U.S. Markets close in 2 hrs 59 mins

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

Thomson Reuters StreetEvents

Q2 2017 Vocera Communications Inc Earnings Call

San Jose Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Vocera Communications Inc earnings conference call or presentation Thursday, July 27, 2017 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brent D. Lang

Vocera Communications, Inc. - CEO, President and Director

* Justin R. Spencer

Vocera Communications, Inc. - CFO and EVP

* Sue Dooley

================================================================================

Conference Call Participants

================================================================================

* Charles Edward Haff

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

* 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 of Healthcare

* Nicholas Michael Jansen

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

* Robert Munnings

* Sean William Wieland

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen, and welcome to the Vocera Communications Q2 2017 Earnings Conference Call. My name is Mike, and I will be your coordinator for today. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Sue Dooley, Vocera's Director of Investor Relations. Kindly proceed, Ms. Dooley.

--------------------------------------------------------------------------------

Sue Dooley, [2]

--------------------------------------------------------------------------------

Thanks, Mike. Hello, everyone. Welcome to Vocera's conference call to discuss our second quarter earnings. 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 IR 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, I'd like to turn the call over to Brent.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Sue. Good afternoon, everyone. Thank you for joining us. On today's call, I'll start by summarizing the highlights from the quarter. Then I'll provide some more details on some key customer wins. I'll conclude my prepared remarks with some commentary about the market and the hospital spending environment, plus some new case studies before turning the call over to Justin for some more detail on the quarter.

Second quarter revenue was $38.5 million, up 23% over the same period last year. This was the fifth quarter in a row where we achieved revenue growth of over 20%. And our revenue visibility remains solid as we head into Q3. The business is growing nicely, particularly in the U.S. And we added some impressive customer names this quarter. Our platform, which now includes the Engage software that we added as a result of our recent acquisition, continues to have significant impact in the market with sizable new customer wins. The workflow capabilities Engage brings to our platform have become a meaningful differentiator for our solution and are helping us win new deals.

In Q2, we had significant new customer bookings, including large wins at Ohio Mental Health, Barnes-Jewish/Christian Hospital and Yuma Regional Medical Center. We had a big quarter with the VA and also captured a pivotal win at Northwestern University of Medicine.

Finally, sales to our installed base were really strong this quarter, with healthy expansions and a growing supply of business. This success continues to illustrate the value our customers see in our platform and highlights the tremendous growth opportunity we have within existing customers to continue to expand to new departments and new users.

Overall, our second quarter results reflect the market that is driving hospitals to become more efficient and patient-focused. The demand for our solutions is robust, as both new and existing customers seek unified solutions to address their communication and clinical workflow challenges. Our mission is to help hospitals achieve the quadruple aim of improving cost, quality, patient experience and staff resiliency. And Q2 takes us closer to delivering on our 2017 strategic initiatives.

Now let me dig a little deeper into some of the highlights from the second quarter, which showcased our broad market appeal, strong sales execution and integrated robust and highly differentiated offerings. One of the highlights of Q2 was a $2 million win at the Ohio Department of Mental Health. The customer will deploy our smartphone voice and messaging offering across 6 mental health hospitals. This win illustrates how compelling our solution can be even beyond the traditional acute care hospital environment and into the mental health space.

Q2 also produced a $1 million win at Barnes-Jewish/Christian Hospital as a core element of their campus renewal project. The deployment will include our communication solution running on Vivo smartphones and will feature several clinical integrations. We're also pleased to receive a $0.5 million booking from Northwestern University who selected our Engage software for their Lake Forest Hospital. We are delighted by this prominent endorsement, and we are hopeful Northwestern will continue to roll out our solutions across more facilities.

We were really gratified to see fresh progress with the VA, and we achieved an impressive quarter of new wins and expansions. We had new facility wins in Vermont and New York and saw a meaningful expansion at VAs across the country for our communication solutions. We also closed 4 new Engage customers within the VA who are adopting multiple workflows to improve patient safety and efficiency. We feel optimistic about our VA business in the second half of the year with a strong pipeline of deals that we're working on. Improved clinical communication, along with effective alarm management, are key initiatives with rising importance in the VA today.

