Vocera Communications' (VCRA) CEO Brent Lang on Q4 2015 Results - Earnings Call Transcript

| About: Vocera Communications (VCRA)

Vocera Communications, Inc. (NYSE:VCRA)

Q4 2015 Earnings Conference Call

February 11, 2016 05:00 PM ET

Executives

Jay Spitzen - General Counsel

Brent Lang - President and CEO

Justin Spencer - President and CFO

Analysts

David Larsen - Leerink Partners

Matt Hewitt - Craig-Hallum Capital

Mohan Naidu - Oppenheimer

Jamie Stockton - Wells Fargo

Ryan Daniels - William Blair

Sean Wieland - Piper Jaffray

Gene Mannheimer - Topeka Capital

Steve Halper - FBR

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2015 Vocera Communications Conference Call. My name is Andrew and I will be your coordinator for today. At this time, all participant lines are in a listen-only mode. [Operator Instructions] As a reminder today’s conference call is being recorded.

I would now like to turn the presentation over to your host for today's call, Mr. Jay Spitzen, General Counsel. Please proceed.

Jay Spitzen

Hello everyone. Vocera distributed a press release detailing fourth quarter and annual results earlier this afternoon. It is posted on our website at www.vocera.com and also available from normal news sources. This conference call is being webcast live on the Investor Relations page of our website where a replay will be archived.

On this call, we will refer to both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted earnings release. This conference call will contain forward-looking information, including statements regarding Vocera's projected operating results and anticipated market opportunities. This forward-looking information is subject to risks and uncertainties described in Vocera's filings with the Securities & Exchange Commission. Actual results or events may differ materially.

Let me now introduce our President and CEO, Brent Lang. Brent?

Brent Lang

Thanks, Jay. Good afternoon, everyone. Thanks for joining us on today's call. The fourth quarter of 2015 was a standout quarter for our business. Bookings and revenue were greater than expected and the company posted a larger number of enterprisewide transaction that will continue to propel our revenue growth in future quarters. I am excited about how we finished the year and we are well-positioned for 2015.

Q4 produced record bookings with significant year-over-year growth and strength across all segments of our business. Total bookings for the year reached $131 million, up 23% over 2014. Bookings growth in the fourth quarter was particularly noteworthy driven by several enterprisewide deals that closed during the quarter.

Our core voice communication business in the United States produced robust results and large sales to new hospitals and health systems were the highlight of the quarter validating the strategic importance of our secure, intelligent and integrated communications solution.

Q4 revenue was $28.4 million, up 15% over the same period last year and continued our trend of healthy year-over-year growth. Revenue for the year finished at $104 million, up 9% over 2014. As a result of our team’s great bookings performance, backlog finished at a record level providing us with increased visibility into future revenue.

As a reminder, conversion to revenue is typically longer for our new customer deployments, so we don't anticipate a spike in short-term revenue. Base on our conversation with customers, hospitals appear to have increased their focus on communication and collaboration to improve patient safety and operational efficiency. While the majority of our sales are still done at the departmental level, more customers are evaluating house-wide or even system-wide purchases of communication solutions.

The average deal size of initial customer purchases have increased as more customers do communication solutions as a strategic priority. As we mentioned on our investor call in early January we booked the biggest deal in the company's history with a Q4 win at the Franciscan Alliance. In addition, we booked our biggest existing customer expansion at [indiscernible] healthcare and our largest federal win at San Antonio Military Medical Center, both of which were multi-million dollar deals.

Our mission to become the leading provider of communication solutions to the healthcare industry by delivering secure, intelligent and integrated products and technologies is paying off with increasing growth in our business. At a market level, while we hear reports of tighter budgets and hospital seers remaining focused on improving their financial position and controlling costs, it appears the spending environment for our products has improved. We are seeing an increased focus on mobility and communication solutions.

In the post meaningful use era where most of hospitals have completed their mandated EHR deployments, organizations appear to be focused on improving operational efficiency and patient experience and recognize the positive impact of communication and care coordination solutions. Industry analysts are taking note of these trends as well. According to a recent report published by the Healthcare Risk Management Research firm CRICO Strategies, over 1700 desks and $1.7 billion in costs were tied to hospital communication failures.

A Gartner report recently argued that providers need to evolve into real time healthcare systems and adopt mobile digital strategies to make the patients a priority by developing enterprisewide collaborative and patient facing IT strategies. Meanwhile a recent IDC Health Insights report highlighted that while healthcare IT budgets continue to grow, that growth is now targeted towards mobile and analytics, rather than EHR.

As of the result of these trends, we see sizable opportunities for our comprehensive solution as hospital and health systems think strategically about communication, clinical workflow and care coordination across their organizations. Our platform differentiates us from the competition in our clinical integration capabilities, unique wearable communication badge and partner relationships with Apple and Zebra are all helping us win these big deals.

More and more organizations are recognizing the importance of delivering critical information to the right person on the right device supported by intelligent clinical workflow. Vocera deliver solutions to meet these needs.

