Vocera Communications's CEO Presents at JPMorgan Healthcare Conference (Transcript)

Jan.13.14 | About: Vocera Communications (VCRA)

Vocera Communications, Inc. (NYSE:VCRA)

JPMorgan Healthcare Conference Call

January 13, 2014 2:00 PM ET

Executives

Brent Lang – President and Chief Executive Officer

William Zerella – Chief Financial Officer

Analysts

Gavin Weiss – JPMorgan

Gavin Weiss – JPMorgan

Good morning. My name is Gavin Weiss and I cover Healthcare Technology here at JPMorgan. I’m pleased to have Vocera with us here this morning, we have the CEO, Brent Lang, and the CFO, Bill Zerella. We’re going to do the format a little differently, we’re going to do it sort of a fire-side chat Q&A. Brent just can start this off and give a quick overview of the business and the acquisition we announced this morning. Brent?

Brent Lang

Thanks Gavin. And welcome everyone, thanks for taking the time this morning.

William Zerella

We can’t hear you.

Brent Lang

Microphone.

Gavin Weiss – JPMorgan

Can we get that microphone?

Brent Lang

Okay, here we go. Great and thank you. Good morning everyone, thanks for taking the time. My name is Brent Lang, I’m the CEO of Vocera Communications. And Vocera is really in the business of simplifying and improving communications inside of hospitals. One of the biggest issues facing hospitals today is poor communication and in fact the Joint Commission has identified that nearly 70% of centennial events that occur in hospitals are a result of communication breakdowns, and not only is it an unsafe environment, but it’s also a very costly environment. University of Maryland did a study that showed that over $12 billion a year is wasted in U.S. hospitals as a result of communication breakdowns. And it also has a direct impact on the patient experience of having a direct impact on HCAHPS scores as a result of slow response times and lack of interaction with the patient.

So what the series all about is delivering an integrated, intelligent communication platform that allows care providers inside of a hospital to get a hold of the right person, at the right time based on the role or the function or the location of where they are within the hospital. And we do this using a software platform that really is the basis of our system and keeps track of all the users, all the people working in the organization that need to be able to communicate with each other, we keep track of their roles, the groups that their the member of, their permissions, their workflows and that enables us to get hold of the right person immediately.

And then we add to this software platform a range of the different client devices, including smartphones and other in-building mobile devices that were probably most known for the Vocera Communications Badge which I’m holding here, which is a small wearable device that operates over the Wi-Fi infrastructure inside the hospital, and allows users to instantly reach someone by just pressing the button on the front of the badge and either saying the name of the person they want to reach, or the role, or the group, or the function that they want to reach. So for example, if I wanted to speak to a transport tech, I would just say, call the transport tech, and be immediately connected to the right person who could help me out with that particular role.

So, it enables care providers to spend more time with the patients’ bedside, less time running up and down the hallways looking for the right person, we end up eliminating overhead paging, we eliminate pagers and we make the care process not only more productive, but also safer and more cost-effective for the environment. In fact, we’ve done a number of [indiscernible] where we measure things like productivity and throughput, one study in particular that we highlight quite a bit is the use of Vocera in the operating room where we’re able to improve cycle time by about 5% in the operating room which makes those operating rooms able to do more surgeries per day and can generate over $2 million of the incremental patient revenue inside of a hospital environment. We also look at productivity in terms of the amount of time it takes to find the right person, or the safety improvements we can get by responding quicker to patient issues.

So, let me pause there and we’ll open it up for some questions also. I’m going to be talking about an acquisition that we announced this morning, a company called mVisum, still learning how to say it, which is in the alarm management space that allows us to expand our smartphone offerings and have a solution that’s targeted towards dealing with a critical issue right now which is Alarm Fatigue, where care providers are being overwhelmed with the number of alarms that they’re receiving. This solution allows us to filter out those alarms that they are going only to the right people and also to provide contextual information including wave forms, images and other data that allows the care provider to triage and make more effective decisions about where to focus their time.

