Vocera Communications (NYSE:VCRA)
Q4 2013 Earnings Conference Call
February 20, 2014 5:00 p.m. ET
Jay Spitzen - General Counsel
Brent Lang - President, Chief Executive Officer
Bill Zerella – Chief Financial Officer
Eric Coldwell - Robert W. Baird
Jamie Stockton - Wells Fargo
David Larsen – Leerink Swann
Gavin Weiss – JPMorgan
Ryan Daniels - William Blair
Sean Wieland - Piper Jaffray
Good afternoon ladies and gentlemen and welcome to the Fourth Quarter 2013 Vocera Communications results conference call. My name is Chrystal and I will be your coordinator for today. (Operator Instructions)
I would now like to turn the conference over to your host for today Jay Spitzen, General Counsel. Please proceed.
Good afternoon everyone. A press release detailing Vocera's quarterly results was distributed earlier this afternoon and is available on our website at www.vocera.com as well as through normal news sources. This conference call is being webcast live on the Investor Relations page of our website where a replay will be archived.
On 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 our company's operating results and market opportunities for our solutions. These forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from our current expectations. These risks and uncertainties are described in Vocera's filings with the SEC.
And now, I would like to turn the call over to our President and CEO, Brent Lang. Brent?
Thank you, Jay and good afternoon everyone. Thanks for joining our 2013 year end call. The fourth quarter of 2013 was a third consecutive quarter of meeting guidance. We finished 2013 with record revenue, bookings and backlog and we are well-positioned for continued progress in 2014.
I am extremely proud of what our team achieved during a very difficult year for our hospital customers. Although existing customer expansion proceeded at a slower pace when we originally projected, new customer growth was actually higher than in 2012 allowing us to meet our revised projections for the year. We added 105 new customers in 2013, a 19% increase over 2012 customer growth. That new customer growth is an important leading indicator.
Many people have asked us whether Vocera is considered must-have among hospital customers’ tight budget and competing mandated priorities. I think that our 2013 new customer growth provides a very clear answer to that question.
Over the course of 2013 we maintained our strong investment in new products and in sales and marketing that have positioned Vocera very well for success in 2014 and beyond. The expand [ph] sales team members hired last year are just hitting their one year mark representing full productivity and they have several new products to sell in 2014.
We have expanded Vocera’s market leadership in providing enterprise class integrated intelligent communications solutions, as those of you who will visit us in the next week will see the new Vocera collaboration suite significantly raises the bar on smartphone based solution and is well-positioned to expand our ecosystem inside and outside the hospital. I highly recommend you take the opportunity to see and understand the value and competitive differentiation Vocera can deliver.
Let me switch gears and talk about the market trends we are seeing for 2014. We're hearing from hospital CEOs that their top priorities are productivity, spacey and patient satisfaction while they continue to try to meet legislative changes. Reimbursements are increasingly tied to patient satisfaction and thinking, and after a year of making painful budget and staff cuts, productivity gains are crucial not only to survive the current state but also to handle the expected rise in patient population this year due to healthcare reform.
Our current communication and care experience solution as well as new products to address alarm fatigue from our recent mVisum acquisition are well suited to help healthcare customers achieve these priorities. In 2013 trend around hospital budgets and competitive priorities may continue into 2014. But based on our new customer growth in 2013 I'm confident we will continue to be able to compete successfully for capital budget dollars. However we are still early in new year, so continuing uncertainty about operating budgets which fuel our expansion business is driving a cautionary stance on guidance.
2013 represented a year of significant sales force development and enablement. We finished the year with 66 quota carriers compared to 54 at the beginning of 2013. More importantly about 40% of our sales team was new in the first quarter of 2013. By year-end 57 of our reps had been in their job at least nine months compared with only 38 in April last year.
Paul Johnson who joined us Q4 to lead a newly combined sales and services organization is providing exceptional leadership for our team. These strategies for 2014 are ability, enablement and execution. You should expect to see greater stability in our US healthcare sales team with anticipated modest growth in our inside sales capabilities and some additions to the international sales team. For example, we recently added another sales person in Australia and a country manager for Singapore and will increase our direct selling efforts in Canada.
We are enabling the sales force by continuing to improve training sales force and ROI proof point materials and delivering consistent messaging. At next week Hint [ph] conference, we're launching our new branding that encompasses the expanded Vocera portfolio products and highlight the increasing impact and value we can have for our customers. These brand efforts, expanded sales enablement materials and new lead regeneration activities should help our sales productivity.
Finally we are focused on execution, predictable growth and meeting our sales goals. We recently added a new VP of sales operation and a new sales enablement position to help drive these strategies. In addition I am pleased to highlight the January hire of Rhonda Collins as our chief nursing officer, Rhonda who has an outstanding industry experience and reputation adds an importance voice to our existing and new customer discussion.
In January we had our sales kickoff meeting where I observed the tremendous energy and excitement on the part of sales who are excited to develop new pipeline opportunities, expand an existing account and sell a broad new product portfolio. The sales team is equipped and ready and I am increasingly confident in what they can accomplish in 2014.