Now, let me turn to some details from the fourth quarter in customer wins, new products and our international market expansion. The highlight for Q4 was our success with big deals. We saw significant year-over-year growth for new hospitals in the US, with several large wins in the quarter.

The Franciscan Alliance win was the largest in our history and was clearly the highlight for the quarter. The deployment includes a 5,000 seat enterprise software license for our communications platform supporting a mixture of Vocera badges and Zebra MC40 mobile computers running the Vocera Collaboration Suite software. This win highlighted our integration capabilities with epic, nurse call and physiological monitors and the flexibility of our solutions running on different devices.

You will have a chance to meet Franciscan’s Information Services Director at [indiscernible] which I will talk about later on this call. Other large new customer wins included Presbyterian Healthcare who will be deploying our solution across six acute care hospitals in New Mexico, Park Nicollet Health Services in Minnesota, San Joaquin General Hospital in California and a new hospital that is part of the Mount Sinai system in New York.

We also had two very significant new hospital bookings in the federal market, San Antonio Military Medical Center, the largest military hospital in the country generated our biggest federal booking ever and Madigan Army Medical Center also booked a substantial new license deployment. I view the number and size of our new hospital bookings in the quarter as a very positive indicator of the future of our business.

We also booked significant customer expansions in the quarter including our largest ever expansion deal at OSF Healthcare in Illinois which grew from three existing facilities to 11 hospital deployment. In addition we collected marquee expansion and badge refreshes at several of our other existing customers. The quarter also included some impressive wins in other vertical markets.

The largest was a win at the University of Minnesota, Veterinary Medical Center where we were replacing a legacy paying system. We also booked a deployment with [00:08:49] and we have additional plans in the pipeline that are expected to close over the next 24 months. Finally, we closed the deal at the Four Seasons in Oahu opening in mid-2016 which will be our fourth Four Seasons property.

Now let me give you an update on the success of our new products. Several of our major customer wins in the quarter included our new product elements. In particular the Collaboration Suite and the Clinical Workflow Engine. Collaboration Suite which enables customers to access our software platform from iOS and Android devices was a critical part of several of the big deals again this quarter, including both the Franciscan and Presbyterian deals that I mentioned earlier. Our platform strategy and support for a range of different client devices makes Vocera the best choice by providing customers options for handheld and wearable devices.

Our Clinical Workflow Engine also played a key role in several of our new customer wins. The Clinical Workflow Engine provides connectivity to a variety of clinical systems including Nurse Call and physiological monitors and reduces the need for customers to purchase third party middleware.

During the quarter, we added 10 new customers of our Clinical Workflow Engine. We continue our successful transition to becoming an enterprise platform company for clinical communications and workflow solutions. Software is an increasing portion of our business and hospitals and health systems are viewing us as a strategic priority as they look to improve patient experience and enhance operational excellence.

Q4 was also a strong quarter for international with bookings up substantially compared to last year. The majority of our international bookings occurred in December and contributed to our healthy end of year backlog entering 2016. In Australia, our big win was at Perth Children's Hospital. In Singapore we added another new hospital facility that will be using our communications platform.

We also booked the Sunderland Royal Hospital in the UK which recently built a new emergency department and was looking for ways to improve communication. Finally, I wanted to highlight our win at Sultan Qaboos University Hospital in Oman. Our first win in that country and one that will provide us with another great lighthouse installation in the Middle East.

Our backlog and sales pipeline in these international markets continues to grow and our investments in these markets are beginning to payoff. We remain committed to growing international to 20% to 25% of our business over the next few years.

Overall, I'm pleased with the velocity of our business. Once again we delivered results above expectations and we are expecting - and we're executing on the important strategic initiatives designed to propel the future growth of our business. The domestic hospital market has continued to improve for our business. I am increasingly confident in our ability to drive double-digit growth in the business while also improving profitability.

Now, let me give you a sense for our priorities for 2016. First, we're making investments to expand and improve our communications platform by adding even more scalability and new functionality to our solution. Through both organic and inorganic investments, we remain committed to creating the most robust, reliable and feature-rich communications platform in the industry. We will be focusing on deeper integration into the clinical workflow and expanding the solution to reach a wider range of users.

Second, we are investing to ensure the successful installation of our large new customer deployments. The company recognizes the importance of making these deployments successful showcase accounts and we're hiring additional services resources so that they go smoothly. We're also excited by the prospect of closing additional enterprisewide deals that are in our pipeline.

Third, we continue to focus on improving the execution and productivity of our sales and marketing functions. We don't anticipate adding substantial numbers of sales resources to achieve our growth targets for 2015 as we believe there is still room for improvement in our sales enablement and enterprise solution selling. We're also encouraged by the returns we're seeing from our investment in demand marketing and lead generation. As you may have seen last week, we brought on new a Vice President of Marketing, Kathy English and I am excited to have her knowledge and experience as part of my team.

Finally, we continue to invest in international and remain convinced it can become 20% to 25% of our business over the next few years. Recently, we brought onboard a new Regional Vice Presidents for our Asia Pacific market and see substantial opportunity in the international markets.

