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Vocera Communications, Inc. (NYSE:VCRA)

Q4 2012 Earnings Conference Call

February 27, 2013 17:00 ET

Executives

Jay Spitzen - General Counsel

Bob Zollars - Chairman and Chief Executive Officer

Bill Zerella - Chief Financial Officer

Brent Lang - President and Chief Operating Officer

Analysts

Ryan Daniels - William Blair

Sean Wieland - Piper Jaffray

Lisa Gill - JPMorgan

Jamie Stockton - Wells Fargo

David Larsen - Leerink Swann

Eric Coldwell - Robert W. Baird

Operator

Good day, ladies and gentlemen, and welcome to Vocera’s Fourth Quarter and Full Year 2012 Conference Call. My name is Patrick and I will be your coordinator for today. At this time, all participants are in listen-only mode. Later, we’ll conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Jay Spitzen, General Counsel. Please proceed sir.

Jay Spitzen

Good afternoon everyone. I am Jay Spitzen, Vocera’s General Counsel. Welcome to the Vocera Communications’ 2012 fourth quarter conference call. A press release detailing Vocera’s fourth quarter results were distributed today at about 1:15 PM Pacific Time and is available on our website at www.vocera.com. This conference call is being webcast live on the Investor Relations page of our website, where it will be archived on the Events and Presentations page.

In this conference call, we will be referencing both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in our earnings release which as I mentioned is available on our website. This conference call will contain forward-looking information including statements regarding Vocera’s operating results and market opportunities for our solution. These forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from our current expectation. These risks and uncertainties are described in Vocera’s filings with the Securities and Exchange Commission.

With that said, I would now like to turn the call over to our Chairman and Chief Executive Officer, Bob Zollars. Bob?

Bob Zollars

Thanks, Jay. Good afternoon everyone. Well, thanks for joining the call today to discuss both our fourth quarter and full year 2012 results. Joining me on the call today are Bill Zerella, our Chief Financial Officer and Brent Lang, our President and Chief Operating Officer. Bill and I both have some prepared remarks and then Brent will join us for questions at the end of the call.

We intend to cover a lot of ground today. So, let’s jump right into the fourth quarter results. During the quarter, we generated revenue of $27 million, adjusted EBITDA of $3.2 million, and non-GAAP EPS of $0.10. Consistent with our prior quarters this year, our margins exceeded our expectations and we realized additional OpEx leverage, which provided the upside to the earnings per share number. As we look deeper into the fourth quarter, there are several positive factors that impacted our numbers and one lingering challenge. On the positive side, we saw nice growth from our voice business with strong new customer acquisition in the fourth quarter.

Additionally, we saw significant expansions within our existing installed base, which continued the strength we saw in Q3. We signed our first national level contracts with four major health systems, Ascension Health, Catholic Health Initiatives, Dignity Health, and the Cleveland Clinic. These systems collectively operate 228 acute care hospital locations with over 48,000 beds and over 300,000 employees. Ascension Health in fact is the largest non-profit healthcare system in the country. We currently have Vocera deployments in 39 of these facilities at varying levels of penetration, but estimates that our overall user penetration across these four chains is under 10%. Lastly, our new patient discharge solution called Good to Go picked up 11 new hospital customers since its launch reflecting a growing focus by hospitals on reducing readmission.

In terms of challenges, government orders have continued to slip. As we mentioned on our last call, government hospital orders that we expected in Q3 got pushed out. We were able to close a couple of those deals in Q4, but the majority of these orders have slipped into 2013. The government has slowed its funding due to debt ceiling and sequestration issues. But despite the contract delays, we still expect to close these deals and believe that delay is a macro funding issue. Our pipeline in the government remains very strong, especially with our certifications with both the VA and DOD. And because the government buys big, it only takes a couple of orders to be completed or deferred to impact our total revenue on one way or the other at our current size.

Turning to the full year 2012 results, we had a very good year. Total revenue for 2012 was $111 million, in line with the full year guidance of $100 million to $102 million we gave since going public and reiterated last quarter. Adjusted EBITDA was an impressive $11.9 million well ahead of our initial guidance of $4 million to $5 million demonstrating the earnings power of our model. Non-GAAP earning per share for the full year was $0.38, again well ahead of our initial guidance. During the IPO roadshow, we committed to providing bookings on an annual basis. And while Bill discussed backlog and revenue visibility coming into 2013, I wanted to touch on bookings and provide some perspective on our bookings performance.

Booking were $101 million for 2012 compared to $90 million in 2011 representing about a 12% year-over-year increase. And while we are disappointed with that bookings growth rate, it’s important to understand the underlying trends behind the different components of our business. Bookings for our voice solution in the U.S. healthcare market excluding government grew by 20%, which is actually an acceleration in growth versus 2011 growth of 17%. This segment represents over 75% of our total business. Even better new customer bookings for voice in the U.S. market excluding government grew 27%, which puts us in a great position to drive expansion revenue in 2013. The U.S. government bookings, however, declined 21% from the prior year due to contract delays.

International bookings grew marginally in 2012 due to smaller expansions in Canada and Australia, New Zealand coming off very strong growth in 2011. While our overall bookings growth rate was below our revenue growth rate, our U.S. healthcare business, excluding government is very healthy and performing well. And we expect government Canada and Australia and New Zealand growth rates to bounce back this year in 2013.

As with our previous calls I wanted to provide an update on each of our five growth drivers and then turn towards 2013 and beyond. Our first growth strategy is adding new hospitals. And as of year end 2012, we had a total of 876 healthcare customers that have deployed at least one Vocera solution. We added 75 new healthcare customers during the year including 50 new U.S. hospitals and 11 international hospitals. This brings our total number of U.S. hospital customers to 716.