As I said in the past, expansion within our existing customer base are a meaningful driver of our growth. And this quarter was no exception. Business with existing customers was particularly healthy, with expansions in supplies delivering robust results. And once again, we achieved a high renewal rate for our software maintenance and support contracts. Let me give you a couple of examples of success from our installed base this quarter.

In a $1 million expansion, Yuma Regional Medical Center selected Vocera for a house-wide deployment at its 400-bed hospital located in Arizona. Adventist Health System's Shady Grove Medical Center booked an $800,000 transaction where we will modernize one existing facility, while adding 2 new facilities and add a new integration with their Rauland 5 nurse call system.

In a strategic expansion of our relationship, University of North Carolina is adding Vocera Care Experience to their deployment of our voice, messaging and Engage software solutions. This $500,000 addition of our Care Experience cloud-based software is intended to create a better experience at UNC by reducing patient readmissions. With our solution, UNC expects to further differentiate itself from its peers and maximize reimbursements as a result of higher patient satisfaction.

In addition to our successful expansions, another highlight from Q2 was the progress of the deployment at our large enterprise customers. The continued focus we're placing on these large deployments and the professional services resources we invested in are paying off. At Franciscan Health, we have almost 13,000 users. And we are now live at 9 facilities with 4 more to go. At UNC, we're now live in 5 of 11 facilities. And at Presbyterian, we are live at 4 of 6 facilities.

MEDCOM is also proceeding well. We have recognized roughly 2/3 of the initial $14 million contract value. And MEDCOM is even planning to deploy Vocera badges to Cerner consultants for use during the deployment of their EHR at DoD facilities.

We hit the ground running at Houston Methodist, a large system win from last quarter. We're already live at 2 sites, including Houston Methodist's main hospital. Last quarter, in a $2.6 million deal, Houston Methodist bought our Collaboration Suite and Engage software to help optimize their EHR and achieve productivity enhancements. We are helping them standardize their clinical community on a single platform for communication and event management, and we are pleased with our early progress.

Now I'd like to talk for a moment from a market perspective. We know that the political landscape remains a topic of interest, and I'm sure all of you are closely monitoring health care policy and how it may impact hospital budgeting. We continue to listen carefully to industry sources as well as our customers about their budget priorities and spending levels. We have said in the past that there are some indications hospitals are being careful with certain discretionary spending. But so far, we continue to hear 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 continuing to move forward with their priorities. And some of these play right into our value proposition.

We continue to believe the increasing number of hospitals that have completed their EHR deployments are freeing up resources for other IT projects. Solutions that optimize the EHR and resolve 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 sets us apart. Our emphasis on addressing ROI-based spending initiatives directly addresses these pressures and helps accelerate our conversations with large health systems who increasingly view clinical communication and collaboration as a strategic priority, not just a nice to have.

In addition, we continue to see a trend towards more centralized decision-making. Health systems are looking to standardize their communication systems across departments and facilities and are seeking a unified solution to address these communication challenges.

Based on feedback from our sales organization, the level of attention health systems are placing on purchase decisions for communication solutions is increasing, and the number of RFPs is on the rise. The C Suite is more engaged than ever in the evaluation and motivation behind many of the opportunities we're seeing. And this means a receptive audience for an ROI-based approach to the marketplace. In this environment, our sales teams are executing well and are embracing our sales enablement tools and clinical assessments to help educate new customers about the value of our solutions.

A growing number of customers are planning to replace aging hardware, especially pagers. And that is leading them into the product evaluation process. This trend plays nicely into our hands, as we believe we are the clear market leader with the most complete unified solution for clinical communication and collaboration.

Additionally, with the presence of Siri and Alexa, there's a renaissance of voice solutions in the market. Customers are experiencing natural language processing in their personal lives and are expressing a desire to utilize voice user interfaces to reduce their workload in their professional lives. This plays to our long-standing voice leadership and highlights the robust, secure and integrated nature of our solution that is so crucial in the health care environment. Vocera is increasingly at the forefront of our industry, creating crucial solutions that materially benefit hospitals, patients and caregivers.