As I turn to our pillars of growth let me remind you that my comments in this section as always are focused on bookings. Let me begin with new hospitals. New hospital customer growth continued to be strong in the fourth quarter with robust bookings both in terms of the number of new hospitals and total bookings from new customers. These new hospital bookings were all in commercial hospitals as our VA business is focused in the third quarter which is the government fiscal year-end.
New US hospital highlights for the fourth quarter include Trinity Medical Center in Illinois and Missouri Baptist Medical Center in St. Louis. For 2014 the federal government budget deal that listed the sequential impact on the DOD. So we're hoping to see those opportunities reenergized in 2014. In addition, FIPS 140-2 certification of our B3000 badge which is required for DOD and VA hospital is anticipated in the first half of this year.
Overall 2013 new customer results demonstrate Vocera is a high budget priority despite competing mandates. Our second pillar expansions within our install base continued at a moderated pace in the fourth quarter. While new customer sales tend to come to capital budget, expansion within existing hospital customers usually comes through operating budgets which will cut across US hospitals when the sequester hit last year.
Notable expansion in the fourth quarter included Baptist Health in Florida and Parkland Health in St. Louis. We're working to gain better visibility into customers operating budgets for 2014 but we know that the lion share of the B3000 upgrade opportunity is still available and we are going to go after it even harder this year.
Based on our new customer success we have every reason to believe that it remains strong demand for expansion. This belief is supported by our solution’s strong ROI to high customer satisfaction scores we received in our fourth quarter survey of high maintenance renewal rates and a lack of customer attrition. As I said on the Q3 call any meaningful uptick in the growth rate of sales into our installed base as a result of improved budget environment would result in the single largest upside to our forecast.
Our third growth pillar is developing and acquiring new products to cross sell into our install base to customers. These products are going faster than our business overall but still represent less than 10% of our business. However in 2014 this pillar will become much more interesting as we introduce three new products to our sales force. As we announced on the Q3 call we are introducing a new solution called the Vocera Collaboration Suite which integrates the advanced calling functionality of our badge with dramatically enhanced messaging and collaboration capabilities into one seamless user experience available on a wide variety smartphone and tablet devices.
Users have the ability to utilize Vocera’s unique person role or broadcast capabilities and seamlessly choose between communicating by voice, secured texts or alerts. On last quarter’s call I also highlighted the Vocera Care Experience suite, a selection of interrelated subscription services that help hospitals improve patient engagement, safety and satisfaction, reduced re-admissions and improved HF scores that can affect reimbursement rate.
Last year the Vocera Care Experience suite was only sold by a small dedicated sales team as we integrated this business, optimizing and expanding the product set, determining optimal offerings and testing the selling model. Two particular highlights in the fourth quarter were multiyear contracts for care experience with Truman Medical Center in Kansas City and Ashokan [ph] Help in Ohio.
On January 1 of this year the Care Experience suite was given to the entire sales force to take to market. Having a full suite of communications solutions spanning entire the care continuum really set us apart from our competitors. Finally in the category of new products, I want to highlight our alarm management solution. If you have tended to listen to the webcast or our presentation of the JP Morgan conference in January you heard us announced the mVisum acquisition which has tremendous potential.
Hospital nurses are already overwhelmed with a barrage of alarms. One Johns Hopkins study found that they were getting more than 700 alarm per bed per day in the ICU based study. As EMR use continues to expand expectations are that this overload is going to continue to grow significantly worse. Recognizing the growing problem, the joint commission created new compliance rules for improving hospital alarm management and safety committee that went into effect on January 1.
The national patient safety goal requires hospital action with measurable deliverables by January 2015 and January 2016 with future requirements to follow. Our new alarm management technology which operates along many of the same fundamental principles as our voice server dramatically reduces overall alarm numbers and also delivers diagnostic images, data or wayform [ph] alongside the alarm for immediate triage and evaluation.
This new solution will further establish Vocera position in enabling and improving critical clinical communications and workflow. We anticipate making the Vocera alarm management offering available to sales force later this year. As a result of all these new products my expectation is that we will see a more meaningful contribution from the cross-selling of these new products in 2014. Aggressive investment in R&D will continue this year and our 2014 financial model grows our engineering expense by more than 25%. In addition we continue to pursue other acquisition candidates that can bolster our product offerings and enhance our competitive advantage.
Our international business which is our fourth growth driver finished strongly 2013, representing 14% of Q4 bookings. Fourth quarter highlights included the signing of a large deal in Abu Dhabi with a 364 bed hospital that’s completing construction this year and our first order from Singapore with a 790 bed facility following a successful trial of our Singapore English products.
We added additional sales resources in Singapore, Australia and the Middle East and are looking to capitalize on the growth in those regions. We also had a very strong finish to bookings in Canada. In total international accounted for 11% of 2013 bookings and we expect to continue to grow international faster than our overall business for the next several years.