While we are happy to be growing our installed base and welcome these new hospitals to the Vocera family, frankly I think we can do much better on this metric in 2013. And here is how we plan to do it? We are in the process of increasing the size of the healthcare sales force from 54 to 65 quota carriers and have all the three in place as of today. We have bifurcated the sales roles between those that focus on new account growth and others managed in the installed base, a traditional hunter/farmer model if you will. And we are finally at a size where we have reps fully focused on just adding new hospitals.

We have replaced several underperforming reps with new hires, who have great track record and we have invested in selling of the national account level with VP level resources calling on large health system organization. These investments have already paid big dividends with our four new strategic account contracts I described earlier, all of which positioned us well for new customer acquisitions and expansion within these health systems in 2013.

Our second growth driver is further penetrating our installed base. We did well on this growth priority in 2012 as our customers continue to involve with their dollars and expand their deployment. As a result, our expansion of supplies bookings grew 27%. Additionally in our most recent customer survey over 70% of our customers indicated plans to expand their Vocera footprint over the next year. We continue to remain confident in this pillar, our growth for 2013, because we now have a dedicated team of account managers focused on existing customer satisfaction and expansion plan.

We estimate that one-third of our installed base customers have begun their initial migration to the B3000 and it’s that upgrade opportunity is very meaningful for us and should accelerate. The old B2000 will have end of life of June 30th of this year with the exception of our government customers who continue to buy the B2000 until our B3000 gets certifying. We are also happy to report that about 67% of our total installed base of customers, and more importantly, 92% of our installed base of large health system customers have now upgraded their software to the most recent version necessary for the B3000. Our new evergreen leasing program introduced in mid 2012 was allowing customers with tight capital constraints to move forward with their B3000 upgrade. We are pleased to report that 11 customers took advantage of this program since its launch and with a greater number of prior generation badges reaching the end of their useful life in 2013 were positioned for strong growth and upgrade.

And finally, the new national account agreements that we just entered into should not only help our new account growth, which would also make it easier for hospitals in these systems to expand. Our third growth initiative is to develop and acquire new products cross-selling to the installed base. On this third growth initiative, I will describe 2012 is a year of learning. Our non-voice lines currently represent less than 10% of our revenue, but have great promise for future growth.

In 2012, we redirected our investments and have set in place a number of initiatives that should position us well for 2013 and beyond. As I mentioned earlier, our new discharge solution, Good to Go, picked up 11 new hospital customers since its recent introduction. And in fact, this product offering recently helped one of our customers’ win the 2013 Robert Wood Johnson Foundation transitions the Better Care award. Good to Go was designed to help our hospital customers manage the discharge process and avoid readmissions in the severe reimbursement penalties associated with those readmission. It’s also important to note that of these 11 hospitals, 7 were existing Vocera customers. We have demonstrated some good cross-selling success in those accounts.

Our secured messaging solution was also growing nicely and we are seeing many used cases for this product in our existing customer base. We added 17 new messaging customers, 14 of which were sales into our existing voice customer base. In one example, emergency department trauma alerts are now sent using our messaging solution to notify surgeons on their smartphones of incoming trauma patients who need immediate surgery, while those same alerts are sent to the OR support staff on the Vocera badges. It’s a great example of integrated workflow between our voice and messaging product.

In another example, our product is used to send messages from Doctors Answering Services to their smartphone and for sending code alerts through response names. As we train our larger sales force and integrate it with our voice solution, we see this is a must have for our customers. We also have a number of development activities underway. And as Bill will mention later, we have increased our R&D spending to accelerate development of future product.

And lastly, while we took a hard look at a handful of M&A opportunities, we didn’t pull the trigger on anything in 2012. With plenty of cash in the bank, we continue to look for products and technologies it would be a sound strategic fit, financially accretive, and offer great opportunity to cross-sell into our installed base.

Let’s turn to our fourth growth strategy, international expansion. In 2012, our international business which today represents a little less than 10% of our total revenue generated mixed results. Revenue grew 80% as Europe, Canada, and Australia, New Zealand, all performed especially well. However, international bookings in 2012 were a mixed bag with Europe seeing continued strong growth, but Canada and Australia, New Zealand experiencing slower booking.

Looking forward, we expect 2013 to be a better bookings growth here across our international regions for the following reasons. First, we added 7 new health system customers in Canada in 2012, which we expect will drive expansion growth in the coming year. We have doubled our sales teams in Australia, New Zealand, and Canada and expanded our team in the UK. We expect initial revenues coming from France during 2013 as we are now live in a pilot, in a large emergency room in Paris, and we are also laying the ground work in Brazil and Germany to drive further growth in the 2014 and beyond.

Our last priority in growth is expanding in non-healthcare. We established the mobility business unit in the fall of 2012, which was dedicated to the non-healthcare market. We have funded an initial investment of five quota carriers, all of them have now been hired were focused on the hospitality, power generation, and retail market together representing a very large addressable market opportunity. While they have only been working on this for three months or so and we are just finishing building out the team, we have a significant amount of activity underway.

In the last 90 days, we added high-end hotels in Chicago and Abu Dhabi as well as an initial order from a nuclear power plant owned by Exelon Corporation, which operates the largest fleet of nuclear power plants in the nation. We look forward to updating you on this team’s progress in the coming months, but we are really excited about the opportunity and our progress thus far. I hope that gives you a sense of the business and where we are across our five growth initiatives. 2012 was a solid year and we have plans in place to do even better this year in 2013. But looking forward, we want to reiterate our commitment to long-term growth of 25% on the top line. We are fortunate to have a very large market opportunity, a unique solution, a healthy and growing installed base, and numerous investment initiatives underway as I just described. That said, with the uncertainty of the government business in the short-term, you will note the guidance that Bill gives in a few minutes will provide a slightly broader range than we usually would.