Before turning the call over to Justin, I would like to take a moment to report that our Director, Hany Nada will be departing from Vocera’s Board of Directors at the end of his current term this June. As many of you know, Hany is a venture capitalist who has served on our board since 2003. We extend our warmest thanks for his 12 years of service. A search for a new board member is already underway.

Now, let me give our CFO, Justin Spencer, a chance to provide some financial highlights from Q4 and update you on our guidance for 2016. Justin?

Justin Spencer

Thanks, Brent. Hello everyone. Vocera’s fourth quarter results exceeded our expectations highlighted by double-digit revenue growth and record bookings, backlog and deferred revenue. We also achieved an important milestone for the company reaching our goal of delivering positive adjusted EBITDA in the quarter and demonstrating the operating leverage we have in our business.

Total revenue in Q4 grew 15% to $28.4 million reflecting the success and momentum we are seeing as a result of our broadened platform strategy and the strategic importance with communication and collaboration. For the full year, total revenue was $104.1 million with 15% year-over-year growth in the second half.

Product revenue in the quarter increased 21% to $15.8 million with double-digit growth at both devices and software. Our device revenue came entirely from our communication badge and related accessories, reflecting the continued value that this unique hands-free device offers in the market. In the future, our device revenue will also include Zebra MC40 devices where we have backlog that will ship over the next several quarters.

Software revenue which was roughly 15% of our total revenue was driven by the strength of our communications platform, software licenses and the continued momentum of our new software products. Services revenue in the quarter was $12.6 million, up 9% from last year. We continue to benefit from a growing base of customers utilizing our software maintenance and support services and a very healthy renewal rate above 95%. Software maintenance and support revenue is all recurring and was approximately 37% of our total revenue.

The growth of our customer base during 2015 and the high maintenance renewal rates led to a healthy increase in our deferred revenue which was $39.6 million at year end. The other portion of our services portfolio is professional services, which represented just over 9% of our total revenue in Q4. In 2016, we expect professional services to grow at a faster rate than the rest of our services revenue, because our new customer acquisition growth has accelerated and we will begin deployment of several system-wide deals.

Our bookings performance in the quarter resulted in record backlog of $58.2 million at year end. There are couple of important points I want to make about our backlog. First, we are very pleased to benefit from a solid backlog position as we enter 2016. It is a positive indicator of the underlying health of our business and helps contribute to improved revenue visibility.

Compared to prior periods, a higher proportion of our backlog is now represented by new and in some cases very large customers who will be deploying our solution to first time. New customer deployments typically have a longer revenue conversion cycle than existing customers who are expanding the use of our solution to other departments or facilities. As an example of this, the two largest transactions we announced in 2015, Franciscan Alliance and University of North Carolina are expected to convert from backlog to revenue over the next 18 to 24 months.

So in 2016 as a result of this increase in new customer deployments, we expect our backlog to revenue conversion cycles to lengthen somewhat. Our 2016 revenue guidance reflects what we believe is a prudent estimate of the backlog conversion and revenue we expect from our largest deals. For reference, our seven largest deals currently in backlog are expected to represent approximately 6% of our total revenue in 2016. And in Q1 2016, they are expected to contribute less than 2% of our total revenue. Roughly 33% of the contract value for these seven deals is expected to convert from backlog to revenue in 2016.

Inclusive of these factors, we believe we have good visibility to our revenue target for the year with roughly 70% coming from the combination of existing backlog, deferred revenue and expected suppliers’ orders in line with our visibility level entering 2015.

On the profitability side, we delivered significantly improved profitability compared to last year and achieved our goal of being adjusted EBITDA positive in Q4. Non-GAAP gross margin in Q4 was 55% better than we expected and was driven primarily by higher revenue. For the full year non-GAAP gross margin increased to 64% reflecting our focus on operational efficiency and revenue growth.

In 2016, we expect our gross margin percentage to be similar to 2015 as we are investing in our service delivery capability to drive deployment success which we believe will in turn enhance our software business. In the long run, as we build more scale and drive more software revenue, we see it pass even higher gross margin.

Non-GAAP operating expenses were $18.7 million, up sequentially from Q3 and flat with Q4 last year. Our excellent bookings and revenue performance in the quarter and the second half led to higher incentive compensation expense in Q4. However, even with this extra success based expense, we achieved our cost reduction goals for all of 2015, driving operating expenses down 4% from last year. In 2016, we expect operating expenses to grow roughly 3% to 5% significantly less than our expected rate of revenue growth.

Now I'd like to comment briefly on our balance sheet. Our balance sheet remain solid with roughly $117 million in cash and short term investments and no debt. We generated positive cash flow in Q4 and also increased cash slightly for the full year as a result of a significant improvement in our operating results. In 2016, we expect to generate positive operating cash flow. Our CapEx will likely be around $3 million, higher than the last few years as we will be investing to modernize our San Jose headquarters location where we recently renewed our lease. Additionally in Q1, we expect cash to decrease due to the normal payment cycle for certain business expenses. We continue to be very focused on effective capital allocation and management.