Our final pillar is focused on growth in non-healthcare markets. When we created the mobility team at the beginning of last year we started the variable pipeline. Despite this team generated 10 new account wins this year. Mobility accounted for less than 5% of this year's total bookings and should continue to grow in 2014. We've established Vocera as the solution of choice for the nuclear power industry, where today we have 10 of approximately 70 facilities in North America.
In the fourth quarter we generated our largest expansion order in nuclear power with the sale of nuclear going plant wide from 75 users at the initial deployment last February to almost 500 users today. The mobility team also did a nice job in 2013 building use cases in ROI proof points for hospitality which is critical for moving those efforts forward.
Before I pass the over to Bill, let me summarize by saying that despite challenging budget environment in 2013 I'm very proud of our team for the work they did this year. 2013 demonstrated Vocera solutions are a budget priority with the record number of new customers. We see many things that could go right or go better this year and are excited by the new growth opportunities in front of us. However we continue to guide conservatively as uncertainty around budgets remain.
Now let me turn the call over to Bill for the financial highlights and guidance. Bill?
Thank you, Brent and good afternoon everyone. I am pleased to report that we met our recent guidance for the quarter and for the year. 2013 represented a year of strong sales performance in the face of significant challenges for our customers, significant investment in future growth and good business discipline to meet our guidance.
Continuing the trend of strengthening as the year progressed Q4 bookings set a new record and were up 17% sequentially bringing full-year 2013 bookings to 114 million. In what we know was a challenging environment we grew bookings in 2013 by 13%, a slightly higher growth rate than 2012. A 19% growth in the number of new customers for the year that Brent highlighted again is a significant indicator of the recognition of Vocera’s value proposition and ROI and our competitive strength.
In bookings dollars new deployments which count both new customers and cross-selling of new products into an existing customer were $26 million for the year, up 36% from 2012. As with the challenge all the year, software and hardware expansion and supplies with an existing customer was $59 million, up only 3% from 2012. Maintenance and subscription renewal bookings of $29 million were up 20%.
On a regional basis year-over-year bookings grew 12% in the US, 16% in Canada, 19% in EMEA and 102% in Asia Pac. In terms of cross-selling bookings for our new care experience products and services increased 38% year on year. Our messaging bookings were flat versus the prior year as our sales force prepared to sell Vocera Care Collaboration suite in 2014 and our non-healthcare bookings were essentially flat during a year that we built significant pipeline entering 2014.
Based on the 114 million in bookings for the year we entered 2014 with a record 24.4 million of backlog, which represents a 52% increase compared to 60 million at year-end 2012. 12 month backlog at year-end 2013 was 20.6 million versus 13.7 million for the prior year of 50%.
Moving to revenue and income statement. Fourth quarter revenues are a record 28.7 million, up 6.4% from last year and up 10.2% sequentially reflecting a continuing improvement over the course of the year. For the quarter, product revenue increased 6% year-over-year and 18% sequentially.
Device revenue was down slightly compared to the prior year continuing to reflect the slowed pace of expansion in badge upgrades. Total badges shipped in the quarter were roughly flat year-over-year where we estimate 70% of the B3000 upgrade opportunity in May.
However software revenue for the quarter was up 27% year-over-year and up 39% sequentially setting a new record and reflecting a higher software content associated with new customer adds that shipped during the quarter. Services revenue which includes both support and professional services for configuration, installation and training was 10.3 million, up 7% year-over-year on higher new customer growth.
For the full year 2013 product revenue was 62.4 million, down 4% from 65 million in 2012 due to slower expansion business. 2013 services revenue was 40.1 million, up from 35.9 million in 2012 reflecting our growing installed base.
As I switch to margins and other income statement line item, please remember that I am going to focus on non-GAAP figures which have been adjusted for stock based compensation and amortization of acquired intangible. I believe these non-GAAP numbers are more representative of the actual performance of the business. Our press release includes a reconciliation to reported GAAP numbers.
For the fourth quarter gross margin increased sequentially by 150 basis points, to 65.3% driven by a higher software mix, continuing the trend of improved gross margin in each quarter through 2013. We were able to grow gross margin during the quarter despite approximately 200,000 of additional E&O reserves related to access B2000 inventory as part of the transition to B3000 badge and approximately 600,000 of additional warranty reserves. The additional warranty reserves recorded [ph] based on return rate data and responded in the projection of future returns.
I should note that we are constantly making small incremental improvement to the B3000 badge, and as a result we expect return rates on badges shipped in the last six months to begin to decline. We also continue to see lower return rates on the B3000s than our prior generation B2000 badge.
Turning to the full-year results, gross margins were 63.9%, 60 basis points below 2012. Product gross margin which include both device hardware and software was 66.2%, down 750 basis points from 67.7% in 2012. Software margin was essentially flat compared to the year earlier and device margin was down 120 basis points reflecting lower sales volumes from our expansion supplies business and the additional warranty and inventory reserves. Despite the warranty reserve uptick in Q4, we remain confident in our ability to achieve our long-range gross margin target of 70%. Services gross margin was 60.4% for 2013, up from 58.8% in 2012 driven by a higher mix of software maintenance revenues.