As we progressed through the year, we planned to tighten that range as we deliver on our results. Before I turn the call over to Bill, I want to announce a couple of important organizational updates for the company. As of June 1st, I am going to assume the role of Executive Chairman and Brent Lang will succeed me as CEO. June 1st will be Brent’s 12th anniversary with the company having spent the last six years as President and Chief Operating Officer. Brent and I have worked closely together for the last several years, during which time he has proven to be an accomplished leader with an extraordinary capacity to act most decisively and strategically in the company’s best interest. And bringing the entire operations of the company under Brent’s leadership will help us deliver against our 2013 objective. This move will also free me up focus on strategic imperatives that will help the company grow and reach its full potential.

Brent, Bill, and I will continue to work together as a team to help maximize shareholder value and we are very confident that Vocera is extremely well-positioned for continued growth and success. I am also happy to announce the appointment of Sandra Miley as our new Vice President of Corporate Marketing. Sandra brings a great track record of developing compelling brands and driving sales growth for numerous successful hi-tech companies, including Adobe, Brocade, Cisco, Juniper, and Nokia. She will be focused on building the Vocera brand and creating customer interest in our solutions help fuel our growth.

So, with that, let me turn the call over to Bill Zerella, our Chief Financial Officer will take it from here. Bill?

Bill Zerella

Thank you, Bob, and good afternoon everyone. I would like to spend my time detailing our fourth quarter results in our 2013 outlook. Revenue in the fourth quarter was $27 million, an increase of 24% compared to the fourth quarter of 2011. Revenue in the quarter was comprised of product revenue of $17.4 million and service revenue of $9.6 million. Product revenue increased 27% over the fourth quarter of 2011 and was driven by continued strength in our voice communication solutions, including sales of our new B3000 badge and our service software.

The B3000 represented 80% of total bad shipments in the quarter right on track. Product revenue in the quarter consisted of $4.5 million from software sales and $12.9 million of device sales. This strength was driven by an 11.3% increase in bad shipments during the quarter versus the third quarter of this year. This demand was the result of strong expansions in our installed base combined with new customer deployment.

Service revenue increased 20% compared to the fourth quarter of 2011. Service revenue in the quarter was comprised of $7.1 million of software maintenance and $2.5 million of professional services. We generated strong year-on-year growth in maintenance and extended warranty revenues due to an expanding installed base of customers.

As I discussed, gross margins and the line items on the income statement, please note that they are non-GAAP figures and have been adjusted to exclude stock compensation and amortization of acquired intangibles. The reconciliation of GAAP to non-GAAP results can be found in our press release, which is available on our website. The fourth quarter represents our second consecutive quarter, where gross margins were above 66%.

Specifically, our overall gross margins were 66.3% in the quarter, a decrease of 10 basis points from Q3 of this year and an increase of 710 basis points compared to the year ago period driving our high gross margin with continued improvement in our product gross margin, which reached an all-time high of 69.8% in the quarter. This represents an increase of 10 basis points from Q3 and an increase of 920 basis points compared to the year ago period. The continued strength in product gross margin was driven by a favorable software mix, a further improvement in our device gross margin due to lower unit cost, and a $280,000 benefit associated with another reduction in our warranty reserves. This reduction was due to lower warranty return rate on our B3000 badge, which continues to exceed our expectations in terms of durability.

Services gross margin was 60% in the quarter, a decrease of 20 basis points from Q3 and an increase of 320 basis points compared to the year ago period. The year-over-year increase in service margins is primarily attributable to improved software maintenance margins as a result of greater scale efficiencies. R&D expenses in the quarter of $3.2 million increased 39% year-over-year, a reflection of our focus on funding new development activities that will drive future growth.

As a percent of revenue, R&D increased to 11.9% of revenue in the fourth quarter of 2012 from 10.6% in the fourth quarter of 2011. R&D spending increased 11% sequentially as a result of increased personnel and non-headcount cost, which we discussed in our previous earnings call. Sales and marketing expenses in the fourth quarter increased 21% year-over-year to $8.7 million. As a percentage of revenue, sales and marketing decreased to 32.3% in the fourth quarter of 2012 down from 33.1% in the fourth quarter of 2011, but still represents the highest quarterly percentage of 2012 as many of our reps came on board.

Our GAAP net income for Q4 was $811,000 or $0.03 per diluted share. Our non-GAAP net income for Q4 was $2.6 million or $0.10 per diluted share. Our non-GAAP net income excludes $1.6 million of stock-based compensation and $218,000 of amortization of intangible. A cumulative impact of the adjustments totaled $1.8 million or $0.07 per share. Our non-GAAP adjusted EBITDA of $3.2 million for the quarter compares to $1.2 million in the fourth quarter of 2011. This equates the non-GAAP adjusted EBITDA margins of 12% in this quarter compared to 14% in the third quarter and 5% a year ago. Our non-GAAP adjusted EBITDA declined sequentially due to the ramping of the sales organization in Q4 to support our 2013 revenue growth and higher engineering spend and support of new development activities both benefited on a year-over-year basis from strong revenue growth, higher gross margins, and operating expense leverage.