Now, let me turn to guidance. We're very pleased with how ended the fiscal year, especially the bookings and backlog momentum we saw in the second half. The overall market conditions for our solutions improved in 2015 and we currently see a relatively positive spending environment for 2016. With the level of backlog in deferred beginning the year align with an expanded sales pipeline, our goal is to deliver double-digit revenue growth in 2016.

Geographically, we expect growth from all of our regions with international growing at a faster rate than our domestic business. We believe our 2016 guidance reflects a reasonable estimate of revenue from our larger deployments and we hope to accelerate this wherever possible. As in prior years, we expect our business to follow a seasonal pattern with a higher proportion of our revenue, profitability and cash flow to occur in the second half of the year. As a reference in 2015, 47% of our revenue was in the first half and 53% was in the second half.

For 2016, we expect revenue to be between $111 million and $116 million. With this revenue growth, we also expect to improve profitability. Our goal is to turn adjusted EBITDA positive for the full year with an expected range of negative $1 million to positive $3 million. Adjusted EBITDA will likely be slightly negative in Q1 on lower sequential revenue that follows a normal seasonal pattern, but then is expected to improve throughout the year as the revenue follows.

We have significant operating leverage in our financial model, such that every incremental dollar of revenue dropped to relatively high amount of profits through our bottom line.

For the first quarter, we expect revenue to be between $24.5 million and $26.5 million and adjusted EBITDA to be between negative $2 million and negative $500,000. GAAP and no-GAAP per share guidance as well as reconciliation of GAAP to non-GAAP reported measures are linked to the press release and accompanying statements.

Before I finish, I would like to take this chance to welcome our new Investor Relations Director, Sue Dooley, who many of you have already met or been in touch with or will be soon.

In summary, we were very pleased with the financial results in the fourth quarter and the momentum we carry into 2016. We begin the year on very solid financial footing with substantial backlog and deferred revenue and expanded sales pipeline and a more efficient operating structure with a broader platform strategy and the increased strategy importance of improving communication in health care, we are excited about the growth potential of our business in 2016 and beyond.

I will now turn it back to Brent.

Brent Lang

Thanks, Justin. Before I close, I want to encourage you to RSVP to the invitation to our HIMSS Investor Breakfast on Tuesday, March 1. The highlight of this session will be a discussion with Franciscan Alliance’s Information Systems Director, who will be discussing their decision to drive [ph] Vocera across their network of 14 hospitals. In addition, we will be showing a new video that captures the breadth and power of our solutions. We will also open up the Q&A with a broader set of my management team. If you’re interested in attending, you can get in touch with Sue Dooley if she has no audio reached out to you. We look forward to seeing you there.

I am proud of our team’s execution and the positive results we delivered this year. I believe this success underscores the strategic importance customers are seeing in our products. We believe the market need for our solutions is rising and customers are recognizing the unique value of our solutions. We are well prepared for a successful 2016. Thank you for listening today.

Andrew, we are ready to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of David Larsen from Leerink Partners. Your line is open.

David Larsen

Hey, Justin and Brent, congratulations on a fantastic quarter and what appears to be a really good revenue guide. It looks like your strategy is really working and I notice the market is clearly recovering. So congrats. Can you just remind me again, what factors could drive you to the top-end of the ’16 revenue guide range and how much of that is basically or you sort of locked in? Thanks a lot.

Brent Lang

Thanks, Dave. So as I mentioned in prepared remarks, we – the level of that – first of all, the level of backlog in deferred revenue, we are at a record level there, which we feel good about. Conversion cycle along the backlog in particular will lengthen a bit just because of the mix of new customers and the large deals. However, we think that we factored a reasonable estimate for that into our 2016 revenue guidance. And so to be specific in answering your question, to get to the higher level, we have about 70% of that revenue target visible to us already through the combination of our backlog, deferred revenue and expected supplies. If we get more conversion from our backlog whether that’s [more the deals or other deals] that will help, and we are also fairly optimistic about the bookings potential that we have in 2016 as we continue to gain traction and build momentum in the international market. And also with our new products, we have a lot of success with that in 2016 [indiscernible] to the revenue growth.

David Larsen

That’s very helpful. And then long-term over the next several years, what is the reasonable gross margin assumption might say over the next three to five years?

Brent Lang

Yeah, it’s a JPMorgan Conference, we discussed our target model, we didn’t put a time horizon on it, but we did characterize the business at a different level of scale and that was about $200 million business, so roughly two times the size of where we are today, which could be in the next several years. But at that level, at a $200 million business, the gross margin structure is about around 68% with an EBITDA margin approximately 20%.

David Larsen

Okay. I’ll hop back in the queue. Thanks so much and congrats on a great quarter.

Brent Lang

Thanks, David.

Operator

Thank you. Our next question comes from the line of Matt Hewitt from Craig-Hallum Capital. Your line is open.