So Gavin, with that one I turn it back over to you.

Question-and-Answer Session

Gavin Weiss – JPMorgan

Okay, let’s stick on the acquisition while you’re talking about it. Can you talk about how this is going to integrate with the Vocera system and integrate with other systems within the hospital I thought it inspired this morning that showed that you are going to pull data in from the other EMRs within the hospital, can you just touch on that briefly?

Brent Lang

Yeah, so mVisum is a software platform that’s an intelligent, data analytics and alarm management system. So it fits very nicely into our software strategy of creating intelligent, integrated communications. Their system integrates to leading patient monitoring systems from Philips and GE, it also integrates with EHR information using an HL7 field we can pull information about patients. And so now when a patient alarm goes off rather than just having an alarm sent out to the care provider, we can actually include say a 10 second clip of the ECG and send that alarm to the care provider on their smartphone, the care provider can then review that image and make a determination whether this is a false positive or whether this is an issue that has to have an immediate attention.

And we can pull in other contextual information like images for example, in a stroke case or a burn victim case we can attach imagery, all of this is delivered out to a user smartphone, so that they can integrate it within their overall platform. Now how this ties into Vocera, on the server side alternatively this becomes part of the Vocera server platform where all of our intelligence is stored and on the client side it becomes part of our smartphone offerings we should ultimately roll up into the Collaboration Suite which is a suite of products designed for iPhones and Android phones it delivers communication and collaboration capabilities for them the mobile workers.

Gavin Weiss – JPMorgan

Okay, great. And then we’ll give you a break Brent, Bill just focus [ph] on to you. Could you just talk about the revenue and margin opportunity for this business I think you said it would be dilutive in the first year what are your long-term expectations?

William Zerella

Yeah so they have a small engineering team which we will take on we got some transition and integration costs that will incur this year, we expect to have this product ready to roll out by the middle of the year. And as a result, we’ll most likely be building pipelines through the balance of the year and really don’t expect any revenues of any significance until 2015 which point we expect that those to be accretive again this is software so it’s very high margin business. The revenue opportunity is actually pretty significant we believe that every hospital has an alarm issue and need some type of solution to address these problems with all these false alarms.

So that the revenue opportunity can be anywhere from 300,000 to 500,000 per hospital and we have over 800 hospitals today so that the first logical expansion will be for us to look the Silverstone’s fall base however we will also offer this as a stand-alone solution for non-Vocera hospitals as well. So we think it’s a pretty significant opportunity.

Gavin Weiss – JPMorgan

And does this hold on a subscription model per user or as a hospital?

William Zerella

Yes, so we haven’t finalized our pricing model yet we’re looking at both a perpetual model and a subscription model and that will finalize that over the next few months before we bring this to the broader market.

Gavin Weiss – JPMorgan

Okay, great. Think we’d jump back to the core of Vocera and may be Brent if you could sort of explain the differentiation between Vocera the Badge, some of your apps versus a smartphone, I think that’s the largest pushback we get from new investors to the story as why can’t doctors to sign on a smartphone and what differentiating Vocera?

Brent Lang

Thanks Gavin. yeah I think the key point is to understand that Vocera is really a software platform and that’s offer a platform supports a variety of different devices including smartphones, we think of smartphones as part of the ecosystem of client devices that we give user the choice. But the thing that differentiates Vocera is that our software platform has knowledge and intelligence around the users and the work flow with inside the organizations so, for example, we know who is the member of the Stroke Alert Team.

We know who is the member of the Rapid Response Team or the Code Blue Team so that when a user places a queue the Rapid Response Team we don’t have to spend time or users don’t have to spend time looking up phone numbers for all of those different care team members, they can either issue a broadcast of the entire Emergency Response Team in one single command or if they’re looking to get a member of a particular group like member of housekeeping or a member of the Rapid Response Team they can call and our system will know who is serving in that particular role at that particular time during that shift.

