about the capabilities of the combined platform. And our intent and what we're instructing the sales force to do is to try to sell that unified platform across all the new deals, as well as going back into the installed base to do the cross-sell piece, selling the communications capabilities into the Engage installed base and selling the Engage capability into our communications installed base.

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Operator [16]

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Your next question comes from Steve Halper from Cantor Fitzgerald.

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Steven Paul Halper, Cantor Fitzgerald & Co., Research Division - Analyst [17]

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Could you just reconcile for me the reduction in the non-GAAP loss per the non-GAAP EPS guidance for the year? You brought the range down by $0.05 on either ends, and you did mention the change in the accounting for stock compensation. Where exactly -- and the tax expense. Where does that hit exactly?

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Justin R. Spencer, Vocera Communications, Inc. - CFO and EVP [18]

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Sure. So to the non-GAAP EPS amount, the only change is the tax expense. And then to the -- so we've increased the tax provision expense by some amount and that's reflected in the table there in the back in our guidance. And then affecting the GAAP net income and EPS are 3 things: one is an improvement or a reduction in expense related to the acquisition cost; and then additional stock compensation expense; and the tax provision. So the tax provision affects both the GAAP and the non-GAAP and then the stock comp affects -- the stock comp and the acquisition-related expenses affect the GAAP.

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Steven Paul Halper, Cantor Fitzgerald & Co., Research Division - Analyst [19]

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So the $3.6 million of stock comp from the quarter, is that indicative of the next quarters, the next 3 quarters?

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Justin R. Spencer, Vocera Communications, Inc. - CFO and EVP [20]

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No, it's going to increase. So really, you should look at -- because the way the timing of our grants as we issue equity grants to our employees, including executives in the first and second quarter of the year. So the stock comp expense is going to be higher in the second half.

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Steven Paul Halper, Cantor Fitzgerald & Co., Research Division - Analyst [21]

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By what magnitude? It's hard for us to estimate that.

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Justin R. Spencer, Vocera Communications, Inc. - CFO and EVP [22]

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Yes. By some amount, I would just kind of gradually ramp it up from where it is today.

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Operator [23]

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Your next question comes from Nicholas Jansen from Raymond James.

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Nicholas Michael Jansen, Raymond James & Associates, Inc., Research Division - Analyst [24]

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Just a couple of quick ones from me. If you kind of look at the new customer wins, I guess, I'm just trying to get a better understand of are they all encompassing wins? Just wanted to kind of get your sense of when you are announcing some of these larger transactions, how do we think about the time line and the potential for further penetration within these bigger customers?

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Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [25]

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Hey, Nick. So it definitely varies from customer to customer. In some cases, they rolled out the products pretty much house-wide. In others, it's more still across a subset of them. I try to give as much color as I can during my descriptions of them. In the case of Houston Methodist, the engaged portion was rolled out pretty much house-wide. Some of the communication elements were more limited and I think there is some expansion opportunity there. The MEDCOM deal was obviously another hospital, sort of as an add on to the previous ones. I think there's more upside there because that one's more on the communication side and didn't include the Engage portion or any kind of connectivity or integration portions in there. So it really varies. I think the goal now with the sales force is try to sell the complete platform and to try to sell as wide as possible. Sometimes, it's a function of what available budgets are there to be spent now versus in the future. And some hospitals may start smaller and then expand from there. And we're still selling a large portion of our overall bookings and therefore, revenue is still coming off of the expansion part of our business and the supply part of our business. Obviously, the growth at the top end is coming from these larger deals. But we had a particularly good quarter within our installed base. I didn't spend much time talking about it in the script but just across the board with supply, with maintenance renewals, with expansions, the installed base sales team really did a nice job of executing in Q1 which can historically be a pretty quiet period. So we're really happy with the health of the installed base.

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Nicholas Michael Jansen, Raymond James & Associates, Inc., Research Division - Analyst [26]

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And can you just remind us how much of your sales force time is spent on going back to your existing customer base versus perhaps, doing some larger whale hunting from an enterprise perspective?

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Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [27]

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Yes, just as a reminder, we essentially have 2 parts to our sales group. Our customer relationship management team, which is focused on selling into the installed base; and then our U.S. healthcare team which is really focused on new customers. There's some expansion business within that portion of the business as well, but mostly they're focused on new customers. From a core carrier headcount, it's split roughly evenly between those 2 organizations. There's more dollars being produced out of the installed base because that incorporates the maintenance piece, the supply piece and expansions. But in terms of amount of resources applied to it, it's roughly split half-and-half between those 2 groups.