Looking at operating expenses, R&D was up almost 3 million or 26% over 2012 reflecting our commitment to invest in the new products and enhancement. And sales and marketing expenses increased 10 million or 31% year over year as we expanded the sales group and marketing efforts as Brent highlighted. General and administrative expenses in 2013 were down 1 million reflecting the cost and staffing control.
GAAP net loss for the year was 10.5 million, or a loss of $0.43 per share. GAAP net loss for 2013 – rather non-GAAP net loss for 2013 was 1.1 million or a loss of $0.04 per share. Our non-GAAP net loss excludes 8.7 million of stock based compensation costs and 0.7 million of intangible amortization. 2013 adjusted EBITDA profit was 700,000, slightly above our guidance range.
Turning to the balance sheet, our cash, cash equivalents and short-term investments at year-end were 128 million, unchanged compared to 128 million at year-end 2012. We remain debt-free and well-positioned to pursue strategic opportunities such as the mVisum acquisition that we announced in January which consumed 3.5 million of cash in Q1 ’14.
Before I get to guidance, let me update you on what revenue we have direct line of sight to for 2014. Earlier I noted 12 month backlog of 20.6 million and we finished 2013 with current deferred revenue of approximately 27 million when including deferred lease liability, to which we would add in our expected maintenance renewals during the year.
Finally we expect approximately 20 million from our supplies business which is very predictable. In total that means we entered 2014 with approximately 70 million of visibility before announced [ph] even sales team secured both customer expansions and new customer growth. This is approximately $10 million higher than our visibility entering last year which puts us in a much stronger position entering 2014 than we did entering 2013.
As was true last quarter however our guidance includes a cost in view of hospital operating budget and spending. There remains both risks and opportunities that are unknown including legislation, utilization rate and patient population trends. Our guidance also reflects a continued bias to reinvest back in the business to power future growth. The areas of investment as described by Brent are focused on increased R&D and sales and marketing.
For the full year 2014 we expect revenue between 105 million and 115 million. Non-GAAP EPS between a loss of $0.10 and $0.28 and adjusted EBITDA between a loss of 4.5 million and a breakeven. We expect GAAP EPS to be between a loss of $0.73 and $0.89. Our full-year 2014 non-GAAP guidance excludes stock-based compensation expense ranging from 13 million to 14 million and intangible amortization of approximately 1.1 million and certain expected legal costs related to the pending securities lawsuit.
Non-GAAP earnings-per-share guidance is based on fully diluted share count for the full-year 2014 of 25.5 million. Income tax for the year is expected to be between $200,000 and $300,000. For the first quarter 2014 we expect revenue between 23.5 million and 24.5 million. Non-GAAP EPS between a loss of $0.16 and $0.18 and adjusted EBITDA between a loss of $3.5 and $4 million.
We anticipate GAAP EPS to be between a loss of $0.30 and $0.32. Our first quarter 2014 non-GAAP guidance excludes stock based compensation expense of approximately 3 million and intangible amortization of approximately 300,000. Non-GAAP earnings-per-share guidance is based on a fully diluted share count for the quarter of 25.1 million. We do not expect any income tax expense for the quarter.
On the whole, although we did not achieve our original target we made good progress in 2013 given the very difficult and changing environment our customers faced. Despite the impact of the sequester in Q1 on hospital spending we maintained our strong investment in sales and marketing and product development over the year and were able to actually slightly increase our rate of bookings growth versus the prior year, while significantly increasing our visibility entering 2014.
Our sales people are starting this year with two additional high ROI products in their bags that were developed as part of 2013 R&D investment with the third to come later this year and through the mVisum acquisition. As a result I think we dramatically strengthened our business in 2013 both operationally and financially, for increasing success this year and into the future.
That concludes my portion of the call. And with that, I will turn it back over to Brent for some closing remarks.
Thanks, Bill. While we were not satisfied with our 2013 results we built strong momentum throughout the year and I believe we’re better positioned today as a company than ever before. We achieved a record bookings and backlog and added more new customers than ever before. We made good progress in our five growth pillars and our investment in sales and marketing and R&D have generated a larger more tenured sales team and a broader product portfolio to sell.
Our focus remains on growth and as a result management’s 2014 incentive plans are focused entirely on revenue growth and I can tell we are fired up to achieve those goals. I want to take this opportunity to thank all of your Vocera employees who work tirelessly to develop and deliver best in class solutions and our customers who are working hard to serve the needs of their staff, patient and customers.
Thanks for your time today and we are ready to take your questions.
(Operator Instructions) Our first question will come from the line of Sean Wieland [Piper Jaffray].