Now I'd like to highlight a few case studies that illustrate our value proposition. Several of our customers, including some of the VA, recently began using Vocera to improve the way they administer and manage pain medication. Typically, nurses rely on notebooks or even writing on their scrubs to report the administration of medication and create reminders to check on patient pain levels. With a new bidirectional EHR integration, our system now delivers timely reminders for patient follow-up and medication administration. These reminders alert team members to check on the patient and perform any needed follow-up. The receipt of this reminder is logged into the EHR without any incremental administrative burden and creates an efficient way to adhere to important hospital protocols for pain management and appropriate opioid use. Ultimately, the goal of this integration is to improve patient experience and satisfaction.

And at Parkland Hospital, Vocera is testing a critical finding notification system, which is another great illustration of the power of our solution. Critical findings in radiology are never good news, and diagnostic information needs to get to the care team ASAP. Typically, a critical finding is sent to a physician's EHR in basket and can be delayed there indefinitely. Using a bidirectional integration between Vocera and Apex, Parkland can now detect and send critical notifications directly to the care team members on their mobile devices and can persistently escalate the alert until it is delivered. The Vocera system records the delivery and read times directly into Apex, reducing the administrative load on the care team. This integration increases the efficiency of delivering critical findings and reduces the time from posting of a diagnostic result to the implementation of a therapy or care plan.

These are just 2 examples of the latest work we're doing to make a meaningful difference in the experience of patients, caregivers and hospitals.

In conclusion, I am confident in our ability to continue to drive double-digit revenue growth on the business, while delivering increasing profitability. I'm pleased with the continued progress in Q2 and our enhanced position in the market. We believe we're still in the early innings as we bring our solutions to an underserved market and expand our presence within existing customers.

Now I'd like to give Justin a chance to cover the financial details of Q2. Justin?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

Total revenue in Q2 grew 23% to $38.5 million, with double-digit growth in both our product and services segment. For the first half of the year, total revenue was $74.7 million, up 29% from last year. We entered the second quarter with a solid backlog in deferred revenue position, which helped fuel our revenue growth in Q2. Product revenue in the quarter increased 17% to nearly $21 million. Our device revenue grew 23% compared to last year and was driven broadly by the strength of expansions in supplies within our installed base as well as devices we shipped to new facilities, including several U.S. Army hospitals.

Software revenue was $5.8 million in Q2, up only slightly compared to last year, but this was more a function of timing as there were several software shipments last year associated with the initial rollouts of large customer deployments. As additional context for the first half, software revenue grew 29% and represented roughly 16% of our total revenue.

Services revenue in the quarter was $17.8 million, up 32% from last year. Our professional services revenue grew over 80% to $5.2 million as a result of a high volume of new customer implementations. We are on pace for a very strong year of growth for professional services in 2017, which are largely driven by software deployments and clinical integrations.

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 19%. This revenue is all recurring and was approximately 33% of our total revenue in Q2.

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 strong bookings in the second quarter we added to our backlog in Q2, positioning us well for the second half of the year.

Turning now to profitability. Our adjusted EBITDA turned positive on higher revenue, and we expect that trend to continue in the second half. We are well positioned to expand profitability on our current cost structure as revenue increases.

Now here are some more details. Non-GAAP gross margin in Q2 was 61%. Non-GAAP product margin was very healthy at nearly 72%. And services margin was roughly 49% due to a higher mix of professional services revenue. I mentioned earlier that professional services revenue grew substantially in Q2, representing nearly 14% of total revenue. Our services margin improved in Q2 versus Q1 on a higher revenue and utilization, and we expect this trend to continue in the second half. As a result, we expect our total gross margin to increase in the second half, consistent with what we've seen in prior years.

Non-GAAP operating expenses were $24 million or 62% of revenue. As mentioned on our last call, we expect operating expenses to be relatively flat for the remainder of the year, as we drive for higher operating leverage, and therefore, profit expansion as the year progresses.