Matt Hewitt

I too would like to congratulate you on the strong finish to year. Couple of questions. First, you touched on briefly in the prepared remarks, the average deal size has obviously grown pretty significantly. I think a couple of years ago, it was like 350,000 to 375,000 that you were talking about selling into an individual department. As you shift more to these enterprise type deployments, how should we be thinking about an average deal size?

Brent Lang

So the average deal size is definitely going up. It tends to be kind of bi-model, whether it’s a large number of departmental deals that are in the sub-$200,000 range and then these large enterprise wide deals. And so to think of it as an average can be a little bit lumpy depending on how many of the larger deals are in there. What we have definitely seen as a market trend is greater and greater interest in customers looking at this as an enterprise-wide solution and obviously, we are in favor of that. I think it helped us to capture the value we can deliver to the customer. So the deal size has definitely gone up over the last three to four quarters, and it really is a function of the relative mix between the departmental deals and the enterprise deals. Yes, we still do a lot of departmental level sales. I don’t want to give the impression that it’s moved entirely the enterprise level deals, but we are certainly seeing more of these large deals.

Matt Hewitt

Okay. Thank you for that. And then I guess, a little bit different. As you look at your – I guess, it’s going to be a two-fold question. First, as you look at your backlog, what percentage of that backlog would you say would be characterized as the enterprise type deals versus the departmental or the follow-on orders? And then the same thing, as you look at your pipeline, how much of that would you characterize as enterprise versus departmental? Thank you, and I’ll get back in the queue.

Brent Lang

In terms of the question about the enterprise deals, so just to give you a reference, I mentioned the seven largest deals that we had in aggregate, they represent about $20 million, $21 million of our $58 million backlog. So there are other enterprise level deals that may be just little bit smaller than that. So that gives you a frame of reference for that.

Brent Lang

And in terms of the pipeline, we’re looking at a variety of deals, the – it’s hard to put an exact number on it. The pipeline is obviously multiples of what we’re forecasting in terms of actual bookings, but I think if you look at the mix of pipelines, what we’re seeing is that continuation of some of these large enterprise deals as well as the more traditional departmental deals.

Matt Hewitt

Okay. Great. Thank you.

Operator

Thank you. Our next question comes from the line of Mohan Naidu from Oppenheimer. Your line is open.

Mohan Naidu

All right. Thanks for taking my questions, Brent and Justin. Brent, maybe on the pipeline, continuing there, when you think about this enterprise deals and presuming they take longer than usual department deals that you used to do, can you talk to us about what goes on in the process before we can get on to you on these enterprise deals signed?

Brent Lang

Yeah. It’s good question, Mohan. It’s definitely a more complex sales process. Typically, the organization starts with an idea of a set of problems that they’re looking to solve around communication and collaboration. Generally, it does not involve formal RFP. It’s more of an informal conversation, where they’re talking with vendors and doing research about the availability of different solutions in the marketplace, talking to other hospital facilities about what’s working for them. There is a fairly extensive discovery and education process where we’re sitting down with them and talking about some of the case studies that we’ve done in other organizations and explaining the value proposition of our software platform, talking about the various choices, devices, giving their users an opportunity to evaluate the benefits of a hands-free badge versus a handheld smartphone device.

What we’ve seen in many of these is that the size of the deal has actually grown pretty substantially during the sales process. So what they may start off with is a smaller vision once they recognize the value proposition in some of these cases, it’s growing. That’s why it’s hard to put an exact number on the way to think about pipeline, because the deal may actually grow as it goes through the pipeline process. But the larger deals are taking a little bit longer to close. Historically, the departmental purchase as we like to describe is sort of 9 to 12 months, purchase process, these larger deals can be 12 to 18 or even longer in terms of the sales process. Part of that is driven by the fact that the dollar amount involved in some cases requires CEO level approval and in some cases, even Board level approval before they’re able to finalize the purchase.

During that process, there is really a whole team of people that gets engaged from the Vocera side, not just the sales organization, but our professional services team, which is sitting down with the customer and mapping out a fairly detailed statement of work, describing the services that are going to be performed and the areas they are going to be rolled out to and the philosophies that they want to use during that rollout, whether they’re going to be using more of the trainer model or whether we’re going to be providing most of the professional services training. So all of that is being assessed. Typically, there is some evaluation of the wireless infrastructure during that process as well. And then eventually, it’s leading to an approval for the booking itself. Once the booking occurs, then the project planning starts to occur for the actual rollout and getting the customer in line and at the speed on what their deployment plan is going to look like and as we’ve described, those deployments can also be spread over a number of quarters.

Mohan Naidu

Thanks for all the details there. Brent, if you look at your pipeline right now, does it give you the confidence to deliver another year of bookings, something similar to what you did in to 2016 as you did in 2015?