Turning to the balance sheet, as of the end of the fourth quarter, we had $127.5 million in cash and short-term investments and no debt. Cash flow from operating activities in the fourth quarter was $6.5 million. Total deferred revenue was $28.4 million at December 31, 2012, an increase of $2.9 million or 11.4% sequentially and 26% year-over-year. Additionally, the deferred revenue element associated with leases that we have entered into with our customers is recorded in other liabilities on our balance sheet under GAAP accounting. This liability has similar attributes of deferred revenue and we will include these amounts in the future when referencing deferred revenue balances. At December 31, 2012, this liability was $1.1 million, which brings what we would consider total deferred revenue to $29.5 million at December 31, 2012. Backlog at year end 2012 was $16 million compared to $22 million a year ago. The decline in backlog was due to three factors. First, with the successful launch of the B3000, a larger percentage of our bookings in the second half of 2012 for badge upgrades, which are typically book and ship in order to hit backlog.

As you think of year-over-year comparison badge upgrades were not a meaningful portion of our business in 2011 and somewhat distorts the backlog number. Second, the delay we have experienced in booking new government deals has impacted our backlog. These deals tend to be big in nature and have a meaningful impact. Third, our professional services team did an outstanding job of completing projects on time and recognizing the associated revenue further reducing our year end backlog.

Turning to guidance, we are providing our initial guidance for the full year 2013 in the first quarter of this year. As Bob mentioned, we see no reason why we can’t continue to grow this business 25% on the top line over the next few years. As said, the lack of clarity of the government business in Q3 and Q4 of last year has made that portion of our business less visible and predictable than we would like. As a result, we are providing a revenue range for 2013 that is somewhat wider than we normally would provide. As we moved through the year, we will tighten this range. For 2013, we expect revenues between $120 million and $130 million, non-GAAP net income between $9 million and $14 million, non-GAAP earnings per share between $0.33 and $0.51, and non-GAAP adjusted EBITDA between $12 million and $17 million.

Our full year 2013 non-GAAP guidance excludes stock-compensation expense of $10.5 million to $11 million and amortization of intangibles of approximately $0.7 million. We expect non-GAAP net income of between a loss of $2.5 million and a profit of $2.5 million or between a loss of $0.10 per share and a profit of $0.09 per share. On the OpEx side in 2013, we will continue to invest aggressively to maximize the growth potential of this business. We will maintain our buys to invest back into the business versus maximizing short-term earnings.

In an effort to realize the full potential of our recently launched mobility business and our new discharge product, Good to Go, we intend to invest an incremental $4 million and dedicated sales and marketing for these businesses during 2013. We also expect to continue to invest investing in R&D to enhance existing products and invest in next generation technology. We project 2013 R&D will grow at a rate in line or slightly above revenue while sales and marketing will grow faster than revenue to support our long-term growth. Sales and marketing spending will increase primarily as a result to the expended sales force while G&A growth will moderate due to the large investments we have made in the last two years. We expect gross margins to expand for the year by 50 to 100 basis points versus the full year 2012 although this expansion will not be linear.

On the tax side, we continue to enjoy the benefits of $48 million net operating loss carry forward as sheltering our earnings from U.S. federal income taxes. We currently carry a $21 million evaluation reserve on our book, which we continue to evaluate on a quarterly basis as to likelihood of utilization. For 2013, we will continue to report non-GAAP earnings excluding a federal tax provision and we expect income taxes of approximately $800,000 due to state and foreign taxes and add backs in computing our U.S. taxable income.

Before turning to guidance for the first quarter of 2013, I would like to discuss the quarterly revenue distribution for 2013 as we expect that it will be more back-end weighted than 2012, primarily due to the delays we’re experiencing in government booking, as well as expected improvement of the sales productivity forecasted in the second half. While second half revenues accounted for 52% of the annual total in 2012, we are modeling that the second half will represent 55% and 57% of total revenue in 2013.

And with that in mind for the first quarter of 2013, we expect revenues of between $23 million and $25 million. Non-GAAP earnings between a loss of $1.2 million and breakeven, non-GAAP EPS between a loss of $0.05 and $0.00 per share and non-GAAP adjusted EBITDA between a loss of $700,000 and a profit of $500,000. Our first quarter 2013, non-GAAP guidance excludes stock compensation expense of $1.7 million and amortization of intangibles of $200,000. We expect the GAAP net loss of between $1.9 million to $3.1 million or between $0.08 and $0.13 per share. Our non-GAAP EPS projections are based on a fully diluted share count of 24.4 million for the first quarter 2013 and 27.3 million for the full year 2013.

We expect income taxes in Q1 to be immaterial. Our confidence in hitting our targets for 2013 stems from a number of factors. The backlog entering 2013 in deferred revenue, the full impact of our sales force expansion, our mobility business is beginning to gain traction, continued uptake of the B3000 by our customers, additional national account opportunities. And finally as a reminder, our revenue model is highly recurring in nature due to software maintenance in our supplies business, which historically accounts for nearly half of our total revenue.

Turning to our operating model, we made very strong progress in 2012 towards achievement of our target business model and in fact exceeded our target gross margins of 65% in both Q3 and Q4. We also demonstrated significant OpEx leverage driving much higher EPS than anticipated. We believe the opportunity exist to further expand gross margins as we sell more software-based solutions and drive further unit cost reductions on our badge with more scale. Over the longer term, we believe the 70% gross margin target is achievable with pretax operating margins and EBITDA margins of 23% and 25% respectively.

In wrapping up, I would like to provide everyone an update on the equity holdings of our four venture investors. Recently, one of these investors exited nearly their entire position, and as a result total shares held by our venture capital investors has now declined from approximately 10 million shares prior to the lockup expirations to less than 4 million shares today.

That concludes my portion of the call. And with that, I’ll turn it back over to Bob for some closing remarks.