Lastly, our balance sheet continues to be very strong with roughly $71 million in cash and short-term investments and no debt. We generated positive operating cash flow in the quarter, and we expect even more improvement in the second half as our profitability increases.

Now let me turn to guidance. We've had a great first half and are on track to deliver strong double-digit revenue growth for the full year. We added to our backlog in deferred revenue position, which gives us good visibility to seasonally higher revenue in the second half. As a result, we're raising our revenue guidance range to $157 million to $162 million and adjusted EBITDA to $6.5 million to $10.5 million. For the third quarter, we expect revenue to be $40 million to $42 million and adjusted EBITDA to be $2.8 million to $4.3 million.

In summary, we are very pleased with the financial results in Q2 and the momentum that we carry into the second half of the year. We continue to stay focused on strong execution in the second half, which will set us up for a solid 2018.

I'll now turn it back to Brent.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Justin. In summary, I am very pleased with the strong momentum Q2 brings to 2017, and I believe our success underscores the strategic importance customers are seeing in our products. 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 on 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.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question is from Rob Munnings from William Blair.

--------------------------------------------------------------------------------

Robert Munnings, [2]

--------------------------------------------------------------------------------

I know you guys talked a little bit about ROI case studies. I'm just curious, do you guys have the data on Engage to really present a wider, broader case study to customers? And then also, how many fully integrated reference accounts do you have live with the Engage and the core Vocera Collaboration Suite?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So in terms of the first part of question, even prior to the acquisition, the Extension Healthcare team had done work on measuring ROI and putting together specific use cases. And those use cases and ROI studies were what we used to train our sales force -- the combined sales force when we got ready to go out into the marketplace. So most of those from existing customers were done from legacy customers that existed prior to the integration of the 2 organizations. The combined solutions were present in about 40 customers even before the transaction was announced. And we've now added a number of additional joint facilities that have both the Engage software as well as the communications aspects of the product. And we're going to be doing more measurement and analysis in those other environments now that we've got the combined solution.

--------------------------------------------------------------------------------

Robert Munnings, [4]

--------------------------------------------------------------------------------

Okay, great. That's very helpful. And I know we've talked about this in the past. But are you guys starting to see any novel competitive responses now that you have an integrated platform with Engage?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

The competitive landscape has really not changed that much. We are, in general, competing against a collection of other vendors. Typically, when we respond to an RFP with our unified platform that's delivering voice and messaging and alarm and event management, we're competing against typically a collection of competitors where one might be responding with the text messaging portion, another might be responding with the alarm management and some of the clinical integration capability and a third might be responding with some of the voice capability. And so it's up to the customer then to integrate those various solutions into more of a unified offering. Obviously, most customers prefer to have a single solution, because it's easier to manage and easier to control the cost. And I think that's really playing to our advantage and is helping us win more and more of these deals. In fact, our win rate in Q2 was even higher than it has been historically. We continue to see that going up higher and higher as a result of the unified platform capability.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Your next question is from the line of Matt Hewitt from Craig-Hallum Capital.

--------------------------------------------------------------------------------

Charles Edward Haff, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [7]

--------------------------------------------------------------------------------

This is Charlie on for Matt. First off, it sounds like there has been a lot of upselling wins at existing customers, success with the VA. Implementations are going well. Can you talk a little bit about the pipeline for greenfield opportunities and what that looks like in the back half?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. We're really excited about the pipeline in the second half, both within the VA, which I've mentioned in the prepared remarks as well as in the broader commercial marketplace. We've got several large deals that we're looking at in the pipeline as well as more of the traditional size deals that are in the pipeline. So we're feeling really good about the second half pipeline. And the momentum within the sales organization is as high as I've heard it. Every quarter, I place calls out to all of the folks in our sales organization who have achieved 100% or higher of their quota during the quarter, and it's a great way for me to get a pulse on the sort of sentiments in the marketplace. And I think the energy and the excitement amongst that group is higher than I've ever heard it before.