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Operator [28]

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Your next question comes from David Larsen from Leerink.

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David M. Larsen, Leerink Partners LLC, Research Division - MD, Healthcare Information Technology and Distribution [29]

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Can you talk a bit about your experience within the VA and also the DoD? And if the VA basically has an RFP in the market or RFI in the market for a new EMR solution. How could that impact you, if at all?

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Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [30]

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Hi, Dave. So we sell separately to the VA and DoD, It's a separate decision-making process. On the VA side, it's really a lot of decisions are driven at the division level which are these regional decision-making authorities. On the DoD side, it's more based on the branches of the military, whether it's Army, Navy or Air Force. The deal that we closed in Q1 on the DoD side was another army hospital. So it was somewhat of an extension of the MEDCOM transaction that we had in the past. On the VA side, the VA win was actually an Engage win. As we mentioned at the time of the acquisition, Extension Healthcare had substantial amounts of success in the VA prior to the combination with Vocera, and this deal in Q1 was an example of that. In terms of the impact of the RFP on their EHR side, we haven't seen any impact from that in the selling process. The one thing that we've heard is that there's been a commitment to interoperability. Part of that process is that they are committed to interoperating with Vocera, and that we're embedded enough in those organizations at this point that they view us as a strategic part of their overall operational workflows. And so I think that any EHR decision is going to be dependent on being interoperable with the work that we're doing.

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David M. Larsen, Leerink Partners LLC, Research Division - MD, Healthcare Information Technology and Distribution [31]

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Okay, great. And in terms of the American Health Care Act, if things heat up, what impact would that have on your base? And are you having any discussions with your clients around that? And are there any delays you're potentially seeing or not? And I'm sorry, I hopped on the call a little bit late, so if you already talked about that, sorry about that.

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Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [32]

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Yes. That's okay. I did talk about quite a bit in early part of the script. But the bottom line is that we're really not seeing any dramatic shift. It's basically business as usual for technology purchases. Clearly, there's a lot of noise and there's a lot of kind of wait and see what's going to happen. But from a policy perspective and from a budget perspective, what we're seeing is that hospitals committed to their technology spending priorities in most cases before the election, and they're sticking to those. And so we haven't seen delays or any substantial impact in terms of spending on our product line as a result of the uncertainty. And more importantly, I think we talked about this before, but the focus of what we're selling in the marketplace, we really believe is policy independent. Our focus on the quadruple aim, focusing on cost, quality, patient experience and staff resiliency is largely independent of what happens with the insurance markets or any of these other dynamic shifts. Hospitals know that they need to improve their cost structure. They know that they need to focus on quality of outcomes and patient experience. And the piece that I think Vocera is really uniquely owning is this whole area of resiliency and staff experience. There's been a lot of discussion recently about burnout amongst nurses and doctors and the negative impact that technology has had on that, particularly the electronic health record. And what we're hearing more and more is organizations that are trying to optimize their existing EHR deployment by utilizing Vocera to sort of streamline some of the hassles and complications that has resulted as a result of that EHR deployment. So they're looking at us as a way of streamlining communication and improving those elements of the quadruple aim.

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Operator [33]

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Your next question comes from Nina Deka from Piper Jaffray.

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Nina D. Deka, Piper Jaffray Companies, Research Division - Research Analyst [34]

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Can you describe what type of competitive advantage you have, if any, within your implementation capabilities in terms of reducing the burden among your customers' IT staff? And how would you say that this advantage has changed from where it was 3 years ago?

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Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [35]

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That's a great question. I think I would point to 2 areas. Number one, we just have more experience. With 1,400 hospitals using the Vocera system today, we've got a team of professional services people who have a tremendous amount of experience in these hospital environments, running into the challenges, whether it be on the Wi-Fi side or whether it's with specific clinical integrations. So we've gone way up the learning curve on that and we have the scalability to respond to the larger deployments because of the size of the professional services organization. I would say that the biggest thing that's changed with the acquisition is that now, we can go in as a unified vendor and deliver the complete end to end solutions. So we're not having to coordinate with multiple vendors at the customer side. Customers typically don't like to have to coordinate with multiple vendors. And I think having the complete solution under one roof is certainly simplifying that aspect of it. So I think those would be the 2 things that I would point to. And on the product side, obviously, the breadth of the solution is really unmatched in the marketplace. And then the services that kind of wraps around that has to be able to handle all those different components to it. And I guess, the final thing I would point to is we have a very strong focus of balancing both technical and clinical resources. We've made a fairly substantial investment in not just having technical people within professional services who understand how to configure and deploy the software and configure the wireless networks or monitor the wireless quality, but also on the clinical workflow side. And with the clinical resources, these are people who are oftentimes trained as nurses and have worked in hospital environments. They speak the language. They understand what it means to do some of these clinical integrations, what some of the downsides of alarm fatigue might result in. And as a result, can sit down and really act as a partner with the customer as we work through the deployment and the training and the rollout of these systems, because they're working having direct personal experience of having worked in these environments.