Bob Zollars

Great, thanks a lot, Bill. Well, summarizing our first year as a public company I would say I am really pleased with our 2012 results. I also believe 2013 will be another great year for the company. Our B3000 continues to show strong results and great promise. Our new software applications for smartphones are performing well. Our sales force conditions are now just beginning to have an impact. Our recent national account ventures contribute to our growth. Our mobility division is off to a great start and at some point our government business will bounce back. We are very excited about 2013 and the years beyond. We believe we are uniquely positioned to create a very valuable business and intend to invest aggressively to make that belief a reality. I want to thank you for your time today and rest assured all 353 Vocera employees are hard at work delivering against the priorities we have discussed on the call today.

So, Patrick, with that, why don’t we open it up for Q&A

Question-and-Answer Session

Operator

(Operator Instructions) Gentlemen, your first question comes from the line of Ryan Daniels with William Blair. Please proceed.

Ryan Daniels - William Blair

Hey, guys. Thanks for taking the questions. Let me start a little bit on the national account signings, I am curious if you can go into a little bit more color on several things. Number one, if there is any common reason for those signings or common units that they are putting in them. So, kind of what was the main value proposition and where might they start? And then number two and equally important, I am curious if those are more hunting licenses, where you are able to go on those systems and you’ve got parent pre-approval or if you have already got some kind of commitment to actually roll those devices out throughout the system and through the year?

Bob Zollars

Yeah, really good, Ryan. So, couple of thoughts, one just to provide some context on these new agreements, we really built the company from the ground up one hospital at a time. And so when we are in the reseller model and even when we had a smaller sales force, we were calling on hospitals one at a time. We really had no selling after going at the corporate level or the national account level. We put those resources in place a while back and that began to be a good focus for us. And I think these four contracts were a direct result of David, people the gentlemen leading that up reports and his team that we are continuing to grow that in. So, I think the common reason that these national account folks registered in contracting with Vocera is they saw more and more of their membership continuing to contract with us on a one-off basis. And we are only about 10% penetrated. We had good member representation in each of these four groups.

And so the value for them is to get common Ts and Cs, better understand the business etcetera. For us, I would call I think a hunting license is a pretty accurate term. This is not an agreement where all attention will buy from us just because there is an agreement, but it does give us approved status within each of these four systems now. It will make it much easier for their members to buy from us with all the Ts and Cs and pricing have been negotiated. And so we think that I will shorten the sales cycle, speed adoption and really help us get the top line moving within these four systems. And by the way we are not done with these four. We have a set of targets we are going to go after and discuss each account team that I mentioned as one of the areas we are investing in heavily right now. So, we are very excited about it.

Ryan Daniels - William Blair

Okay, that’s helpful color. And then the big focus probably is going to be on the Q1 guidance, obviously a little bit weaker on both the sales and EBITDA that I think individuals were expecting. And I am curious if you could talk a little bit more about that? Is that really just more on the government business that you are seeing weakness there as you entered the year and kind of not expecting those contracts to come in, so you are just kind of pushing those out of the Q1 or anything more behind that?

Bill Zerella

Yeah, hey Ryan. Yeah, that’s actually precisely the answer in terms of the revenue guidance, we are entering the year with a lower backlog than we expected, because a lot of those government deals we expected to book before the end of the year, and those would have turned into revenue in Q1 or Q2. So, that’s certainly causing us to be cautious in terms of the guidance for Q1 in terms of revenue. On the OpEx side, we are going to continue to invest on that side of the business, because we firmly believe that the growth opportunities are in front of us. So, we continue to focus on that investment. And that’s what’s driving the bottom line for the quarter.

Bob Zollars

Now, I maybe add one comment on top of that. The government tends to buy big and when you look at even our full year 2012 results, we were one government deal away from beating the top end of our revenue range versus hitting it right in the middle. So, it does have a big impact, and that’s the reason Q1 is what it is.

Ryan Daniels - William Blair

And then I guess a last follow-up and I will hop off from what some others get in, just can you give us a proxy for that. I mean, are those literally million dollar type of contracts versus a typical deployment that might be in the $350,000, $400,000 range. So, they have kind of a 3X impact from a client acquisition standpoint?

Bob Zollars

Yeah, they tend to be large. You may recall that our largest deal ever that we have talked about before is (indiscernible) which was a $2.6 million purchase order. So, they tend to buy big. They buy all at once. And it’s the reason it’s an important segment for us. And I think it’s also one of the reasons we are still excited about ‘13 is that none of these deals have been locked. They are just kind of been standby until this macro funding issue gets resolved in Washington.

Ryan Daniels - William Blair

Okay, great. Thanks guys.

Operator

Your next question comes from the line of Sean Wieland with Piper Jaffray. Please proceed.

Sean Wieland - Piper Jaffray

Hi guys. Thanks. So, here we are, we are sitting on the precipice of sequestration, what gives you confidence that the government business is going to bounce back?

Bill Zerella

Yeah, Sean good question. We are out of the game of predicting timing, that’s for sure, but I think what gives us some confidence is that they are very people that expect out our out product and are waiting for it at the account level are still very solidly in our camp and they are as frustrated as we are about the funding issue. I do think it’s going to be interesting to see what happens with sequestration, whether it happens when they fix it or however that turns out. I think our hope also is positive because one of the areas that the politicians have continued to talk about is that they want to take care of our veterans and the folks coming back from Afghanistan etcetera. And so we are hoping this becomes a budget priority for them and we are counting on the folks at the account level to really keep us as positive as we are about it after several months of delay here.