Brent Lang

Yeah. I think that the pipeline looks strong. I think that we’ve got a healthy book of business that we’re looking to close. The sales reps are excited about the opportunity in front of them. They’re coming off of what was a very, very strong Q4 closing out 2015 and obviously, Q1, you sort of start back at 0 again and we drove that momentum. But we’ve got a number of both small and large deals that we’re tracking in the pipeline. It appears like customers are putting communications of higher priority amongst their overall IT spending and I think that works to our advantage. The consolidation that’s occurring in the industry where larger systems are combining together is resulting in more of a centralized decision making process and that leads towards a purchase decision that heads towards the market leader and so with Vocera being the clear market leader here, and having clearly the most differentiated solution, the largest installed base, we become very obvious choice for these larger health systems as they’re looking to make that purchase decision.

Mohan Naidu

That’s great. Maybe one last question around your government deal flow, so you have like two large deals that you signed up in the last months, for the last time we talked about this, the FIP certification was a big deal and that opened up a lot of doors between army and VA and all the stuff. Can you remind us how many hospitals do you have there already running Vocera and how much more to go?

Brent Lang

Yeah. So the two deals that we closed in the Q4 timeline were both – the two large ones that I mentioned were both new deals, which is a little bit unusual to have them closed in Q4, most of the bookings in the segment occur in Q3. We mentioned on the last call that the VA, some of the VA deals had pushed out of Q3 and some of the DoD deals were still to come. So we were pleased to see that level of booking from the Fed government business and we still have a very healthy pipeline on both the DoD side with the Army as well as on the VA side.

The fifth 140-2 certification is a wireless certification that we have to go through for the badge and also the smartphones have to go through that process. We have received that certification for the B3000. So our federal government customers are currently still buying the B3000. The B3000 badge that we introduced earlier last year is currently in process going through the fifth certification process, it’s making good progress there and then once that finalizes the certification, then our fed government business will transition to starting to purchase the B3000 ad so we’re hoping for just a smooth transition there as that occurs.

Mohan Naidu

That’s great. Thanks for taking my questions. Congrats on a great year.

Operator

Thank you. Our next question comes from the line of Jamie Stockton from Wells Fargo. Your line is open.

Jamie Stockton

I guess maybe the first one, you’re signing more of these enterprise deals, could you talk about mix between devices and software in these deals and whether we should expect for the software line on the income statement to start to grow a little faster maybe than devices and whether that’s part of the improvement in gross margin that Justin referenced earlier?

Brent Lang

Yeah. Let me start and then I’ll have Justin chime in here as well. So there is an interesting dynamic. In our business overall, because of [Technical Difficulty] software oriented, we are expecting to see software increase as a percentage of our business overall. There are kind of two models that we’ll allow here though in terms of these larger deals that are using the collaboration suite. In some cases, they’re using IOS devices, predominantly IOS devices, in other cases, they’re using the MC40 Android device. UNC was a case where they used IOS and Franciscan was a case where they’re using the Android device.

And depending on which device choice they make, the actual revenue that’s flowing through Vocera and the split between hardware and software will be impacted because in the case of UNC, where we don’t resell the iPhone device, it ends up being a very software intensive deal whereas in the case of Franciscan, there was a portion of that booking, which was essentially us reselling the MC40 devices and so it kind of cuts in those ways. We also have deals where they’re going to be running our Vocera collaboration suite on an MC40, but they’ve decided to buy that through a different channel. So it’s a little bit hard to make a generalization about the relative mix, but I do think that we’ll see software increase as a percentage of our overall business, just as a result of the new product that we’ve got in the pipeline here.

Justin Spencer

Yeah. That’s right. And I would just add Jamie that with that software growth, I think the two categories that we expect to grow the fastest in 2016 would be the software as Brent mentioned, driven by both on the voice side as well as the new products and then also the professional services revenue in terms of the growth rate, those will probably be the two fastest categories. But the device business should continue to grow and will be bolstered by the addition of the [indiscernible] that we do in 2016.

Jamie Stockton

Okay. Justin, that kind of leads to me my next question, which is when you think about the maybe higher level of intensity around professional services that you guys have talked about, should we be assuming that that’s probably going to maybe contain the gross margin for the overall services line, because I would imagine that the gross margin profile of the implementation services are a fair amount lower than it would be for the maintenance piece of that revenue component?

Justin Spencer

Yeah. That’s right, Jamie. I mentioned earlier that we expect our gross margin percentage to be roughly flat compared to 2015. In the long run, as software becomes a larger portion of our revenue, approaching say between 20% and 25% over the next couple of years. Today it’s about 15%, in 2015 software was about 15% of our revenue. But in 2016, we will be expecting for the gross margin percentage to be basically flat. Our software is typically is bundled with everything else and to really drive that software business, the professional services is a key part of the overall offering that we have. So that will blend out. But still very, very attractive margins and opportunity for expansion as we get beyond the deployment.

Jamie Stockton

And maybe just one more quick one just in the sales and marketing expense line was up a fair amount, it’s not a unusual or seasonally but a little ahead of what we had expected. Is that just, hey, we had a strong bookings quarter and some commission expense flow through there as a result of it or was there anything else going on in that line?

Brent Lang

That’s exactly what - we had a very, very strong Q4 which drove the commission expense and that will then reset in Q1.