So unlike a traditional telephony solution whether are you talking about a cell phone or even a wired phone, where the route of the system is based around a phone number, an extension number and in order to get a hold of the right person you have to figure out who is serving in that role and what their phone number before you can place the appropriate phone call, with Vocera you just say what you want, you just say the role or the group or the function you’re trying to get a hold of and our intelligence server software knows who is serving in that role, we know what device that they’re wearing, we know where they are in the organization and we can route that call immediately to them.

So, really its back-end intelligence that our system provides that differentiates us in the marketplace. And on the client’s side as I say, whether users end up deciding to use the badge or a smartphone or even a [indiscernible] wild stone we can have a mix of devices across the hospital environment, get the right device for the right person depending on their particular workflow at their preferences.

Now, we know from experience that the Vocera Badge is highly differentiated and very customized for the healthcare environment, because of its wearability it allows nurses to maintain conversations and a hands-free environment they just wear it around their neck, so they don’t have to take off their surgical glove, they don’t have to stop what they’re doing in order to have a conversation unlike they would with the phone, the badge is also been ruggedized to survive the tough environments of a hospital, it’s actually got Biocoat [ph] technology in a plastic which prevents the spread of bacteria, it’s got four separate microphones that can block out background noise.

So there is a bunch of innovation and technology that’s been put into the badge to make it more successful within the hospital environment, but from a platform perspective Vocera is embracing this range of different devices we have a Collaboration Suite which a software that runs on iPhones and Android devices that allow those to participate in this ecosystem of users and let the call flows and the work flows that I was describing earlier have a combination of both badges and smartphones.

Gavin Weiss – JPMorgan

You know there is no real other pure competitor that has a product like the badge, but can you talk about in the sales process what hospitals might be looking at as well as Vocera when they’re choosing to implement this type of system?

Brent Lang

Sure, the most common thing we run into is a comparison for the status quo and the status quo is typically a function of using overhead paging or pagers which are very inefficient. They, they’re sort of page and play or broadcast and pray. Open-loop communication where you don’t get any feedback than anyone that’s actually received the message or is taking actions. So that’s by far and away the largest group. The second category of competition we run into is from in-building wireless phones and companies like ASCOM or SpectroLink or Cisco itself in-building Wi-Fi phones that are essentially TDS extensions that extend the PBX internal of a hospital. But the challenge there is that because they’re PBX extensions they don’t have any of the intelligence or the work flow or call flow capabilities that we have in our software platform.

The third group of competition we run into is from Texting Solutions and there are some companies who come up with very simple texting solutions who run on smartphones but again there is none of the intelligence or rule-based call flow capability and typically it’s purely text-based communication which for a hospital environment where there is mission-critical and life-threatening events going on, there are times when it’s absolutely necessary to have a live conversation. So we tend to run into those occasionally as well, but for the most part the real competition is competing for capital dollars and making sure that the strong ROI and capabilities of our system are exactly begins other capital investments at the hospital might be making.

Gavin Weiss – JPMorgan

Great. So obviously healthcare is your biggest end market right now. 2013 was not a great year for a hospital spending environment, obviously a lot of factors there including sequestration. What’s your outlook for hospitals in 2014 obviously we’re pretty early into the year in ACI, but what do you think hospitals are feeling about the year in spending?

Brent Lang

Yeah I think that as we look at 2014 it’s a net positive improvements, there is clearly some continuing headwinds in the marketplace, but if you just look at a couple key factors first of all, in 2013 the rollout of Meaningful Use Stage 1 was a very much of a focus for a lot of hospital organizations, at this point most of the data would point to about 90% attestation. So most folks are through Stage 1 and moving on to Stage 2 with the move out in the timelines for Stage 2 implementation that takes some of the pressure off and for the most part most hospitals have made a decision about which technology providers are going to use. So it is really a more function of implementation. We certainly saw that as a distraction during 2013 for some of our providers.