Sean Wieland - Piper Jaffray

So, the issue then is not so much with the decision makers at the facilities, it’s just that the money has been pushed out. Is there a budget that’s established for this new calendar year or are you waiting for that budget to be established?

Bob Zollars

Yeah, it’s a good question. There are some unique things that happened in this Q3 of last year that were new to me anyway and I’ve been selling into this market for a long time. They took fiscal 2012 money and actually that a term that used – we are changing the color of the money and we are pushing it into 2013. So, those dollars were pushed from one fiscal budget to the next. How specific – how specific that comes down and to where we fall in that budget as a line item or so forth it’s pretty opaque really don’t have good line of sight to that. But what we have been hearing for again from the end users is that the dollars will rollout, hard to tell when, but right now, there is just a moratorium on any spending whatsoever and we think we’ll be a kind of a top quartile priority when they rollout of the sequestration issue.

Sean Wieland - Piper Jaffray

Okay. And in 2012, what percentage of your revenue was government?

Bill Zerella

Yeah, hey, John so, we don’t disclose that breakdown?

Sean Wieland - Piper Jaffray

Okay, alright. And then second question, Bob, Executive Chairman is that going to be a full-time position?

Bob Zollars

I think it will be pretty down close to full-time, if not full-time, there is so much to work on here Shawn as you know, I’m pretty excited about aligning all the operations under Brent who has done really, he has been amazing executive here over the last 12 years. And this is in the work from the day I was hired by the Board to prepare Brent to take over as the next CEO. When I’m going to try spend my time doing other things that I’m freed up to do now, large industry relationships used to roll that from the healthcare market, but for industry partnerships those sorts of things and actually I’m quite excited about it. And then Brent will run the day-to-day and I think we’ll continue to be a good team along with Bill as our – that’s part of the trend we are there.

Sean Wieland - Piper Jaffray

Yeah, I, and Brent I think you are completely 100% qualified for the job. I am just curious what is the – what was the catalyst for the change or what prompted it?

Bob Zollars

Yeah, it’s been an ongoing discussion Shaw for instance that’s really the day I will tell Brent is the acting CEO of Vocera when they hired me. And so part of the charter the board gave me was to help Brent to become the CEO of this company. And so over the last six years in addition to building and running the business that’s been an ongoing dialogue that he and I and the board have had. And the time is right, it’s his 12th anniversary, he is a very talented guy. There is so much to accomplish. We are just kind of recapping the list and giving it up and we think that this will create both the best operating performance for the company and also may be give us the chance producing things. So, we have enough time to get to in the previous structure.

Sean Wieland - Piper Jaffray

Alright, it sounds good, thank you.

Bob Zollars

Thanks Shawn.

Operator

Your next question comes from the line of Lisa Gill with JPMorgan. Please proceed.

Lisa Gill - JPMorgan

HI. Thanks very much and good afternoon. Bill, I was wondering if maybe you could just give us more color around the new longer term target as far as timing goes. Do you have a specific timeline of when you can achieve those targets would be my first question. And then secondly, can you maybe just talk about what are some of the key drivers behind it?

Bill Zerella

Sure, sure. So, in terms of timeline, Lisa, we see the ability to hit these targets in two to three years and it certainly depending upon gross rate with more growth, we get more scale. But generally speaking that timeline that you should be thinking off and in terms of the drivers other than scale, it’s really product mix. Software is specifically is a big driver to our margin that has been throughout 2012 and the lot of the things that we’re looking at investing in will drive we believe more software revenue that will be end the accretive to margins and drive us towards that target.

Lisa Gill - JPMorgan

Okay, great. And then my second question would just be around the opportunities outside of healthcare. Bob, if may be if you can give us an update, I know in the past we have talked about Nextel and the opportunity to take on some of that business. Did you see opportunities in the fourth quarter and do you see continued opportunities as we move into 2013?

Bob Zollars

Yeah, Lisa, good question, the – I will say the activity level is at an all time high, they are just a ton of great conversations going on. We didn’t see any of the big push to talk contracts or business come through, but a lot of activity at a pretty high level and Brent maybe you want to expand on that a little bit.

Brent Lang

Yeah, I think that there is a lot of work in progress particularly in the hospitality space but also in retail. And I think that we will start to see some of those materializing over the coming quarters.

Lisa Gill - JPMorgan

Okay, great thank you.

Bob Zollars

Thanks Lisa.

Brent Lang

Thanks Lisa.

Operator

Your next question comes from the line of Jamie Stockton with Wells Fargo. Please proceed.

Jamie Stockton - Wells Fargo

Yeah, good evening and thanks for taking my question. I guess first I should say Brent congratulations.

Brent Lang

Thank you.

Jamie Stockton - Wells Fargo

But maybe if we could talk about the second half of 2013, the guidance implies pretty strong acceleration as far as revenue growth is concerned. And I hear you guys that the government business you expect to get stronger as the rest of the year progresses. Could you talk maybe about when you think you will see the inflection point of the newer sales people really becoming productive, are we going to see that in the second quarter you think or is it more of a third quarter phenomenon?

Bob Zollars

Yeah. Hey Jamie, good question. We have used a model that’s been pretty predictive on new sales reps and it’s sort of the 30%, 60%, 90% productivity rating by quarter. So, their first calendar quarter they are at about a 30% productivity level, they moved to 60%, then 90% and then when they – sort of been their fourth calendar quarter, their fourth quarter in the territory, they are pretty much fully productive. And we have seen exceptions today in the front end and to the back end. Interestingly as we’re speaking right below that’s here in our headquarters we’ve got a boot camp going on with about 14 new reps in it. They are going through pretty extensive training for a two-week period then turn them loose.