--------------------------------------------------------------------------------

Charles Edward Haff, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [9]

--------------------------------------------------------------------------------

Okay. That's good to hear. For the wins that you did have this quarter, like Northwestern, for example, is the rationale from their perspective to implement what they have and then potentially if things go well, upsell from there. How much increasing in contract size is there from where you used to be on a departmental basis to go into the full hospital to where you are now and potentially cross-selling the Vocera and the Engage platform?

--------------------------------------------------------------------------------

Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [10]

--------------------------------------------------------------------------------

Yes. There continues to be a range of different approaches that different hospitals and health systems take to their deployment. Sometimes it's driven by the budget that's available in a particular fiscal year or in a particular quarter, and sometimes it's driven by a desire for them to experiment with the technology in one facility to make sure that they're comfortable with it before they roll it out to multiple facilities. So the deal size is definitely increasing. And we're seeing more of the house-wide or system-wide deals where people are starting upfront with a broader deployment. But we still do see customers that start with one product and cross-sell to other products, or start with one facility and then start to evaluate it before the rollout to the other facilities. Northwestern would definitely be in that category where they're initially starting with just the one facility and then the upsell or the expansion opportunity to the other facilities remains in the future. And I think, again, it just depends on kind of their budget time line and their comfort level with the solution that they're looking at.

--------------------------------------------------------------------------------

Charles Edward Haff, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

--------------------------------------------------------------------------------

Okay. That's great there. Can you talk a little bit about -- you mentioned the U.S. is very strong. Can you talk a little bit about how international was this quarter?

--------------------------------------------------------------------------------

Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [12]

--------------------------------------------------------------------------------

International was pretty much right in line with where it's been. It represented roughly 10% of revenues for the quarter, a little less than 10%. I still feel like that's an untapped opportunity for us. We feel like the growth opportunity is greater there than what we've tapped into. So it's held its own, but I think that the opportunity to accelerate growth in those regions is really good. And we're actually putting some increased focus in some of those regions. We actually are putting in a guy, who used to be one of our leading sales leaders here in the U.S., who's going to be moving to the U.K. and leading the U.K. sales efforts and really energizing that. We're making some other investments in sales and marketing in some of those other international regions and continue to believe that we're under-penetrated there and that ultimately, rather than that being sort of 10% of our business, we think it could easily be 20% to 25% of our business and would like to see higher growth as we look into future quarters.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Your next question is from the line of Nicholas Jansen from Raymond James.

--------------------------------------------------------------------------------

Nicholas Michael Jansen, Raymond James & Associates, Inc., Research Division - Analyst [14]

--------------------------------------------------------------------------------

Just -- my 2 questions will be one on the Extension cross-selling opportunity. I think you've provided some diligence here. But just wanted to get your sense of how big that could be. Where we are in the early innings of that? And any sort of sizing would be helpful as we think about the power of the combined model?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, it's still early on, Nick. And I think we don't have a numeric answer to your question. But I can tell you that the level of penetration is still relatively low. We're pleased to see some of the examples that occurred in Q1 and Q2. So I think there's good proof that it's a viable strategy and it's well received in the marketplace. But out of our over 1,000 customers, we've only got the Engage software installed in less than 50, probably around 50 of those customers. So there is a tremendous upsell opportunity there to drive Engage into the rest of the installed base. And I think that's what we're going to see moving forward. And then obviously, with the new deals where we're selling more of it as a combined entity, it's, I think, a really interesting opportunity. I'll just give you one anecdote that might be helpful. I was last week out at a large academic medical center that had been a Vocera customer in the past, and they were on the midst -- in the midst of issuing an RFP for looking at middleware solutions for clinical integration right about the time that we announced the acquisition. And they've now made a decision that they're going to be rolling out Engage for all new facilities in the future. And that's not even a purchase order or revenue reflective. That's just basically them saying, we want to have a unified solution from Vocera. And the fact that the Engage software is now part of the Vocera platform helped to tip the scales in our favor to be able to win that system-wide win. I think we're going to see more of that in the coming quarters and years.