Sean Wieland - Piper Jaffray
My question is on backlog. Can you – I know you have given us a lot of information already and I appreciate that. But could you maybe give us some kind of indication of the mix of backlog of software versus products and how that’s translating into the guidance? I am doing the math on – as you laid out also on the visibility and I am just trying to get a sense – if there is some mix in the backlog that’s causing that revenue number for next year to be more conservative?
So first, again, just to review the numbers, so 20.6 million of the 24 million is shippable in 2014. So that’s the first metric. And then of course the question gets, what does that distribution look like by quarter? And as you would expect there is a higher percentage of that, that falls into Q1 and then a decline over the course of the year. So that’s I guess the second data point I would give you.
In terms of the mix of the backlog about three quarters of that total represents hardware software and related services. And then within those numbers of course, there is a breakout within those components. But our guidance is based on first, to the full year looking at how much will fall into the year and then Q1 is based on how much of that will fall into this quarter based on all the committed ship days.
Sean Wieland - Piper Jaffray
And how about your sales force productivity assumptions, I mean could you tell us how many reps made their quota in 2013 and what are your assumptions around improvements in sales force productivity in 2014?
So Sean, what I can tell you is that it was a mixed bag, we had some stellar performances from some of the reps particularly in the federal teams that were able to generate a lot of new business. We had a couple of the hundred who landed some of those new customers that blew out their numbers and did a great job. But obviously overall for the year we felt short of our original expectations. So we had a number of people who did not make their quota numbers for the year. I think the focus for 2014 is as you said is on productivity and some of the work we are doing around sales enablement, around some of the ROI tools, that we are building around the account planning, account management, we are expecting will drive greater productivity. We don’t quote a specific productivity number but I can tell you that the focus coming into 2014 was more around how do we take the team that we have got make them more productive as opposed to adding a bunch of additional reps and [indiscernible] the territory for the most part, the reps are going to have the same territory that they had last year, so they’ve got greater familiarity with their customer base and as I mentioned the tenure is up a lot from where we were last year and their familiarity with the product is much higher, with familiarity with their customers in their territory is much higher. So we factored that all in when we come up with our bookings forecast and ultimately our revenue guidance.
Our next question will come from the line of Ryan Daniels with William Blair.
Ryan Daniels - William Blair
Want to give a follow up to Sean, it looks like doing the quick math, the percentage of revenue you had visibility on is kind of higher this year, we use the midpoint than where it was last year based on the final results. I am curious if you can comment, is that just purely taking a more conservative stance on your part or is it an indication that you’re seeing even more hesitation among the end market in particular with the expansion, so maybe you are seeing more deviation from the surveys with future expectations. Any color you can give there.
Yes, best way for us to describe this is we are just being conservative about as a gazer [ph], I mean obviously we don’t want to repeat what happened last year in Q1 and our view is let’s take a conservative approach, we are coming into this year certainly in better position than we came in the last year. And as we go through the year we will adjust our guidance accordingly as things unfold. There is still some headwinds and tailwinds out there. So it’s unclear yet how the year will go [ph] but clearly at this point out the gate we want to be conservative.
Ryan Daniels - William Blair
And just on the mVisum acquisition, I know you guys indicated that it would be dilutive to 2014 results. Do you have a target for the EBIT impact that we may see from that?
Ryan, we don’t get into that kind of breakout. But look, there is additional engineering folks that were taken on board. There is additional development in terms of making sure it’s properly productized and integrated into our overall solution. So we will spend some money, that’s kind of baked into the increase in R&D that Brett quoted, that's where most of those dollar lie.
Ryan Daniels - William Blair
And then maybe last just a big picture one for Brent. Update on the collaboration suite you obviously talked about that in the prepared comments, but I think you went through beta trials in Q4. So when is that going to be fully launched to the sales force and then curious what early feedback from your beta users has been on the collaboration suite?
So the feedback from the beta users has been very positive, I think they are excited about the user interface. They think it's best user-interface they have seen and it simplifies the process of interacting and collaborating whether it’s by voice or by text. So we have been really pleased with that. The launch actually is occurring next week. So we’re launching it at HINT [ph]. The sales force has been being trained over the last couple weeks, we’ve been doing the internal training there and we will be demoing it in the booth and you will actually see it there next week if you are coming to our booth.
Our next question will come from the line of Gene Menheimer [ph] with B Riley.
Just extrapolating little further on what said before, with respect to the visibility you have record bookings, backlog, deferred revenue, it seems like you're holding back a little bit on the top line view, what are the elements that would cause you to come in at the low end of your guidance versus the high-end? Is it really related to timing of device shipments and perhaps some government activity, what can you tell us about that?
So probably the single largest variable for us is what – buying from our install base of customers, that’s the biggest part of our revenue stream, it’s a book ship business and that represents the largest amount of potential upside for us if we can get that back on track. I mean last year was a tough year obviously in terms of expansion business from the install base. So that’s probably the biggest variable and frankly we’re not – it’s hard to say at this point in time how this would play out. So all we can do frankly in terms of current year visibility is I think a conservative position and then if and when the environment improves then we will obviously take that into update guidance. But that’s probably the single largest factor that can drive the numbers one way or the other. I will ask Brent, if you want to add anything else to that.