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Nina D. Deka, Piper Jaffray Companies, Research Division - Research Analyst [36]

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Great. And just one follow-up. If you could describe how the Banner relationship has evolved over time. How long were they a partner and what were they initially signed in the very beginning?

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Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [37]

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The Banner relationship is well over 10 years old. We probably sold our first Banner hospital back in the 2005, 2006 time frame. They've been a very loyal customer to us. They started out with just 1 hospital and over time, have grown to adding multiple departments in that hospital and then adding multiple hospitals on that system. And so now, most of the Banner facilities are using the Vocera capability. And it's a good illustration of the recurring nature of our business because obviously, there's maintenance renewals associated with that. There's the increases in the size of the licenses as they add new users. And then there's the refresh aspect of the badges and batteries that come in on a regular basis as they upgrade to the latest and greatest version. We take tremendous amount of pride in our customer loyalty and customer satisfaction and maintain those strong relationships, and it certainly pays off with customers like Banner who continue to see great promise in their utilization of Vocera over the years.

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Operator [38]

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(Operator Instructions) Your next question comes from Mike Ott from Oppenheimer.

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Michael Joseph Ott, Oppenheimer & Co. Inc., Research Division - Associate [39]

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Seems like there's been several quarters of healthy expansion. Just wondering if there's anything in particular driving that, possible M&A, aging devices? And do you see it continuing?

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Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [40]

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I think the thing that I would point to is really the market dynamics have shifted to be much more favorable towards our solutions. That's coming out of an era where there was a tremendous amount of focus on the electronic health record rollout, where IT resources and dollars were very focused on that deployment. And now that that's largely behind us for most hospitals, they're really looking at what are their other spending priorities and IT priorities and more importantly, how can they improve the utilization of their EHR and reduce some of the hassle factor. I think in parallel to that, we have executed more effectively over the last couple of years. On the sales side, Paul Johnson has done a great job of building a sales organization that's really focused on enterprise selling and consultative approach, working with customers on understanding the value of our platform and selling higher in the organization at the C-suite which has resulted in larger deals. And on the product side, we've really moved from being viewed as a point product around voice communication to really being viewed as a complete solution. The platform scalability, the security, the functionality, the ability to have a choice of devices running off of that platform and the integration functionality and clinical integration capabilities are making the product and frankly, making the company be viewed very differently from the marketplace. And I think it's really the combination of an improvement in the market dynamics and then the execution that we've had on both the sales and marketing as well as on the product side that's really helped drive the growth.

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Michael Joseph Ott, Oppenheimer & Co. Inc., Research Division - Associate [41]

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All right. And then could you give us an update as well on the non-healthcare vertical?

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Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [42]

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Sure. Non-healthcare, we view non-healthcare pretty opportunistically. We don't make a lot of proactive investments in non-healthcare, largely because we feel like the value proposition in health care is so strong. We have a small team of people that's out calling on a couple of limited markets in hospitality and nuclear and some of these other verticals. We didn't have any standout wins in Q1 in that space but we -- if you look at the announcements over the last couple of quarters, we've continued to add some nice properties in the Four Seasons and several nuclear power plants that closed last quarter. So it's an incremental piece of our business. It's not something that we're banking on as being a major growth driver, but it's always nice to have that incremental business.

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Operator [43]

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There are no further questions at this time. I will now turn the call over to Mr. Brent Lang for closing remarks.

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Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [44]

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Okay. Thanks, everybody, for dialing in today. I really appreciate your time. As we said, we're happy with how we got things started for the beginning of the year, and we're looking forward to a strong remainder of the year and look forward to chatting with you on a go-forward basis. Thanks a lot.

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Operator [45]

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This concludes today's conference call. You may now disconnect.