So, I think it’s one of the reasons that the back half is a little bit more heavily weighted, 3 to 4 percentage points more heavily weighted than what we saw in 2012. I think when you combined both the bookings issue and this new sales rep productivity that’s why we feel confident in the back half and these national agreements. We’re working on these national agreements both at the street level and at the corporate level. And I think we will see some acceleration within Ascension, Dignity, and CHI and others. And then lastly this June 30, end of life issue for the B2000 starting to provide some stimulus for adding – add its good bookings momentum on the B3000 coming into the summer month. And we are already seeing that migration started to take place, we think that might accelerate a little bit as we hit that sort of the end of Q2 and end of Q3.

Jamie Stockton - Wells Fargo

Do you think just following up on the comment, do you think there could be any dynamic where you have some customers who B2000 in a more aggressively before it goes end of life?

Bob Zollars

Yeah, we do that could also happen and that sign as well and we are planning our inventory levels accordingly. And then of course the government is going to continue to buy B2s until the B3 get certified for their security protocols?

Jamie Stockton - Wells Fargo

Okay and then maybe one more question on the sales force. I think you said you were going to – you are ramping to 65 that are just going to be focused on the voice business within healthcare, is that going to be a number you think will be at through the rest of 2013 essentially?

Bob Zollars

Yeah, so just to clarify the 65 are all healthcare quota carrying reps and that would include our voice as well as our XPERIA and messaging product lines. So, healthcare in total and we’ve got five mobility product areas with total of 70 product areas in 2013. I think we’re going probably follow a pattern that we have for the last couple of years which is that should hold us through Q3 of next year and then as we sort of head towards the back end of Q3 of this year, we’ll start to add additional reps that position us well for 2014. This rhythm of hiring in Q4 has worked pretty well for us, so we will hire in Q4 bring them in and put them through blue camp and then turn them this early in the year. And that’s something we will probably continue to do.

Jamie Stockton - Wells Fargo

Okay and my last question. It seems like maybe given your focus on more strategic issues, we might actually see some more M&A occur in 2013. Could you comment on the types of companies I think previously you guys have talked about broader communications within hospitals being a pretty significant focus maybe workflow solutions within the hospital if you can just comment there, that will be great? Thank you.

Bob Zollars

Yeah, thanks Jamie. Yeah, we have been pretty cautious on the M&A front as you know in the history of the company, now our balance sheet is in great shape with $127 million in cash and no debt. So, we’re always keeping an eye out there and what we would like to do is talk to our customers on what pain points they’re experiencing that are being solved very well or the product ideas that our customers like a lot and helping themselves certain pain points and so we focus then on communication as number one. And then that ties into a lot of different areas there. I think perhaps right now, lot of it is about ROI and productivity, so communication solutions that can help with that turning the ORs faster, getting people out of the ERs, focused on patient experience is important. So, we have got a big tradeshow coming up the first we actually we leaved Sunday for him. And we will be working to exhibit for because it’s a great place to look at the industry and to look at product ideas and companies that are out there that maybe a fit for that. So, I think it’s safe to say that we are going to be very cautious, that will be a very good strategic fit and it’s going to be financially accretive because we’ve got such a good organic growth story in front of us, so we don’t want to – we don’t accept that at all (indiscernible).

Jamie Stockton - Wells Fargo

Thank you.

Bob Zollars

Thanks Jamie.

Operator

Your next question comes from the line of David Larsen with Leerink Swann. Please proceed.

David Larsen - Leerink Swann

Yes, what do you need to show for bookings growth in order to achieve say 25% revenue growth, the bookings need to grow 25%?

Bob Zollars

Yeah. Hey David, so a couple of things, so as I mentioned in my prepared remarks we are seeing a little bit more in terms of book/ship business in each quarter, right, so that tends to mean that we don’t need as much backlog to hit our revenue target. Certainly our objective is to grow bookings in a strong fashion that actually increases our backlog going into 2014, while again growing the top line at a good cliff. So, we have as you would expect pretty high targets that we should for internally. But again this dynamic where we do have a little bit more in terms of book/ship business does result in a little bit of a different dynamic and lot of that’s because of the upgrade opportunity.

David Larsen - Leerink Swann

Okay, great. So I think your bookings were up 10% in 2012, your revenue was up 27%. So, it doesn’t sound like you need to grow your bookings by 25% year-over-year or anywhere even close to that, is that reasonable or?

Bob Zollars

Yeah, I would say directionally – directionally David we are looking to grow our bookings at a similar rate of revenue growth, okay, it’s not higher.

David Larsen - Leerink Swann

Okay.

Bob Zollars

And it gets to the visibility of the model we do still have a lot of visibility and we want to maintain that going forward.

David Larsen - Leerink Swann

Okay, great. And then with these four hospital chains, were those signed in 4Q, so those were included in 2012 bookings?

Bob Zollars

Three of those were signed in the fourth quarter. One very late in the fourth quarter, and then one of the four was actually signed in very early January.

David Larsen - Leerink Swann

Okay and then I think the initial deployment price is like 360 grant, has that been increasing I think last year you mentioned that increased a little bit?

Brent Lang

Just to clarifying the last question because the second part of your question was about the impact that would have on bookings in revenue. And as we talked about those national account contracts in more the contracts of the corporate headquarters. It didn’t immediately have a huge impact on bookings or revenue, it’s really setting itself for a success here in 2013, I think it’s important to understand that dynamic. And then in terms of the average deal size, we are not seeing a material change in average deal size year-to-year.

David Larsen - Leerink Swann

Okay, so it sounds like there is 200 Greenfield hospital opportunities within those four systems, just trying to size that 360 grant per facility, I mean, it sounds to be a very large opportunity for you guys?