I think that’s right – there is a level of uncertainty amongst the budget holders and it’s still too early in the year to know exactly how that’s going to play out. We’re excited about the new customer growth and the new product growth and we are obviously pleased with the visibility we got going into the year but that existing customer expansion business is such a large portion of our business but until we start to see better visibility of what that’s going to look like over longer-term we just want to be conservative.
An then with respect mVisum, the question was asked about the contribution there to profitability, but what – can you share with us about pricing model with that product and if there is any mVisum built into your current year view, or more broadly where do you see software going as a percent of revenue this year and maybe longer term?
So model assumes actually very little revenue from mVisum this year. Again we were conservative, probably major account every expense associated with mVisum but wanted to be conservative on the revenue side just until we get it launched. I guess the early feedback even prior to launching it to the sales force there seems to be a lot of interest in the product. We’ve had a lot of inbound inquiries from our customer base and noncustomers who are interested in the product. But when we're putting the model together we really didn't factor in a whole lot of revenue from this year on the assumption that we need to build pipeline, get people budgets and that kind of thing.
So I guess the short answer to question is that it's been downplayed quite bit. For the software overall, yes, the expectation we have is the portion of software revenue will continue to increase not only as a result of mVisum but also some of the other new product offerings, so the collaboration suite is going to obviously drive additional software revenue as will the care experience products. We haven’t talked a lot about those yet today but the care experience suite we started with the good to go product and it has now been expanded to several other modules including care around module and care calls modules. Those are all fast pace, all software based products and now that we have launched those products into the broader sales force, we expect that to grow to be a more substantial part of the business. So we would expect to see software increasing as a percentage of overall revenue, and that’s part of the reason why we expect to see gross margin continue to go up over the long-term as well.
Our next question will come from the line of Gavin Weiss with JPMorgan.
Gavin Weiss – JPMorgan
Looking at the EBITDA guidance for next year and for the first quarter, could you maybe give us some more detail on your expectations for expenses in the first quarter and for a wider improving throughout the year – is there some impact from mVisum or something else?
Yes, so we grew OpEx, just to kind of level – we grew OpEx last year 21% and we see frankly a similar type of trend for 2014 and most of that would be focused in R&D and sales and marketing line. So what you're seeing in Q1 is the impact of both those continuing to invest on that side and then lower revenues obviously. Now our gross margin profile is so strong that when we take a step back in revenue a high percentage of that falls down to EBITDA. So that’s kind of the dynamic that you’re seeing in Q1, a combination of those two factors.
Gavin Weiss – JPMorgan
And then just touching on the two announcements from this last week, the hotel deal, was that included in guidance and then maybe can you talk about what the implications of the intermountain being a part of that lab would be for you going forward?
Sure. I don't know that the specific hotel deals would be factored into that level granularity. We clearly have a number for hospitality we are shooting for for the year. The hospitality tends to be relatively small deal, so it takes a number of them to make a meaningful impact on the total number but we didn't factor that specific deal into our guidance, and more the category of hospitality. And then now more broadly speaking as you look at – Intermountain, this is actually a really exciting opportunity. We've had Intermountain as a customer for a long time and the opportunity that they are creating is a customer experience and where they want to test new technologies and evaluate them for solving some of the biggest problems inside healthcare. So we will be working right alongside the folks at Intermountain on this experimental lab that we will be bringing technologies in, working with other vendors who were also part of a lab to work together to see which one can actually make a dramatic impact on their overall workload. So it’s just really a continuation of the relationship with established with them many years ago. I think you probably may have seen certain announcements from last quarter and they are also participating in this particular lab with similar one.
Gavin Weiss – JPMorgan
Okay. And can you remind us what’s your penetration is with InterMountain
I don’t have a specific number. InterMountain is made up of a number of healthcare facilities and we are in several of them, but there are good size customer for us as I say we probably in about half of the facilities today.
Our next question will come from the line of Rohan Naidu with Stephens. Please proceed.
Thanks for taking my question, guys. Very quickly on this professional services revenue, you have a very strong new customer growth year-over-year, yes your professional services went down, what’s the discrepancy there? I though whenever a new customer you find you actually get professional services revenue?
I’m sorry. Could you repeat the question? I didn’t understand.
Sorry. Your professional services revenue and their services...
Our professional services, okay. I got it. Yeah from our healthcare business fair amount of professional services revenues are actually sitting at backlog. They get out as we deployed lot of the bookings that still haven’t been deployed, as of year end they only have been shipped and deployed. So Q4 was weaker in terms of PS revenue, but we’re expecting as we started and get a lot a lot of these deals deployed especially on the government’s side since there is a fair amount of government deals that are still sitting backlog and the professional services will kind of follow along with it in part to fall through the.
Okay. So in 2014 we can expect a steady growth in professional services then?