--------------------------------------------------------------------------------

Nicholas Michael Jansen, Raymond James & Associates, Inc., Research Division - Analyst [16]

--------------------------------------------------------------------------------

And then maybe one for you, Justin. Maybe you went into this a little bit earlier, I've been juggling a couple of conference calls. But the software growth was a little bit less than what we were expecting. I know you had a very difficult comp, and the first half of the year number is still very strong. But can you just maybe help us think about that relative to what your assumptions are in the back half of the year, particularly when the Extension revenue kicks in more meaningfully?

--------------------------------------------------------------------------------

Justin R. Spencer, Vocera Communications, Inc. - CFO and EVP [17]

--------------------------------------------------------------------------------

Sure. Yes, we feel really good about -- overall about our software business. For the first half, we're at nearly 30% year-over-year. So Q2 software performance was more a function of timing. At this time last year, we had several software shipments in conjunction with our larger deployments. As we look forward to the second half of this year, we expect strong growth in that category and for it to represent an increasingly larger portion of our overall mix. So nothing to be concerned about. We're really in good shape. We've good, good visibility, good backlog related specifically to software and expect that growth to return in the back half.

--------------------------------------------------------------------------------

Nicholas Michael Jansen, Raymond James & Associates, Inc., Research Division - Analyst [18]

--------------------------------------------------------------------------------

Great. If I can squeeze one more in. If we kind of think about some of the larger deployments this year, the VA being a big one, how do we think about the comps for next year? I know it's way too early to think about 2018. But certainly, that's a large $9 million, $10 million contract that you're kind of cycling through. So just how do you think about your pipeline now in terms of some of those bigger opportunities as we think about fine-tuning models heading into next year?

--------------------------------------------------------------------------------

Justin R. Spencer, Vocera Communications, Inc. - CFO and EVP [19]

--------------------------------------------------------------------------------

One of the benefits of our overall revenue model is we're very diversified business. And even though we've been announcing over the last several quarters some of these larger deals, when you break them up into individual quarters and even into individual years, the revenue recognition pattern of them is broken up as well. So while some might think that there are big holes that are created when we recognize revenue on a large contract, and we now have something that's out in the future. The reality is that the maintenance revenue stream, the supplies revenue stream and the continued focus on continuing to add new customers and now with the cross-sell and expanded portfolio that we have, we're able to achieve strong revenue diversity. And so we have the opportunity to essentially have a shifting mix of drivers from one customer to the next as we move forward into 2018. Our focus this -- in the second half is going to be really continuing with our strong bookings performance so that we can continue to build our backlog and be able to be in a position to have good visibility into all of 2018.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

Your next question is from the line of Sean Wieland from Piper Jaffray.

--------------------------------------------------------------------------------

Sean William Wieland, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [21]

--------------------------------------------------------------------------------

And I'm sure I'm going to ask a question that's already been answered. I'm coming in cold here, quadruple booked this afternoon. When you initially gave the guidance for 2017, you said that there was just not a lot of cross-sell that you're baking into your guidance of cross-selling Vocera into the Extension customer base. Can you talk about any progress that's been made on that front?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, Sean, no problem. We've made good progress, and we're really in the early innings of the cross-sell opportunity. And one of the things that Brent touched on in his prepared remarks and some of his commentary is how we've been able to -- it's really opened up a new window or an expanded window of deal size and opportunity as we think about some of these house-wide deployments. So we really -- we continue to be really conservative in terms of our assumptions for guidance and things like that in terms of what that cross-sell opportunity is. But there's no doubt, we're seeing larger deal sizes as a result of now the opportunity to sell a much broader platform solution, not just at an individual or a multi-department sale, but more importantly, at a strategic house-wide sale.

--------------------------------------------------------------------------------

Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [23]

--------------------------------------------------------------------------------

I think the only thing I would add, Sean, is that if you look at it from a bookings versus revenue perspective, when we gave the original guidance, the expectation that we were going to see a relatively small amount of revenue from Engage during the first half, and that's remained accurate. The growth that we're seeing in the business has been primarily on the organic side for this first half. And we have seen some nice acceleration on the booking side and some of these cross-sell opportunities that I highlighted. But I don't think it would be accurate to say that, that's been the main driver of the beat or of the acceleration here.