Jamie Stockton

All right. Thank you.

Operator

Thank you. Our next question comes from the line Ryan Daniels with William Blair. Your line is open.

Ryan Daniels

Yeah, thanks for taking the question guys. Brent, a follow-up on for you. You talked about how the size and services consumed often grow during the sales process as they understand more of the vision and how they can engage Vocera. I am curious how you can or if you have been able to replicate that into your existing customer base. I know historically you’ve got a lot of net new deals that come in as departmental, so how do you kind of leverage that momentum and push it back into the enormous install base you already have?

Brent Lang

Yeah, it’s a great question, Ryan and something we are very focused on. The deals that I referenced was exactly a situation where that was an existing customer that was actually being managed by our client relationship management sales force that manages the existing customer base. And through the process of working through that client, they took what had been just a three hospital deployment in that system and booked basically an expansion that included the remaining of the – went out to 11 hospitals, so the remaining whatever – eight, easy math, and so I think part of that is just changing the mindset of the way we are selling to those customer accounts. Most of the enterprise sales people are in the hunter group, but the folks that are in our client relationship management sales force are now receiving the same kinds of training and tools to help them with these enterprise deployments and we're kind of a proven entity within those customer accounts, so it's actually in some cases a more, an easier conversation because they can start from the success point that they've already had and now talk about some use cases that go enterprise wide.

Ryan Daniels

Okay. That's helpful. And then do you think that the UNC in the Franciscan Alliance deal actually, kind of helped you with that process as well, meaning our other institutions looking at that and saying, hey, they might be under something, maybe we should relook at how we use those areas. So is that creating a benchmark in the marketplace that's helping or is it too early to tell?

Brent Lang

Absolutely. I think you're absolutely correct. These kind of lighthouse accounts, they're proof points in the value of the solution and they end up acting as reference accounts for other new deals and for existing customers to reference. It's one of the reasons why I reference the fact that we're making investments to make sure that those large deployments go smoothly because we think that they'll end up being very important reference accounts for us down the road. And we've already seen that evidence, the number of other customers that are reaching out to UNC and to Franciscan and to some of our other large deployments that we talked about earlier in the year, is definitely helping with the sales process.

Ryan Daniels

Okay. Great color. And then maybe one final here. As you've gone through some of these larger enterprises, I'm curious two fold question. Number one, are there other areas that you see kind of core to Vocera that you think you can help these customers with, maybe it’s analytics or more on patient safety, number one, and then number two, given the strong cash balance and effectively hitting cash flow breakeven, any more thoughts on more actively deploying that cash via M&A to accomplish that expansion? Thanks guys.

Brent Lang

Yeah. So on the first part of your question, we are definitely seeing a broadened use of the products, even the existing products with new groups of users. One of the examples that I really like is the environmental services folks, the housekeepers in the hospitals who are a large number of the workers inside of a hospital after nursing, I think they are the second-highest population of employees inside of a hospital and we've got some great case studies where environmental services is using the platform for communication and coordination around room cleaning and documenting the room that didn't clean and being able to transport patients into those rooms and ultimately driving reductions in ED wait times and increasing overall throughput in the hospital.

Some of those have resulted in interesting integrations with Ethic and some of the other clinical systems, so we’re very committed to continuing to drive those integrations and whereas historically, we might have been more focused on thinking about just the nurses as our target users, more and more of our organizations are really rolling the products out to a wider set of users and part of the focus is going to be on increasing the clinical context, the patient context of the communication so that it's not just purely communication, but it's actually leveraging the clinical context to help triage the information that is necessary to take action and make it very much of an action oriented interaction when people are using the products.

And the second part of your question was around M&A, there are a number of potential acquisition targets that would help us continue to expand functionality and capability of the platform. As I've talked with you about in the past, the private company valuations in ‘14 and ‘15 were a little out of whack. As we are seeing a bit of a correction in the marketplace, our expectation is that some of those will come down and given our cash balance and our profitability and the growth of the business, we’re going to be taking a more aggressive stance in terms of potential M&A and how we can build out the platform and build scale in the business.

Ryan Daniels

Okay. Great. Thanks for the color and congrats.

Brent Lang

Thank you.

Operator

Thank you. Our next question comes from the line of Sean Wieland from Piper Jaffray. Your line is open.

Sean Wieland

Thank you very much. Nice work, fellas. So I think you just kind of answered my question, but I wanted to just dive -- get a little bit deeper and my question was going to be around the use cases for the clinical workflow engine. I mean specifically, I think you said the 10 customers are contracted for the clinical workflow engine in the quarter, what are they going to be doing with it and then where do you see the use cases for that ultimately going?

Brent Lang

Hey. Sean. So we've booked an additional 10 customers for the clinical workflow engine in Q4. The predominant use cases for that right now are nurse call integration and physiological monitoring where people activating the nurse call button is being able to route that directly to the Vocera clients to streamline that workflow. Some of the EHR integrations don't necessarily need to leverage the clinical workflow engine. We’re able to do those as direct integrations into the platform.