Yeah. I think well again there is no reason having floored by quarter which depends upon the timing of deployment and that’s the one with new customer booking they can kind of vary pretty wildly from the next quarter to three or four quarters out, it really depends, but I would think rationally we would hope that in 2014 we would see a little bit of a bump on the PS side.
Brent, quickly, on the FIPS certification on B3000, any of your government deals contingent on the certification on B3000?
No. Obviously, future business will rely on us continuing to be able to meet certifications, but none of the deal that we’ve already booked are contingent on that pro se. I think it’s just a requirement for us on a go-forward basis to make sure we continue to meet those certification requirements.
Okay. So the deals that you had booked though, are they B3000 or B2000?
They are booked to B2000 deals, yeah.
Okay. Alright. So once you get the FIPS certification then you can actually book on FIPS B3000 of the government deals?
Yeah. Typically, those would be new bookings. The expectation would be the deals that have already been booked with ship is B2000 badges and then future business that we book at other facilities or upgrades or extensions that might occur in the future would be on the B3000?
Our next question comes from the line of David Larsen with Leerink Partners. Please proceed.
David Larsen – Leerink Swann
Hi. Can you guys talk about the conversations you’re having with your hospital clients around increases in hardware sale. I think the CEO projected an increase around 8 million people that you have Medicaid insurance and 3 million will have insurance through these exchanges. In my mind that’s pretty good. Are your hospital clients positive about that or is it too early to tell? Thanks.
Hi David. Thanks for the question. I think it’s still too early to tell. We were speaking with some hospital leaders earlier this week and they did indicate that sounds like patient populations are projected as they’re coming back but I think for the most part they are still taking a pretty cautionary stand, there’s still lot of moving pieces on it and I don’t think really understand fully the impact of the exchange registrations and how that will translate the patient populations, but I think that most of the analysts that I have read and most of the analysts point to the fact that ultimately the joke is that we didn’t sold sickness. So ultimately the patients will start coming back in the hospitals and the challenge then at that point becomes in some of the budget cost and some of the layouts that have occurred over the last two months starts put real pressure on these organizations as they now have to figure out a way to serve the increasing patient population. I think it drives greater need for productivity solutions and communication solutions that Vocera can really have a dramatic impact on. So I think this starts to come our way, but I think it’s too early to predict exactly when that transition will occur.
David Larsen – Leerink Swann
Okay. And then just one more. In terms of the sale cycle indicated that over the past quarter or so relative early 2013 buying patterns of hospitals has improved pretty significantly. Would you agree with that in general terms?
Yeah. In general terms, we saw a momentum improve each of the four quarters during 2013. I think for us Q1 was clearly the worse and Q4 was clearly the best and it was kind of a gradual progression during that period of time and so we’re hopeful that the basic trend will continue.
David Larsen – Leerink Swann
Okay. Thank you.
Your next question will come from the line of Jamie Stockton.
Jamie Stockton - Wells Fargo
Yeah. Good evening. Thanks for taking my questions. I guess, and this has been touched on a little bit already but Brent, the non-voice solutions, which I think you have were under 10% of revenue today. When do you expect those to start to inflect? Is that rolling the collaboration suit is going to really help kicked that off or is there something else that you think some of the catalyst that needs to occur before you start getting more significant contribution there?
I think it’s really a combination of the collection of the non-voice products. The one that probably the most exciting for us is the care experience suite which is a completely separate business for us right now and bringing that good-to-go solutions, care arounds, and care-call solutions into our broader sales force. As I said in the prepared remarks, during 2013 we essentially had four people, four product specialists to try to go out and really navigate the market, understand what the needs were, what the selling process was, what the product requirements were and we made great traction there and showed some substantial growth in that particular product line. Now as we bring that into the entire US healthcare sales organization, the sales team is really fired up about that product and really excited about the opportunities to sell out. So I think you’ll see pretty substantial growth there. The collaboration suite is an interesting one. We are excited about it. We got really positive feedback on it. It remains to be seen how quickly that grows as you and I talk about before it’s interesting the degree to which we go out and we talk to customers about being the platform of being device diagnostic and having solutions that allow people to leverage the platform and build ecosystem.
Lot of times, ironically, of coming back and driving more bad sales because they really realize that the hands-free nature of the badge is important. What I get excited about the collaboration suite is actually adding incremental users particularly as we think about doctors who maybe outside the hospital rather than just with the folks inside the hospital. So I think that frankly getting our brand out there and making people aware of the fact that we have these other product solutions available, is going to be the first step. The second step is making sure that our sales force is trained and ready to sell them, but I think that we’ve now got products that are right for the market and it’s just a matter of execution, but I don’t think there is any particularly chipping point or force in function that we’re looking for, I think it’s just a matter of growing of somewhat starts out as a small base to grow pretty substantially over time.
Jamie Stockton - Wells Fargo
Okay. And you kind of touched for my next question a little, but are you seeing more deals where hospitals would be looking at an app only model incrementally?