--------------------------------------------------------------------------------

Sean William Wieland, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [24]

--------------------------------------------------------------------------------

Okay. And the flat software revenue, which I know has already been discussed, but -- is that -- does that have anything to do with you're not shipping prior versions of the software until you -- is there any pent-up demand going on there? Do you have the orders that you're just -- that's not recognizing revenue? Or is that not the case?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No, it's purely timing, Sean. We had -- at this time last year, we had several of these larger deployments where we shipped quite a bit of software. And so for the first half, we were at close to 30%, and we actually expect that growth to return, aided also by or enhanced, I should say, by the Engage revenue stream and the ramp in that revenue in the second half.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Your next question is from the line of Gene Mannheimer from Dougherty & Company.

--------------------------------------------------------------------------------

Eugene Mark Mannheimer, Dougherty & Company LLC, Research Division - Senior Research Analyst of Healthcare [27]

--------------------------------------------------------------------------------

I too joined the call late, so I apologize if I'm being redundant here. But have you touched on your long-term model at all and how you're tracking to that? Is that kind of a 2019 view at this point? And then my other question would be around that platform sale. How would you quantify it in terms of -- when you throw in badges and Collaboration Suite and care management and Engage, what's the magnitude of that wallet share versus badges alone? Is that a 50% incremental type of deal? How do we look at that?

--------------------------------------------------------------------------------

Justin R. Spencer, Vocera Communications, Inc. - CFO and EVP [28]

--------------------------------------------------------------------------------

In terms of our long-term model, we're really right on track with where we expected to be at this point and progressing well. As we look at, and we hit an important inflection. After the acquisition, we saw a dip in our profitability as a result of bringing on the expenses. And now the revenue is starting to ramp, and we expect more of that in the second half of this year. And so we're on the curve, if you will, towards our model. We still believe that the business has a ton of profit expansion potential and leverage as we grow our revenue. We don't feel like we have to add a significant amount of expenses to scale and to grow. So we feel good about that trajectory, and we're right on track with that. And in terms of -- we haven't said specifically what the time frame around that is, but we expect to make meaningful progress towards that long-term model here in the second half. In terms of your second question about expanded deal sizes associated with being able to sell a broader solution, there's no doubt that we're able to monetize a greater sale as a result of being able to sell the Collaboration Suite, the Care Rounds product, which is our cloud-based solution for the -- that addresses an improved patient experience as well as now Engage. And we're actually seeing deal sizes that are across the board. For example, at St. Elizabeth, which is the deal that we announced previously, that was a $2.7 million deal across, I believe, 3 hospitals, [holds] a $1 million deal; and Parkview, $3.5 million deal. So we're really seeing a pretty significant expansion or broadening of our overall solution and revenue opportunity as we upsell the broader solution. So more to come there. These deals tend to vary quite dramatically. It used to be that the average kind of typical entry point for us was $300,000 to $400,000. And now we're seeing house-wide sales or larger sales with a full -- with a more robust software platform offering that are approaching $1 million a hospital, if not more than that. So still more to come on that, but we're really encouraged by that change and that progress.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

Your next question is from the line of David Larsen from Leerink.

--------------------------------------------------------------------------------

David M. Larsen, Leerink Partners LLC, Research Division - MD, Healthcare Information Technology and Distribution [30]

--------------------------------------------------------------------------------

I think you mentioned that the VA pipeline looks good for the second half of the year. Can you provide any more color on that and remind us how many facilities you're in? And if you can touch on the DoD as well, that'd be great.

--------------------------------------------------------------------------------

Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [31]