But as we look forward, it's really, as I talked about, getting more clinical context and clinical information into the workflow and then increasing connectivity and some of the connectivity we do will continue to leverage third-party middleware and third-party interfaces, but for those that are part of more simplistic nurse call and physiological monitors, we can do those as direct interfaces using our software.

Sean Wieland

All right. Thank you. And can you tease us on telling us what the bookings growth was in the year?

Brent Lang

Yeah. Bookings growth for the year was 23%. I think I had in the script. But for total year-on-year, it was up 23%.

Sean Wieland

That was bookings or backlog?

Brent Lang

That was bookings. Bookings growth was up 23%, backlog was up more than that.

Sean Wieland

Okay, thank you very much.

Operator

Thank you. Our next question comes from the line of Gene Mannheimer from Topeka Capital. Your line is open.

Gene Mannheimer

Thanks. Good afternoon and my congratulations also on a good quarter and year. Guys, I wanted to ask on the backlog, how does that 70% visibility that you talk about to your revenue compare to historical and I understand the longer tail on the conversion given the large deals, I just want to be sure you have at least as much visibility into the backlog as you have in the past and for example if one or more of those large deals would've pushed you still have somewhere to go to fill that gap, so to speak?

Justin Spencer

Hi, Gene. Yeah. So our overall backlog is at 58 million, up from 33 million at the end of last year. So we do benefit from having higher backlog and deferred revenue and as I mentioned earlier, we do see a longer, slightly longer conversion cycle on the backlog in 2016, but because we have a higher base of backlog, when you take the projection of backlog conversion as well as our deferred revenue conversion and expected supplies orders, we have about 70% of our revenue targeted visible to us as of today or as of the beginning of the year.

That is very consistent with where we were at the beginning of 2015. So we are in a good place there and then in terms of the large transactions that are system wide deployments, we think we've taken a prudent or reasonable estimate of revenue from those and I mentioned that the seven largest transactions, roughly 33% of the backlog from those seven transactions, we’ve expected to convert to revenue in ‘16 with a balance in 2017 and beyond.

Gene Mannheimer

Okay, makes sense. Thanks. And last one here. Just wanted to get a little more granular on the software, can you tell us what the contribution of software revenue from the newer products outside of your core voice platform was?

Justin Spencer

The revenue contribution was less than 10%, but as Brent mentioned earlier, we had a really strong bookings quarter in those product areas in particular the collaborations also with clinical workflow engine. So over time, they are still quite lumpy, but the several of the large enterprise system wide deals that we’ve sold in the last couple of quarters have the software products, so we expect that percentage to grow over the next couple of years.

Brent Lang

And Gene, one thing to keep in mind is that over time, more and more of that functionality gets pulled into the platform. So when we talk about platform sales and platform software, more of that capability becomes part of the platform, so I don't think we will necessarily long-term look at it as discrete businesses. The strategy really here is from a customer perspective, present them with a unified platform and has all the various pieces of functionality wrapped in together and that will be reflected in overall software sales and larger deployments and more bad sales and more client sales in general.

Gene Mannheimer

Sure, got you. Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Steve Halper from FBR. Your line is open.

Steve Halper

Hi. You talked in your prepared comments about ramping sales resources and I’m just wondering can you size the incremental cost, the timing of the ramp and what particular areas are you going to focus on?

Brent Lang

Hey, Steve. It’s Brent. So in terms of sales resources, our expectation is that we are not going to be adding substantial numbers of new headcount there. We actually feel like we've got good territory coverage and the focus again for 16 is going to be on driving sales productivity. I did reference the fact that we’re going to be adding some professional services headcount in support of delivering these large customer deployments. That's going to be about 10% increase in the services headcount for the year if you look at it sort of year-to-year and that will -- those folks are in the process of either having already been hired or being hired as we speak, and will be added to the organization over the course of the year.

Steve Halper

And so is that -- if we think about subsequent years, as you sign more enterprise deals, do you have to continue to add more of those sort of resources. So in essence, is this what we should expect as you do bigger and bigger deals?

Brent Lang

I think we will always add some, I am hopeful that we’ll add at a slower rate over time by becoming more efficient in the way we deploy them. So part of it will be automation tools and configuration tools that can help streamline it. Once we’ve done more and more of these larger deployments, we can take the learning from the early ones and apply it to future deployments. We are also evaluating whether there is an opportunity to have some of the professional services done by a third party that we would contract out or partner with to deliver some of those professional services. The goal is not to ramp up to being a large professional services organization, we obviously want to ensure quality and success of these deployments, but my expectation would be that the growth rate in professional services would ramp down a little bit over the years.

Steve Halper

Thank you.

Brent Lang

Thank you.

Operator

I don't see any other questioners in the queue at this time. So I would like to turn the call back over to management for closing remarks.

Brent Lang

Okay, thank you. I appreciate everyone's time today and the questions were very insightful and helpful for the dialog. I look forward to seeing all of you and thanks for your time. Take care.

Operator

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect your telephone lines at this time. Everyone, have a great day.

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