We’re seeing a handful of customers that are focused on the app only solutions performing only solutions. More of a time what we’re seeing is customers that are looking at a mix environment and they want some users to be using badges and some users to be using smartphone, but number of the existing smartphone solutions with messaging texts is a relatively small number of users in there are grand populations and most of the customers we talked to recognized that depending on the user group, they got different use cases and different needs for different devices. And so it's been more exception rather than the rule where we see customers that are going to be going with the smartphone solution for the entire user population. And I think again it really depends on who you’re talking about, the physicians as a new group for us are more likely to head towards smartphone solution because they want to be able to get access to the other information available on screen.
Some of the work we are doing with the EMR companies is going to be driving some interesting integration work there. The mVisum piece obviously leverages the smartphone for displaying visual images that are waveform. So that will be additional value-add. I guess my philosophy on this and I talked a little bit about this earlier in the year but our feeling on this is that if all the customer really need to do is communicate with someone else in the organization then they are by and large going to be in favor of the hands-free wearable capabilities of the badge. And for us what we need to do is deliver additional value on to a smartphone solution beyond just the simple messaging and calling capability. And that’s why I think the importance of mVisum technology, the alarm management piece, the waveform, the imagery, the integration with EMR to pull rich data, patient population, that’s what’s actually been justified that person to be carrying that smartphone device. And if we don't deliver that additional functionality then most of those users are going to actually prefer to continue to use their badge form factor.
Our next question will come from the line of Eric Coldwell with Robert W. Baird.
Eric Coldwell - Robert W. Baird
A lot of my question was around collaboration suite and Brent, you hit on a bunch of it with your last response. But this might be a simple obvious answer but I haven't thought it. But you talked about collaboration suite driving a higher mix of buffer sales going forward, but obviously the user has to have a mobile device. And my question is are you expecting the users to use a hospital supplied device or are you actually going to be providing the device in resell function? And if so whether it’s an iPhone or a Galaxy whatever might be, but if so, would you not to have third party reseller hardware, how should I be thinking about the economics of a user adopting the collaboration suite?
The model today is a software only model. So the assumption is that in most cases the hospital is going to be providing the device for their users and we will be providing software, both the server software as well the client software to engaging that. And then we are also looking at potentially providing more whole product in terms of the chargers and store units and that kind of thing to deliver more of a complete solution for the customer. But by and large the solution will be a software solution that would be running on top of either r hospital provided or potentially DOD devices that the users would have.
Eric Coldwell - Robert W. Baird
And in terms of the economics of this app based model, will there be various pricing levels based on the number of applications embedded? In other words, will there be somewhere maybe the user doesn’t choose mVisum but chooses other solution and there is a ratable plan? And after answer that question, I guess I am curious let’s say the doctor could have gone with a badge instead goes with a collaboration suite on the PDA, what are the economics of that versus the badge maybe in terms of the total revenue just starting there? Is it a similar price point on an annual basis or significantly different?
So the answer to your first question is that various piece of functionality will be sold as modules. So the collaboration suite initially will incorporate the voice messaging and alerting functionality into a monthly subscription fee and then a server license fee. The mVisum, the alarm management piece, there is actually multiple products within mVisum. One is an alarm management piece that will be be sold primarily for the use by nurses and another one is more targeted at physicians that allows them to actually retrieve EKGs and other images in wafeforms from PAC systems and other archiving system. So those add-on modules will be sold by user or by departments depending on the number of users who are interested in using them, because they are going to be targeted at the subset of the population whereas the core communication piece is more broadly use cross everyone.
And then in terms of the trade-off in terms of revenue it is actually – we talked a little bit about this in the past but the way we set up the economics is kind of a push for us. If you think about the revenue and gross margin from the badge it’s typically they buy the badge and may share that across multiple users. If you compare that with the software revenue that we will get from the subscription of the perpetual license, on the smartphone side, it ends up being a pretty close to the same total revenue and Bill walked through that in the past looking at that over life of the product.
So the gross profit dollars we talked about would be the same. The revenue would be actually less but all that revenue with software is virtually – almost a 100% margin. The other new variable though that now enters into the equation is the mVisum technology, because that would be a separate module, that would be separately priced and that would be incremental therefore to kind of the revenue generation that we would get, either by selling the badge today or selling the collaboration suite. So we haven't finalized the pricing on that but that’s obviously something that’s in the works as we are looking to hand that off to the sales organization by the middle the year. So we can start selling it.
But as we get clarity on that, we can talk more specific there but that clearly would be an incremental revenue stream that will be all software and virtually all margin as well.
And with no further questions in the queue, I would now like to turn the call back over to Brent Lang for closing remarks. Please proceed.
Well, I just want to thank everyone for their time today. We appreciate you guys taking time. We know it’s a busy schedule and there is competing calls going on today. So thanks for taking time, we look forward to seeing you at Hints [ph] next week and we will have opportunity to demonstrate some of these new products and continue the dialogue then. So with that thanks a lot for your time.
Ladies and gentlemen, that concludes today’s presentation. You may now disconnect. Have a great day.
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