But probably more important than that, the budget environment for most hospitals we believe will be better in 2014. If we were sitting here exactly a year ago, we would have talked about the sequester that something that we hoped it wasn’t going to happen and didn’t think was going to happen and then in March when it did happened what we saw was a lot of hospital budgets impacted their departmental level, their operating budgets. And we rely on those operating budgets for the expansion part of our business, roughly 85% of our revenues come from our install-based customers. And what we saw during 2013 was that the impact on the operating budgets in a lot of these organizations impacted those expansions.

But going into 2014, what we’re seeing is that budget, first of all we have a federal budget for the first time in many, many years which should help provide some greater levels of certainty. And hospital providers have greater visibility into what their environment is going to look like. And so we can now go out and compete effectively for those dollars, in fact most of the data that we’ve seen would indicate that IT budgets inside of the hospitals are going to be improved. Going into 2014 and we’re actually part of the solution, because of the impact that we can have on productivity. In an environment where hospitals are asked to do more with less serve more patients with fewer dollars, we believe that the productivity in patient safety and patient experience in benefits that we can provide actually will be help be part of the solution moving into 2014 and that should be a net positive for our business.

William Zerella

I would also add again before we move to the next question, is that 2013 was a year also marked by year in which we constantly built our backlog every quarter, even though our revenue was flat year-on-year effectively. What we talked about our last call was that our shippable backlog within the next 12 months at the end of Q3 was up just over 50%. And while we haven’t obviously really start 2000 or rather Q4 numbers, we did say that we expect that our backlog coming into 2014 would be up nicely versus that coming into 2013. So that will also give us more visibility into revenue heading into the year.

Gavin Weiss

Bill, you stole my question.

William Zerella

Okay.

Gavin Weiss – JPMorgan

Obviously during 2013 you also had some changes to your sales force, I believe you hired a new head for the sales force. So can you may be talk about how the sales’ new hires are working sort of the ramp-up schedule in sales and where do you expect that to be in 2014?

Brent Lang

Sure. Let me provide a little bit of history here by a way of context. So in 2009 we made a transition from being a VAR-based organization, selling through resellers, just selling direct through our own sales force. And that point in time, we had 14 sales people serving the marketplace. We exited in 2012 having grown that to 54 sales reps, but coming into 2013 we were looking to grow and upgrade that sales force. So we actually upgraded 12 of those of 54 positions and we also added another 14 to get it up to close to 70 quota-carrying sales reps. As a result of that churn we did some retrofit and at the end of Q1 of this year, we had a very high percentage of our sales force that was new to their role, many of them were inheriting new territories and still in the process of learning our products. So in a difficult budget environment we sort of compounded that by having a very large percentage of the sales force in new to their territories.

Coming into 2014 we expect to see a much greater level of stability, most of our territories are going to have consistent coverage from 2013 to 2014 and most of the growth in the sales force is actually going to come in international, in our Asia-Pac and Middle East environments and some growth in Canada. So the U.S. sales force serving our customers base here in the healthcare in the U.S., is going to be a lot more stable. The focus for 2014 then is on sales productivity. And we believe that the experience level of the sales force that’s in place today combined with some work we’re doing with ROI modeling and lead generation from our marketing department on the front-end will result in greater levels of sales productivity for 2014. So expecting the growth actually to be driven by the experienced sales learning curve, as well as better front-end lead generation from those folks.

And as Gavin mentioned we brought in Paul Johnson as our new EVP of Sales and Services, so we’ve combined our sales and services organizations into a single organization under its combined leadership. Paul brings a tremendous amount of experience of running enterprise sales organizations, both at IBM and at Intuit. And he’s been in the job just a few months now, but I’ve been very impressed with the job he’s done in pulling together the strategies and the focuses that going into next year.