--------------------------------------------------------------------------------

So on the VA pipeline, yes, so it's been interesting. If you think back over the last 1.5 years or so, the VA has been pretty quiet. In fact, most of the wins that we've had in the fed business over the last couple of years have been on the DoD side of things, as budgets have been really tight on the VA side. And so we were really pleased that we had the success in the VA that we saw in Q2. There's a number of additional deals that we're expecting to happen in Q3, which is more of a traditional quarter for when we would expect to see more of the large VA wins occurring. These are both expansions as well as new facilities that we're looking at. Just to update the numbers, based on the number of facilities, we are now in 72 of the VA facilities out of the 153 facilities. So we're approaching that halfway mark, and we see a lot of greenfield environment in front of us moving forward. On the DoD side, we also had some success there. We're now in 33 of the 64 DoD facilities. As we've mentioned in the past, our penetration has been highly concentrated in the Army on the DoD side of things. And so we've got some good work going on there, and we're continuing to try to make progress on the Navy and the Air Force branches of the military as well. But I think the overall fed business is looking really positive, and it's great to see the VA come back into the fold. And I think the fact that we now have the Engage piece as part of the platform is even more exciting for them. As I mentioned in the prepared remarks, we have 4 more customers that added Engage to their existing portfolio. And so that was great to see as well. I think they really appreciate the fact that they can get that unified solution from us. And it bodes well for us as we head into the rest of the year and next year.

--------------------------------------------------------------------------------

David M. Larsen, Leerink Partners LLC, Research Division - MD, Healthcare Information Technology and Distribution [32]

--------------------------------------------------------------------------------

Okay, that's great. And then you've got a pretty broad portfolio of products that you can provide to hospital customers. You've obviously got Care Rounds. You've got the wireless communication solution, the post-acute sort of care coordination product. What other types of assets do you think would perhaps, I don't know, fit into the portfolio well, that your hospital clients could benefit from in terms of like M&A activity. Any broad thoughts there?

--------------------------------------------------------------------------------

Brent D. Lang, Vocera Communications, Inc. - CEO, President and Director [33]

--------------------------------------------------------------------------------

Yes, Dave, I think I've got it in sort of 2 dimensions. In one dimension, it's pretty clear to me that we have the platform that we need to be able to be successful in the marketplace today. I don't see any glaring holes in our offering [in order to] -- our ability to respond to RFPs or to be able to win customer deals. And so that allows us to be pretty selective in the marketplace as we look at M&A. So investments that we would likely make would be areas that might allow us to expand our total available market or expand us into other parts of the market and other groups of users. And some of these might come in the form of integrations as opposed to full out acquisitions, because in some cases, that's easier or quicker to get into marketplace. But as it relates to clinical communication collaboration, we're feeling really good about the functionality that we have in the combined offering today. And while we continue to look at other deals, I don't view it in terms of gaps, I view it as pure incremental available market opportunities and ways to expand our offering.

--------------------------------------------------------------------------------

David M. Larsen, Leerink Partners LLC, Research Division - MD, Healthcare Information Technology and Distribution [34]

--------------------------------------------------------------------------------

Okay. And then just one last one from me. With a potential repeal and replace, any chatter amongst your hospital clients around a slowdown in purchasing activity?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

There really hasn't been. The general line has been business as usual. There have been some examples, as I mentioned in the prepared remarks, about discretionary spending, particularly on things like conferences where that's been held back or travel budgets have been under scrutiny. But at the end of the day, I think what hospitals are looking for is clarity. And hospitals spend every day focusing on saving patients' lives and delivering care, and frankly, don't have time to watch the gyrations in the Senate that can be a distraction for the rest of us, because they are focused on taking care of patients. And I think what they would appreciate is clarity that would allow them to move forward. But they have to deliver care either way. And whether they get reimbursed for it now or later or how that happens is somewhat of a secondary thought in their mind. As a result, they're trying to focus on what they can do to improve the level of efficiency, the level of care coordination, the level of patient satisfaction. And more and more, the focus that they have on resiliency amongst their staff members is a driving force behind a lot of the purchase decisions and certainly a driving force behind their interest in Vocera. There's a tremendous amount of concern around staff burnout, particularly amongst the nurses and doctors. And anything that they can do to try to ease the burden or reduce the hassle factor for those clinicians and allow them to deliver care more effectively, more efficiently and with more human dignity, I think, is going to rise to the top of their priority list. And I think that's really helping us to be a more strategic solution for them.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

(Operator Instructions) We have no further questions at this time. I will turn the call back over to the presenters.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. Thank you, everyone. I appreciate you taking the time with us today, and we look forward to seeing you out in the marketplace. Have a good evening.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

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