Brent Lang

Absolutely, we estimate the opportunity to be in the range of $150 million pretty easily just looking at those facilities.

David Larsen - Leerink Swann

Okay and then just my last question, how has the leadership of each of those national accounts sort of communicated to the site levels about your new relationship?

Brent Lang

It varies from account-to-account, in some cases they have actually helped us promote the solution throughout the facility in other cases, it’s been more of a stamp of approval that allows us to then open-up the dialogue with the individual properties. And as Bob mentioned in all of those cases we got existing customers that we are able to use as references within the chain and those end up being a big part of the selling process as well. But you are absolutely right in some cases the corporate entity has actually helped the solutions out to their member network as they promoted our improved solution.

David Larsen - Leerink Swann

Okay, thanks a lot.

Brent Lang

Thanks, David.

Operator

(Operator Instructions) Your next question comes from the line of Eric Coldwell with Robert W. Baird. Please proceed.

Eric Coldwell - Robert W. Baird

Thanks. Just a couple of quick ones, first off I missed the total client number, I think I got the U.S. hospital number, but what is the total client count if you will?

Bob Zollars

Let me go back to that one, Eric. We have added 87 customers during the year, that’s across both healthcare and non-healthcare.

Eric Coldwell - Robert W. Baird

And 75 were hospitals?

Bob Zollars

75 were healthcare, yeah, they were a couple non-hospital healthcare.

Eric Coldwell - Robert W. Baird

Got it.

Bob Zollars

But the vast majority of those 75 were hospitals.

Eric Coldwell - Robert W. Baird

Got it.

Bob Zollars

And the other number we referenced was 60 of them were U.S. hospitals as you remember there is a roadshow deck where you talked about the total number of best hospitals in that pie chart element that moved from 656 up to the 716?

Eric Coldwell - Robert W. Baird

Got it. And on the national accounts just one final one, I know you – as you have said, you have worked with some of the members of these national systems for many years. Some of the Ascension guys, I think you have been with for probably 10 years now, but with the terms and conditions pricing going to a standardized format, do you – does that lead to a degradation in margin that you are willing to trade off for the potentially faster revenue growth in penetration or our terms and conditions pricing even though standardized is still consistent with what you would have sold on one-off basis?

Bob Zollars

They are directionally the same. In some cases, there is volume incentives put in place, so there is clients by larger and across multiple facilities that there is incentives in place there, but it doesn’t have a big impact. Bill, do you want to talk about that?

Bill Zerella

Yeah. The other thing I would add Eric is that remember when we get deployed in a new hospital and signup a new license, then the software component of our revenue streams are higher, okay, versus expansions if you will. So, new customer acquisition really drives margins in a very big way, because of the software side of the equation. So, well, there maybe some puts and takes in terms of price negotiations, in terms of adding new locations, new hospitals, that’s a huge benefit to our business in terms of both margins and then of course future expansion revenue.

Eric Coldwell - Robert W. Baird

Got it. And Bill, the last one is more of a just a technical question, not showing the federal taxes this year as of pro forma taxes of 35% which I believe most of your covering analysts are doing. That obviously helps provide some support to the earnings numbers this year, but eventually you are going to have to show that rate. And I am curious with 21 million of NOLs now reserves, do you think you hit that number in ‘14, so we should be thinking about shifting our as if taxation number to ‘14 or can you give us any sense on how we should be thinking about this? I just hate to go into the same circumstance a year from nowhere?

Bill Zerella

Yeah.

Eric Coldwell - Robert W. Baird

It really isn’t on the same basis as the Street is.

Bill Zerella

Right. So, let me give you a little guidance here. So, as I said in my prepared remarks, we evaluate NOL and the reserve on a quarterly basis. And in terms of utilization, it really from a GAAP perspective, you really focus on GAAP earnings, not non-GAAP earnings. So, the question gets to be on a quarterly basis as we move forward when do we get to a place where our GAAP earnings are such that we are then required to reverse out the reverse and start flowing federal tax provision through the P&L? So, right now, our guidance for the year is under the assumption that we get through the rest of this year without any federal tax provision going through the year. That could potentially change as we get to the end of the year, and it all depends upon profitability and the sustaining of that profitability going into 2014. So, yeah, I suppose you could assume that by time we get to 2014 that reserve is probably released, but it really is something we evaluate on a quarterly basis.

Eric Coldwell - Robert W. Baird

And then just one and I understand there is some movement in the actual technical event there.in the pre-IPO process concurrent with the IPO, we all had agreed that we have insured 35% tax rate starting in the first quarter of ‘13 and that’s changing now, but is 35% even the right number, because there are other taxes been showing here at around 6%, 7%, 8% I am thinking based on the new guidance. So, should we really take the 35% and add another 6% to it and maybe show a number of like 41% going into ‘14. Is that a fair way to look at this?

Bill Zerella

Yeah. So, if you want to be conservative, you would use the rate of 40%, but the counter there is that we get a tax benefit associated with option exercises when there is a disqualifying disposition as you know, right. And since we still have a lot of option holders that have relatively low strike prices since we have been public less than a year that benefit will potentially accrue to us depending upon what the stock price is when they exercised and how many shares are exercised? So, that’s the only counter that could potentially drive the rates lower, but if you want to be conservative of 40% rate would be directionally correct.

Eric Coldwell - Robert W. Baird

Okay, great. I will drop off. Thanks.

Brent Lang

Eric, this is Brent, just to finalize the total number of healthcare customers, referenced back in the script with 876.

Operator

At this time, there are no remaining questions. Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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