Gavin Weiss – JPMorgan

Can you also may be just touch on briefly how you’ve changed the management of the sales pipeline, I think, first quarter last year some deals slipped, perhaps if they got too big and then they moved up into the C suite you saw some decisions put off. Can you talk may be just to how you’ve changed the way you look at the deals that are in the pipeline and the sales force assessments of getting those deals completed?

Brent Lang

Yeah what Gavin is referencing is that in Q1 of this year, I’m sorry of 2013 we saw a few expansion deals within our existing customers that we had expected to close in Q1, slipped out. And all of those deals eventually ended up closing at later points in the year, but they didn’t necessary close in the timeline that we’d originally expected. So what we are going to address that is we’ve refocused on how we’re managing the pipeline process and frankly creating a greater amount of deal flow, so that we’ve got more backup capability it was any one particular deal we’re to fall out of the system.

And the other thing that Bill mentioned earlier which is critical to driving predictability in our business is the level of backlog that we have coming into a given quarter. 2013 was a really strong year for us in adding new customer growth from a bookings perspective, typically new customers are booked and then we’ll convert to revenue two quarters or sometimes one or three quarters later once we do the implementation. Having a high level of backlog coming into the year gives us some greater visibility and predictability in the business as a whole. Bill, do you want add anything to that?

William Zerella

No, all I would say in addition to that is obviously we’ve got more conservative as a result of the spending environment. So, we try to reflect that on our guidance each quarter since Q1.

Gavin Weiss – JPMorgan

Okay and then obviously without giving 2014 guidance, may be could you just talk about what are the biggest swing factors of 2014, what do you see as the biggest headwinds, biggest tailwinds and where do you see those sort of weighing out throughout the year?

Brent Lang

I think the biggest, single biggest driver that could really return our overall growth rate would be to see our installed-base customers returned to their historic purchasing levels. We know that we’re relatively low penetrated into our installed-base about 30% penetrated into our installed-base customers. What we saw in 2013 was a delay in upgrades of the B2000 Badge just a prior generation badge and in some cases delays in expansions to new departments. And because such a high percentage of our revenue comes from our installed-base that we were able to see those purchases of returning to more normal levels as departmental budgets stabilized that would be a big growth driver for us.

The other things I would point to for this year would be around new geographies so we’re making a big investment in Asia-Pac and in the Middle East where organizations are making big investments in modern healthcare facilities and the rollout of medical tourism, so we’re growing our sales force in both of those regions and then finally I would point to new products that we’ve announced a couple of new products that will be coming out in 2014 including the Collaboration Suite some enhancements to our care experienced products which are focused on the overall patients experience and then with the acquisition of mVisum will have the Alarm Fatigue and Alarm Management Solutions adding to the portfolio. So combinations of new products, new geographies and then a return to a just more historic and normal levels in terms of purchases from the installed-base.

Gavin Weiss – JPMorgan

Can you may be just touch briefly on our last two minutes here on the non-healthcare market and your expectations for that in 2014?

Brent Lang

Sure. So today Vocera is predominantly focused on selling into the healthcare marketplace roughly 97%, 98% of our revenues are derived from the healthcare marketplace. In Q1 of 2013 we hired a team of non-healthcare sales people a team of five folks that are going out focusing primarily on the hospitality in Street High Inn hotels as lows on the power industry in particular nuclear power plants that have got a large number of mission critical mobile workers.

What we saw in 2013 was a nice building of pipeline at this new group of sales force went out and built relationships and we’re expecting that to continue to drive growth into 2014, it’s obviously still going to be a relatively small percentage of the overall business but one of our goals over the next couple of years is to diversify the business by growing the non-healthcare piece. And frankly we view any mission critical mobile environment is being a potential target for market for Vocera. We continue to be remaining fairly focused on a few key verticals but you’ll see us continue to make investments in those key verticals.

Gavin Weiss – JPMorgan

Okay, great. I think we should move across to the Sussex Room and hopefully some of you in the room can continue with the questions for Bill and Brent. Thank you.

Brent Lang

Thanks Gavin.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!